A checklist of financial planning issues to consider in collaborative divorce
Divorce is expensive and almost always a losing proposition for both parties from a financial perspective. Financial stress during the marriage is increasingly cited as one of the reasons that married couples seek a divorce. An expensive divorce only makes this problem worse. During this emotional and often chaotic period of life, a divorcing couple typically makes a series of bad decisions that devastate their future financial security. The cost of a divorce can be minimized when each spouse commits to minimize the battle and enlists the help of experienced advisers and a mediator or collaborative law service to facilitate the process.
The total cost of traditional divorce is far greater than most people realize. As a general rule of thumb, I suggest to my clients that a divorce will take twice as long and cost at least twice as much as they initially expect. Attorneys report that typical legal fees fall in the $10,000 to $15,000 range for each spouse. Yet in my local community, the costs consistently run much higher. Typical fees for my clients have been in excess of $50,000 and contentious cases with fees that exceed $75,000 per spouse are not uncommon. But the legal fees are only the tip of the iceberg. The same income that supported one household must now be stretched to support two, creating additional financial stress. There is considerable evidence from a wide range of sources that divorce contributes to substantial decrease in future earnings, higher future healthcare costs, lower consumer credit ratings, higher borrowing costs, higher insurance costs, lower rates of return on invested assets and higher taxes. Considering all of these factors together, it is not hard to imagine that the total long-term cost of divorce could easily exceed $100,000. Financial recovery usually takes years, and some never make it back to the economic level they enjoyed during the marriage.
The best way to control the cost of divorce is to recognize potentially damaging behavior before it gets out of control. This maybe easier said than done. Those who have gone through a divorce may look back on that period of their life as a time of “temporary insanity” and acknowledge that they made some poor choices during the process.
This article lists eight financial planning issues that should be recognized and considered to control the cost of the divorce process:
1. Changing advisors
Emotional ups and downs during the divorce process have a dramatic effect on our financial behavior. The need for steady advice from a long-term trusted adviser has never been greater. The problem now is that your regular accountant1, family attorney other financial advisers formerly worked with both you and your spouse together. The old advisers may initially try to be objective and unbiased but your old adviser will ultimately be closer to one spouse than the other. Inevitably, one spouse winds up without the of long time trusted advisers.
When you sense that your old advisers are not 100% in your corner, it is important to establish new adviser relationships that will endure and develop over the readjustment process. Avoid planning paralysis over the loss of long time advisers by recognizing the damage that lack of action.
2. Start the mediation or collaborative process early
The time for a couple to agree to control the cost of divorce is the moment immediately after they acknowledge that the marriage is ending. In many cases this is a sad but peaceful moment for the couple. This is the time to agree on peaceful money-saving procedures. A professional adviser should be brought in immediately to help prevent the process from deteriorating to an expensive battle. The chance of a successful mediation or collaboration is maximized when an experienced adviser is involved from the very start of the process.
In some cases the collaborative divorce process served the role of marital counseling and enabled couples to take a second look at whether they might be able to resolve the underlying financial differences that damaged their marriage.
3. Cash flow consequences of the property settlement
The split of marital assets in traditional divorce often does not consider the cash flow consequences to the parties.
When one spouse receives the bulk of the marital assets that require monthly payments, but now has a lower household income from which to pay those monthly bills, the results can be disastrous. Some settlements leave one spouse with significant immediate expenses but no liquid assets to meet those liabilities. Every proposed property settlement should be checked for cash flow implications before reaching the final resolution.
4. Tax implications of the property settlement
Pre-tax items like a 401(k) plan are not worth as much as the tax-free dollars like the gain in equity of a home. No property settlement should be signed until an independent tax adviser has reviewed the effects of the settlement. Be extra careful with this one since too many attorneys seem willing to skip this step in an effort to close a marital case quickly. Once the agreement is signed, the tax effects cannot be undone.
5. Employee benefits
One of the most common financial mistakes divorcing spouses make is to have the dependent spouse enroll in COBRA health benefits provided by the other spouse’s employer in order to provide continuity of coverage. COBRA was designed to be a plan of last resort and this turns out to be the best option in very few cases. Yet many people choose this more expensive benefit route simply because they do not know of other options. This can add $5,000 to $10,000 per year onto the cost of support. Health reform makes some low cost health coverage options available so be sure to consider all of the options. In some cases COBRA may be the only viable choice for short term coverage even if it is the most expensive plan.
Issues with 401(k) plans, pension plans, stock options and other incentive benefit plans can be tricky and couples are encouraged to keep an open mind and think creatively to maximize the value of their after-tax benefits allowed under the law.
6) Consumer credit
Consumer credit ratings plummet when couples do not work together to maintain credit worthiness for both partners. This is also often an emotionally charged issue, especially if the accumulation of marital debt is a significant issue in the decision to break up the marriage. Allowing one or both spouses to run into credit problems often has significant long term financial implications long after the divorce is resolved.
7) Shortsighted tactics
Even in war, it is not smart to decimate your enemy. Divorce, of course, is not war. Spouses must put aside their temporary emotions and realize that it is in their best interest to make sure that their former spouse survives the divorce intact – both financially and emotionally. Subsequent problems with delinquent child and spousal support can often be directly attributed to a failure to reach a “meeting of the minds” on the fairness of the settlement during the divorce process. A spouse who has input into the negotiation of the marital settlement and believes in the fairness of the agreement is far more likely to remain committed to the payment schedule.
8) Lifestyle adjustments
Failure to make adjustments to the new financial realities is likely the leading cause of prolonged financial pain for newly single people. One author call this a “divorce hangover”.
Some people, especially women who were not financially self-sufficient in the prior marriage, expect that they will be in another marriage in a matter of time. The statistics tell a different story. The plan is to change the mate and leave everything else basically the same. This approach is rarely successful.
Adjustments in attitudes, beliefs and lifestyle are usually necessary to make a financially successful transition from married to single person.
Brighter days ahead
There is a bright side at the other end of journey. It might be encouraging to add here that in my 20+ years of financial coaching with clients who worked through a divorce, I have noticed improved finances as well as a notable increase in confidence about money in every case. Financial recovery often takes years, but it is always rewarding to step back and view my clients’ progress. Smart coaching combined with personal determination and patience will produce financial improvement over time.
Financial recovery in a new post-divorce life begins with a commitment to minimize the financial cost from the moment the divorce process seems likely.
About the Adviser – Tony Novak, CPA, MBA, MT, has over 25 years experience as an independent financial adviser and is a UAHC-trained volunteer couples group discussion leader, college instructor in financial planning, accredited instructor for continuing education for accountants, attorneys and financial advisers, and one of eight advisers selected by the publishers of Financial Planning as moderator of the largest national online forum for financial advisers. Perhaps more important than professional credentials, Novak’s former life partner is a collaborative divorce attorney. This relationship ended amicably and successfully in 2004. He is now remarried and making it work for the past nine year through often difficult financial circumstances. Novak’s articles on personal financial planning strategies appear in dozens of magazines and newspapers.
1 Attorneys and Certified Public Accountants are restricted in the services they can provide to both parties in a divorce by professional ethics standards.