Financial Perspectives: Things to consider when getting divorced

Everyone knows someone in their family who has gotten divorced. The reason for divorce may be simple, but the process of getting divorced is usually complex, particularly if children are involved.

When people get married, they intertwine their lives emotionally and financially. The purchase of a home or vehicle, merger of bank accounts and purchase of insurance are just some of the ways a couple joins together financially. Besides a mortgage, couples may open credit cards together, which, if not properly managed, can result in things spiraling out of control very quickly.

There is no question that a divorce is very hard on both sides, but women often face an uphill battle to recovery. This is especially true if the woman was a stay-at-home mom and has been out of the workforce for some time. Women normally take on the most responsibility with raising the kids and this can stifle their earnings potential. Balancing a career and the demands of raising kids is incredibly hard on single parents. In many situations, the man is very involved in caring for the kids. This is a real plus, and can be a tremendous help to a mother who is trying to progress in her chosen field.

Many decisions have to be made at the time of divorce and they can include who should keep the house (if anyone), how much alimony and child support will be paid, how will custody and visitation be handled, how the financial assets and liabilities will be split, how will the dependent spouse get health insurance (if they are not already employed), and what will the spouses’ cash flow look like after the divorce (will they have enough money coming in to cover their expenses).

These things often get glazed over by well-meaning attorneys who fully appreciate the financial implications of certain decisions. Here is a brief summary of things that you can keep in mind if you, or a member of your family, will be going through a divorce.

Keeping the family home often sounds like a good idea, but can be financially draining if the spouse cannot afford the mortgage payment, utilities and insurance on a much smaller income. This is often true for older divorcees as they can often be the only person left in the home and the cost to maintain the home can be overwhelming.

A dependent spouse needs to understand COBRA benefits eligibility from the other spouse’s health insurance and what the cost is. Since this will only last 18 months, they should investigate the cost to purchase an individual health insurance policy. It is good have an idea of this cost before the divorce is finalized.

If the dependent spouse has been out of the workforce for many years, it may make sense to request a portion of the settlement to get additional training (certification or a degree etc.) before returning to work. This will make he/she more marketable and increase their income potential.

Be sure to review your share of the property settlement to ensure you are not being given all of the qualified assets (401k, IRA, 403b, annuities and other retirement types of investments) while your spouse gets all the regular taxable investments and bank accounts (these would be accounts that are more liquid and can be accessed without any penalties or surrender charges). These can include mutual fund and brokerage accounts in addition to bank or credit union accounts. The reason this is important is that a dependent spouse who gets only qualified assets will have to pay income taxes and potentially a penalty to access the money. Having a balance, or mostly non-retirement assets, is more preferable for a dependent spouse. If retirement accounts are all the couple has, it may make sense to keep the assets invested in the working spouse’s 401k (in a separate account in his/her own name) since they may be able to make withdrawals free of any penalties (but not income taxes).

A dependent spouse should do a cash flow analysis to understand what will happen when the alimony and child support stops and how to cover any gaps from that point forward.

A dependent spouse will want to make sure that the court orders their spouse to maintain a life insurance policy to cover the projected child support they would pay while their children are minors.

Both spouses should evaluate their beneficiary designations on their retirement plans and other life insurance (non-divorce related) to ensure the correct beneficiaries have been selected.

These steps may seem complex, but if you are working with strong attorneys, they should ensure you are protected. In fact, they may even recommend that you hire a financial professional to assist in this process. If they do not, it may make sense that you hire one yourself. The cost will be well worth what you could lose in a bad settlement.

Good luck!

The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC 8725 Frankford Avenue Philadelphia, PA 19136 215-332-4968

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.

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