In my previous post, I looked at the first two steps that, as a woman, you absolutely must take prior to agreeing your divorce settlement. Now I have four more for you.
Studies have shown that more women lose out after a divorce in terms of income than men, and that these effects are chronic (i.e. very long lasting or permanent) for women, whereas men typically only suffer short term losses. So to address this imbalance, it’s absolutely crucial to go through all of these steps. Eliminating even one of these steps could mean dire financial consequences in the long term.
Step 1 involved creating a full inventory of your assets and understanding their liquidity. It also gave some hints as to how to identify any assets that might have been hidden, if you suspect that to be an issue in your divorce. Step 2 explained the need to fully understand your retirement accounts and how to access the money within them in the most tax-efficient ways.
Ensure you’re fully familiar with steps 1 and 2 before agreeing your divorce settlement, however the next steps are equally important.
Step 3: Get Tax Advice
To negotiate the right divorce settlement for you, you need to fully understand the implication of taxes on any agreements made. Taxes can have long-reaching impacts as well, lasting deep into your retirement. Make sure that you get tax advice from an expert who looks at your entire financial picture.
First, you need to think about the impact of capital gains tax. For example, if you receive property in your divorce settlement, find out about the associated capital gains. If the cash value has increased, you might be subject to short and/or long-term capital gains tax. You may be offered property in the divorce settlement that looks like it has a high value, but has an extremely high capital gain, leaving you liable for a huge tax bill.
Capital gains tax isn’t all that straightforward – capital gains tax depends on your income as well as the length of time you’ve held the asset. Therefore your entire taxable income needs to be taken into account when you are dividing property.
Step 4: Update Your Insurance Policies
The most important thing to do with your insurance policies after you divorce is to make sure that any life insurance policies have you named either as the owner and/or the irrevocable beneficiary.
Life insurance policies are intended, after a divorce, to insure the value of alimony payments, child support or other financial agreements. Your divorce settlement may well require your and/or your spouse to get a new policy.
For example, if your spouse took out a life insurance policy before or during your divorce, you will be expecting to have important income covered should they pass away. However, how would you know if your spouse stops payments and the policy lapses after the divorce? You will need to talk with your attorney to make sure that language is included in the divorce decree that addresses the potential of this happening.
Also, don’t forget that some life insurance policies accrue cash value over time. This is then an asset that needs to be taken into consideration as well.
Step 5: Examine Your Debt and Credit
Make sure you have fully examined your debt issues and your credit report. A credit report will also show you bank accounts you might not have been aware of previously, so it’s always a good idea to have a thorough look through one during a divorce.
So, make you sure you get your credit report – there are several free ways of doing this. A credit report will show your bill payment history, debt and a range of other financial information. A high score is good – you’ll have good credit and will be more likely to be accepted for loans at a lower interest rate. However, if your credit is not in your name, your credit rating will sometimes be lower.
If you can, pay off all debts, close all joint accounts and open new accounts in your own name. And if you need to, find out how to improve your credit score now that you are financially independent from your husband.
Step 6: Make a Budget
I bet you thought this would have been the first step, didn’t you? Instinctively, it seems like the easiest thing to do when thinking about your money and financial planning. But you need to understand the issues involved in the finances of a divorce to get a crystal clear picture of your finances.
Knowing about your housing needs, alimony payments, your tax liabilities, insurance premiums, debt repayments as well as any passive income from investments will enable you to make a realistic budget. Because divorce requires the spouses to divide the whole, your assets and ultimate budget won’t be as high as it has been.
So it will be important to take the time to reevaluate your life goals. Think about what your true values are, and how you can work them into your budget. You will want to align your financial resources as close as possible with the experiences that bring you joy.
Your Divorce Settlement: A New Beginning
Due to the pain of divorce, It may be hard right now to envision your divorce as a new beginning. But, I promise, with time and lots of prayer, you can get to a place where all of this turmoil will become a distant memory. You can achieve a fulfilling life; it will just be different than the one you envisioned.
Just make sure that you are fully informed and more empowered so that you are capable of being your own best advocate. Understanding the details of your finances is absolutely essential. During emotionally devastating times, it often seems extremely overwhelming.
If you think you might benefit from a meeting with a financial planner who can help you through this process, please do get in touch. We are happy to have a conversation to see how we may help.