How to handle investments when you divorce
It may be the supreme irony of anyone going through a divorce: As much as the unpleasant or heartbreaking state of affairs leaves one absent of a life partner, the first piece of advice many experts offer – at least on the financial side – is to seek companionship. Now.
"Don't go it alone," says Mike Lynch, vice president of strategic markets at Hartford Funds, based in Charlotte, North Carolina. "Build a team today – a qualified team of legal, tax and investment professionals. Maybe it's your current investment professional, or you may seek a new one that understands your situation better."
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Granted, they probably won't understand your broken-heart situation. (That's what friends and counselors are for.) But getting the best advice, especially for keeping things amicable and equitable, involves careful consideration. In a world where chances of a marriage ending in divorce are 50-50, you'll want to make sure you and your ex-love work out a 50-50 split, if possible.
1. Always make it as civil as possible. As senior vice president and wealth advisor at David A. Noyes & Co., Linda M. Conti knows the importance of keeping things calm for clients making major financial changes due to divorce. "My parents went through a bitter divorce," she says. "They separated when I was 3 and the divorce was final when I was 6. I grew up living through 'what not to do to your kids during a divorce.' I wish someone could have counseled my parents better through all aspects of the divorce."
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2. Be careful about keeping a home for adult kids. While it's a natural reflex for one spouse to want to keep a beach house, for example, so the kids can take advantage of it, the scenario begs for trouble. "It's much more effective to sell the house and distribute the proceeds to the children," says Ric Edelman, chairman and CEO of Edelman Financial Services, a national firm. Especially if one sibling uses the getaway more than the others: "You get into the issue of fights amongst the kids – issues of maintenance, repairs and upkeep." Or if one sib wants to keep the house and the other wants to sell, there's a potential fight in the making, or even a lawsuit.
3. Name your personal assets. Imagine borrowing money to follow through with your divorce when as a spouse you enjoyed a wealthy lifestyle. "I have seen in several cases recently where the marital estate is extremely large, and the earnings of the moneyed spouse are also very healthy," says Lois Liberman, partner and matrimonial attorney at Blank Rome in New York. Yet these weren't no-brainer splits. "The non-moneyed spouses – and in this case both were women – were relegated to monthly allowances and had absolutely no money in their own name." The crucial lesson? "Make sure that you have assets in your own name."
4. See if a certified divorce financial analyst can help. Yes, there are such people, affiliated with the Institute for Divorce Financial Analysts. They can act as an advisor to the divorce lawyer of one party or as a mediator for both parties. "Decisions made during divorce are long-lasting and it's important to stay focused and recognize the significance of the proceedings," says Allison Alexander, a CDFA, CPA and financial analyst at Savant Capital Management, based in Rockford, Illinois. "As painful as it is, there is no advantage to rushing the process and making errors in judgment."
5. Know that it's no longer 'on paper.' A generation ago, most financial records, if not all, were kept on paper documents. But with digital tax filing, investment and the like, you can't just pull them out of a filing cabinet. "Ignorance is fatal," says Carlos Lastra, a principal with Paley Rothman in Bethesda, Maryland, and a member of the firm's family law and litigation practice. Financial information now exists "in digital form on computers, smartphones, and other digital devices – even smart watches. Further, these devices are protected by a myriad of federal and state laws, including the Stored Communication Act, the Electronic Communications Privacy Act and other anti-hacking laws, which could get an otherwise innocent house spouse in trouble."
6. To make it less taxing, study the taxes. Yes, the thought of looking at any tax document is a pain, but it pays to have a close look. "Familiarize yourself with your joint tax return, because this is where many key elements about investments, partnerships and other sources of income are listed," says Vickie Adams, a financial planner in Los Angeles who specializes in divorce and taxation. "In fact, the coming months are the best because a lot of this information will arrive in the mail."
7. Get out of the dark. If you preferred to not deal with money and investments, now's the time to change horses. "Hiding investments is not all that common," says Tracy Stewart, a financial planner based in College Station, Texas. She's also a member of the personal financial planning executive committee at the American Institute of CPAs. "There are ways to find clues about hidden investments, beginning with a simple review of the tax return. Earnings on the investment may show up on the return. If the earnings are not on the return and should be, the dishonest spouse is flirting with getting a letter from the IRS."
8. Examine your cash flow needs. "Be as specific as you can and make the necessary adjustments to your budget as soon as possible," says John Garvey, senior vice president of wealth management at UBS in Philadelphia. "Next, plan for your future as a single person. If fewer assets are available to you, you may need to reprioritize your spending. As an example, college savings plans may need to be revisited to account for decreased income flows."
9. Prepare, even if you're happily married. Maybe the thought of leaving your sweetie (or them leaving you) gives you the willies. But as it turns out, the same protections you'd take in those instances overlap with sound financial planning in general. "Pre-nuptial agreements are important," says Gary Plessl, a managing partner of the Houser and Plessl Wealth Management Group and co-author of "The Book on Retirement." "Lay out the rules of engagement up front. If one in two marriages end in divorce, why would you not want to be fair to each other? ... It's not about being emotional. It's a practical thing to do."
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