How to Divorce-Proof Your Finances
No one gets married thinking they’ll ever divorce, but it still happens to half of all couples. A big reason why? Money.
A survey by Experian revealed that finances played a role in 59 percent of divorces. How a couple handles their shared and separate assets can be a bellwether for future issues in their relationship.
All too often, a lack of openness about financial issues can lead to a difficult divorce. How can you and your significant other or spouse protect your relationship from money-related problems? And if you are considering a divorce, how can you minimize the financial impact it would have on both of you?
Talk About Financials
The Experian survey further showed that many couples don’t talk extensively about their financial habits and goals before they tie the knot — the majority of both men and women (but especially women) are surprised by their new spouse’s spending.
Many couples don’t discuss their salary or credit score before joining their finances together, either.
Start talking about money today, whether you’ve been together for 10 months or 10 years.
If your marriage is ending, work with professionals like mediators, attorneys, and certified divorce financial analysts (CDFA), who can guide you through the divorce process and help you both walk away with the most positive financial outcome possible for you both.
While You’re Dating: Communicate, Communicate, Communicate
That means talking about your incomes, credit scores, debts, spending and saving styles, and financial obligations to relatives (like if you help support elderly parents or make child support payments to an ex-spouse).
It can be hard to do this, especially if you’re still in the honeymoon phase of a new relationship. Who wants to talk about something as taboo as money while lovingly staring into someone’s eyes?
Make it easier by starting small. Instead of one intense, hours-long discussion, you can learn a lot about each other over time and figure out where you agree and disagree. A conversation about your jobs and career goals, for example, is a great time to mention your salary history, the kind of lifestyle you can afford on your income, and what you hope to be paid in future jobs. Telling a story from college could be a good lead-in to talking about your student loans.
If you sprinkle money talks throughout your relationship, by the time you’re considering getting married and combining your finances, you’ll know a lot about each other.
“The key to me is communication and transparency. If there are secrets, that makes it kind of a dark hole," said Mike Miller, CFP, managing director of Integra Shield Financial Group in Plymouth, Minn.
“Couples would do well to sit down together, even before they’re married, to talk about how they’re going to merge their money lives together,” said Miller, who has worked with divorcing couples for nine years. “They often come from different backgrounds.”
Didn’t Talk About Money Before Marriage? Start Today
If you didn’t discuss your finances before you got married, you might be surprised at some of your spouse’s spending and saving behaviors — or the balances in some of their accounts. The time to create a household system for your money is right now.
Miller notes that many of the issues that come up for married couples include budgeting, debt repayment, and changes in employment.
“How does it change the relationship to, say, have a female breadwinner? Or equal incomes? Or the husband makes more? It’s really about sitting down and having conversations about conflict,” he said. “These are opportunities to make things better now and in the future.”
Diane Park, CPA, CFP, CDFA and principal for Wealth Management for Cahill Financial Advisors in Edina, Minn., suggests a joint effort when it comes to household money management, even though it’s common for one half of the couple to lead the charge.
“As couples go into a marriage, a formula for success is they both need to be engaged with the finances,” she said. “When I work with spouses, I want both of them to be in the meetings.”
Inventory Your Assets
Having your assets inventoried can greatly reduce stress in the event of a divorce, because the division of assets can get heated.
In the course of your money conversations with your spouse, create a list of all your accounts and valuable assets. Not only does this help keep you both honest, but it’s work you’d probably end up doing anyway. You need to photograph or record video of valuables for your homeowners insurance policy, and if you ever work with an accountant or financial planner, you’ll have to produce financial documents. Think of this as a good way to get your homework done early.
It’s important to know which assets are jointly owned and which existed before your marriage, as state laws can affect what is considered marital property (and is therefore divided in half in the event of a divorce).
If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), be careful when commingling assets that belonged to you before you got married. If you do, they become marital assets and you only have the right to half of them if you divorce.
In common law states, it’s easier to keep property separate, because you can retain full ownership of an asset even if you purchased it while married. If you and your spouse jointly buy an asset or open a bank account, then it would be divided evenly if your marriage ended.
