Going through a divorce can be a heart-wrenching, devastating time in your life. I know what it feels like – I’ve been through it.
It can feel like your future has been stolen away from you. Sometimes it’s a gradual decline, but for others it’s an extremely sudden blow. Having to deal with the intricacies of a divorce settlement can feel absolutely impossible when negotiating the emotional turmoil as well.
It is important to hire your support team (an attorney, a therapist, a financial planner and an accountant). Seek professional advice. Lean on your friends and your faith.
Women often just want to cut ties and walk away – and in doing so, they might not negotiate the best terms for their divorce. If they haven’t been the primary breadwinner or financial decision maker, they may often feel unable to form strong opinions and arguments about their post-divorce entitlements. In other words, they risk losing out significantly.
I founded my company with the aim to help women through the most important transitions in their lives, and there are few transitions that can have an impact like a divorce. So I’ve put together some key steps that all women MUST take before agreeing to their divorce settlement.
Step 1: Familiarize Yourself with Your Assets
First, you need to fully understand your financial worth – and that means your husband’s worth too. You’ve likely been married a long time, and have accumulated different kinds of assets over the years. You need to be able to make well-informed decisions when it comes to division of those assets, and it can often be quite complex.
Assets include, amongst other things, property, retirement plans, invested stock and so on. Pending tax refunds also count as an asset. Obtaining a net worth figure for these assets is one thing, but then understanding their use to you for your long-term security is more difficult. And that’s arguably far more important.
Understand Your Liquidity
One of the most important things to understand is the liquidity of your assets, and that means the ability to access the cash value of those assets. Your cash flow is extremely important and you will need to know how much cash is accessible to meet your needs on a month-by-month or day-to-day basis.
If you’re allocated high value items in the divorce settlement, but have no access to an adequate source of cash, you may well have to drastically alter your lifestyle. A large figure in a bank account is highly liquid as it’s easy to access the cash; something that might have high value, but be very difficult to sell (some kinds of houses, antiques etc) have less liquidity.
Some kinds of investments have much lower liquidity than others. Some but not all publicly traded stocks, ETFs and government bonds have high liquidity; private equity funds and hedge funds tend to have lower liquidity.
It’s VITAL to fully understand both the value of your assets and their liquidity, to make sure that you get the divorce settlement that’s right for you. Throughout the awful turbulence of a divorce, your aim should be to retain as secure a future as possible for yourself. You won’t be able to do that if you aren’t completely clued up about your assets.
Identify Hidden Assets
Finally, make sure that you have identified any hidden assets. In particularly acrimonious circumstances, one party might try to hide assets to keep a financial advantage. Financial professionals and forensic accountants can advise on steps to take to locate hidden assets, but a good first step is to check historical tax returns. You can hide assets from a spouse, but it’s much harder to hide them from the IRS.
Remember that when it comes to division of property, the rules vary from state to state, so familiarize yourself with local laws as well. And bear in mind that debts may well be divided just as assets are, so have a full picture of your liabilities as well.
Step 2: Understand Your Retirement Accounts
Retirement accounts are classed as assets, and they can have tax-related implications, too. That means I could have put them under a different category but they’re so important that they MUST make up their own step of any divorce procedure. They need to be very carefully thought through and fully understood.
If you’re going through a divorce close to or beyond your retirement years, these accounts are going to be crucial in determining your new lifestyle. But more than that, they may well form the vast majority of your income in your retirement years.
Your Spouses 401(k)
Your spouse’s 401(k) may make up an extremely significant part of the assets to be divided, but if value from one is transferred before retirement, then they will be subject to a penalty tax as well as income tax. There’s usually a mandatory withholding of tax, too.
As you can see, transferring assets in the wrong way from a 401(k) can be costly. It is important to note that as part of your divorce settlement, you can get a Qualified Domestic Relations Order (a QDRO). This will prevent the penalty tax from being payable, but the mandatory withholding will still apply. To avoid the mandatory withholding, you can transfer the assets to another retirement account, such as an IRA.
You may well need to use some of those assets after your divorce – maybe you need to buy a house or car, for example. Make sure that you fully understand the tax implications of moving money from these accounts. These rules change after the age of 59 and a half, so seek advice to make sure you’re completely in the know.
Before Agreeing to Your Divorce Settlement…
A divorce settlement must not be taken lightly. Women must go into negotiations fully equipped with the knowledge they need to make the right decisions for them and for their financial future.
In my next post, I’ll outline the four remaining steps that you absolutely must take if you are facing a divorce, including understanding your tax liabilities and looking at insurance policies as well as credit issues.
In the meantime, if you feel that you’d like to get some more information now, or have a chat about your finances during divorce proceedings, please do not hesitate to get in touch. It’s important to have a financial planner so that he or she can advise you on how your settlement affects your cash flow.