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Monday, August 9, 2010

Financial Strategies for Divorcing Couples

I’m happy to report that my wife and I will soon celebrate our 30th anniversary of marriage. Unfortunately, about one-half of marriages do not stand the test of time. Now you’d think that divorcees would have learned the lessons from a failed marriage and ‘get it right’ the second time around…but this is not the case. According to research, 67% of second marriages and 74% of third marriages fail. The emotional and financial trauma associated with divorce is often substantial. If you or someone you know is facing the prospects of a divorce, here are suggestions that can soften the impact:

Seek mediation. I was working with a couple who decided to end their marriage. In this case both people worked in well-paying jobs and they had minor children so there would be custody issues in addition to property division, child support and perhaps alimony issues. I suggested they consider divorce mediation rather than the traditional ‘you hire your attorney, I’ll hire mine’. There were lots of assets involved so the stakes were high including potential legal expenses. These clients approached their divorce with civility, a sense of fairness and a focus on doing what was in the children’s best interest. The result was a smooth transition and legal fees of under $3,000. Contrast this to a recent couple’s divorce that chose to each hire their own attorney to fight out both the financial and custody issues. This couple, whose wealth was but a fraction of the couple in my first example, spent more than $70,000 in legal fees. This is money that could have been split between the couple rather than the attorneys or used to set up college funds for the children.
Get professional help regarding division of financial assets. Which would you rather receive in a divorce, $100,000 personal investment account or $100,000 retirement account? Well, it depends. Clearly there are very different tax issues involved. A Certified Financial Planner or CPA can help you work through the various tax issues according to each person’s individual goals. In addition, there will be income tax issues that will need to be resolved. You’ll also want to decide how attorney fees will be handled.
Protect your credit. The divorce process can easily take many months and ‘disruption’ is a common byword. This disruption of the normal handling of your finances can result in things falling through the cracks such as bills not getting paid on time. The last thing you want is to be newly divorced and have bad credit. Pull a current credit report from each of Transunion, Experian, and Equifax; resolve any current credit inaccuracies together; and be diligent regarding paying all bills in a timely manner. It’s often much easier to repair credit before rather than after a divorce.
Change beneficiary designations. You’ll want to re-write your will. However, the laws of most states automatically exclude an ex-spouse from receiving assets under your will if you forget to change it after your divorce. This is not the case with life insurance beneficiary designations, designations for retirement plan beneficiaries, co-ownership of bank accounts, etc. We had one case where an ex-spouse was left on a bank account for more than 20 years…and was therefore entitled to the bank account proceeds when the owner died.

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