“What do we fight about when Grandma dies? It’s the china plate that we used at Thanksgiving. It’s the stuff that people fight about,” Park said. “Sometimes it helps if you can put it on paper and turn it into a task. That takes the emotion out. If we do this before that time of crisis it’s already done and more complete. It’s not as stressful.”
Retain Some Independence
Couples who combine all bank accounts may be setting themselves up for arguments if they frequently disagree on how money should be spent.
Establish credit in each of your names, too, because this gives you additional control over your credit card usage and payments. Simply being an authorized user on your spouse’s card means that you don’t have the ability to close that account. If your spouse doesn’t pay their credit card bills, you’ll be liable for the payment.
Your soon-to-be-ex-spouse may try to use your identity to open accounts and lines of credit without your knowledge. If you worry this may happen, take precautions by freezing your credit and checking your credit report to what accounts exist in your name that you didn’t open yourself.
“One of the things I see, particularly in divorces, is sometimes one spouse is more controlling than the other about finances,” Miller said.
One way to curb micromanaging is a “yours, mine, ours” approach to your bank accounts. “Each spouse, ideally, in my opinion, should have their own spending bucket, like an allowance,” he said. “The two agree how much goes into those spending accounts.”
Preserve Your Ability to Earn an Income
It’s common for both halves of a couple to have to lower their standard of living after they divorce. This is especially true if only one spouse worked. The non-working spouse can be especially vulnerable in a divorce because returning to work after years at home can be difficult.
What can non-working spouses do to advocate for themselves when divorce is imminent? Stay up-to-date in their career field, keep professional licenses active, and even volunteer or work part-time. This puts them in a better position to work again in the future if they need to support themselves after their marriage ends.
Sometimes an alimony agreement, where the working spouse helps support the non-working spouse financially, can benefit both, especially if this allows one parent to stay home with young children. There are tax benefits to alimony, as well: the payer can deduct alimony from their taxes, which further motivates them to be generous.
Miller helps clients who don’t currently work think about their marketable skills and what training they’d need to reenter the workforce.
“We use vocational counselors who are familiar with divorce to work with an individual to help them figure out what their vocational opportunities might be,” he said. “Many times the working spouse will support that because they want to see the other spouse contribute financially to the situation.”
Plan Your Estate
If your spouse has rights of survivorship on any of your property, or if they’re still listed as a beneficiary on any of your accounts, a will indicating different beneficiaries isn’t enough, and your assets will still go to your ex after you die.
Once your divorce is finalized, meet with an estate attorney to discuss how to adjust your estate plan. This is especially important if you have children or you eventually remarry and want your current spouse to inherit property from you.
Make sure your ex-spouse isn’t still on the title of a house that is now yours. This could have tax implications for them if you sell the property and there is a tax on the gain from the sale.
“Estate planning is huge,” said Park. “I always remind everyone we need to go through your estate plan again. Make sure money doesn’t go to the ex-spouse if you don’t want it to. Beneficiary designations are a must.”
Get Professional Help
During any major life change, it’s a good idea to seek the help of financial professionals — financial planners, accountants, and estate attorneys. But divorce is an especially emotional time, so you want the right people on your side.
A certified divorce financial advisor, or a financial planner with extensive experience in helping clients through a divorce, can be extremely helpful. Their role is to analyze the family finances and provide expertise on how the divorce can affect both parties. This information can be a huge part of the mediation process, where couples decide how to divide assets.
Think of your financial planner is part of your team, in addition to your legal counsel. Park also emphasized the importance of self-care during a divorce. “We always focus on the legal and the financial,” she said. “But we need to think about mental health as well.”
“I talk about inter-space negotiations,” said Miller, who sees his work as helping clients see the whole picture at a time where it’s easy to focus on every small detail.
“I have an orange sitting on the table. How are we going to divide that orange?" he said. "More often than not, people say to split it in half. But I ask, ‘What if Spouse A wants the peel for some cooking, and Spouse B wants the inside because they’re hungry?’ If you cut it in half, you both only get half of what you want. But if you talk about what you want, you might both get all of what you want.”