Opinion: Take steps to minimize the financial fallout of a divorce
By Kimberly Malesky
A divorce doesn’t have to be contentious, and most couples don’t have to go to court to settle.
There is more than one way to navigate the process, and the easiest — and least expensive — is the “kitchen table divorce,” where couples work through the divorce themselves, or they can choose mediation or a collaborative “uncoupling.”
But to do this, you must understand your finances first.
As a certified divorce financial analyst, I am here to demystify the process and help individuals understand how they will financially sustain their new lives and move on with confidence while focusing on the more challenging and important topics of child custody arrangements and parenting agreements as they move through their divorce.
Helping couples understand finances, avoid surprises down the road and set realistic expectations are my primary goals when working with divorcing spouses. Too often, though, I face the dread of telling new clients they came to me too late.
When couples divorce, they immediately think they need to hire an attorney. While this isn’t a bad idea, it’s not the first thing that should be on their to-do list. First should be to hire a therapist, followed by a financial adviser, and then an attorney.
This is my recommendation and the reason I pursued this niche area of work.
Divorce settlements are difficult to adjust, undo or alter in any meaningful way once signed off by a judge. So, understanding how a divorce settlement affects you before signing is key to a successful divorce.
Divorcing spouses must first understand the financial ramifications of what they are setting out to do. Understanding the numbers is the easy part of a divorce, if you do it correctly and have the right team in place. This frees up time and energy to focus on child custody issues and other considerations as part of a divorce settlement. It can go sideways if you don’t understand the financial ramifications of uncoupling.
A common scenario is when Party 1 refuses to share his retirement account and Party 2 refuses to sell or leave the marital home. This immediately causes tension as both are emotional decisions. Breaking down the ramifications of obliging both parties allows them to determine if these choices are in their best interest individually.
Illustrating how things will play out if Party 2 remains in the marital home, from a financial perspective, will allow this individual to make an educated decision. Party 1 may be surprised that splitting his pension or retirement account may be in his best interest. What will the projected tax brackets be in two to 10 years? If Party 1 will remain in a higher tax bracket, it could potentially be in his best interest to share this asset and corresponding tax consequences.
A common mistake when getting divorced is neglecting to factor in taxes. Running financial projections to determine tax brackets and the after-tax figures is key to understanding the effects of a settlement. The division of accounts appears simple on the surface; however, what are the after-tax ramifications? Did one party take a low-cost-basis stock, which will trigger capital gains for them in the future?
Drilling down the details is key in a divorce to ensure there are no surprises. I commonly hear, “If I knew this, I wouldn’t have accepted the settlement.” If you work out the finances first with a certified divorce financial analyst, you’ll avoid those regrets.
Creative solutions exist and no two settlements look alike. While it’s not unusual to compare settlements with friends, neighbors and colleagues, it can be misleading and confusing because every divorce settlement and financial situation is different.
The same income is now being distributed between two households, not just one, so lifestyles will need to be adjusted. It’s the surprise factor that creates resentment and animosity during an already difficult time, so working out those details ahead of a divorce is smart.
This is why it’s so important to review the details, understand the tax ramifications and create a realistic budget for moving forward.
My role as a certified divorce financial analyst is rewarding. Witnessing a divorcing couple transition from fear of money as it relates to their future to feeling empowered feels gratifying.
Understanding how they will financially sustain their lives as they transition into the next chapter allows them to move on with confidence. It also allows them to focus on what matters most to them when it comes to their children.
So consider working with a certified divorce financial analyst to untangle your finances before you start the divorce process. A harmonious solution does exist. You won’t regret it.
• Kimberly Malesky has worked as an investment adviser for more than 15 years in Santa Barbara County and is a certified financial planner and a trained mediator. She is also a certified divorce financial analyst, which is separate from investment management.