It’s no secret that many couples end up airing their grievances in court. About 50% of our married population ends up in divorce, with second marriages showing a higher rate of divorce at around 65%.
Rarely looked back upon with fond memories, the battling and legal costs associated with divorce brings anguish. Almost as rare is a financial planning discussion about the financial consequences of divorce before the final decree is agreed to by all parties.
The financial issues taking front and center in most divorce proceedings are tax consequences, insurance maintenance requirements, health insurance for now and the future, dividing pensions and IRAs, dealing with family business issues, the use or sale of the family home, among many more potential issues. Many are so drained by the time a settlement is near, many compromises are made, some lasting forever.
An example of compromise may be exchanging one asset for another. Let’s say that you want the family business and he wants the home. Today they may be appraised at similar values, so the exchange appears to be equitable. But the future has many unknowns and taking an all or none approach could be costly if you bet wrong. For example, the sale of the home could exclude potentially $250,000-$500,000 from taxation whereas the business gets no exemption and pays tax on the entire gain when sold.
A wiser attitude is to emotionally detach from any specific asset and examine both your short and long term financial needs and goals. If your long term goal is owning a home outright, then maybe receiving the home in your settlement is best. Can you afford the home and what implications does it have on your current cash flow and your future income needs from the sale profits of an unknown amount? Crunching some numbers to assess the impact of keeping or selling the home, including any possible tax penalties ought to be evaluated prior to signing the agreement and not years later when you’re thinking of selling.
Another soft issue is the maintenance of life insurance for either spouse following the divorce. This is almost always negotiated into a divorce agreement, yet I have rarely seen any mechanism required that would tell the beneficiary if the premium has been paid or not. In addition to keeping the policy alive, insurance policies should be evaluated every 5 years or so to verify they’re still on track to deliver what was promised. If it’s permanent insurance, beneficiaries may like the right to examine the policy from time to time to ensure it’s still performing as originally illustrated. If it’s not performing, the beneficiary under a decree of divorce should have the power to make changes to require greater premium payments or allow a switch to a new policy with better performance.
There are books written about the financial consequence of divorce. We can’t begin to cover it all now, so ask your attorney how they’d handle the financial consequences of your divorce, then consult a financial professional well -versed with divorces. The worst case is that you’ll confirm that you’re being well served.
John P. Napolitano CFP®, CPA, PFS, MST is Founder and Chairman of Napier Financial in Braintree, MA. Visit napierfinancial.com for more information. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult your legal counsel regarding your specific situation. Investment and financial planning advice offered through US Financial Advisors and Great Valley Advisor Group, Registered Investment Advisors.
