When you’ve made a decision to get divorced, you’re eager to get things in order and move on as quickly as possible. A big part of moving on includes taking control of your finances.
For some people, it’s the first time in their entire lives they have been in charge of their own money. First their parents and then their spouse may have always overseen the big financial decisions. They may never have balanced a checkbook, managed credit or opened a retirement account.
No single article can walk anyone through the long to-do list. But before your divorce is final, you’d be smart to sit down with a Certified Divorce Financial Analyst® (CDFA™) to make sure your final divorce agreement doesn’t have long–term consequences that could negatively affect you or your children.
Here are some key issues you’ll want to work on immediately with your professional advisor.
- Changing or naming new beneficiaries in the case of your death. No, it’s not a fun thing to think about but it’s critically important. Your soon-to-be-ex spouse is probably your beneficiary now. Imagine him or her getting everything and not your children, extended family, or charitable organizations important to you. As part of this task, you will need to open new retirement accounts and name new beneficiaries such as your children, parents, or siblings.
This can be complicated if you live in a community property state like California. You’ll need to get your spouse’s consent to name a new beneficiary. Many financial institutions require this even if you don’t live in a community property state to protect them from lawsuits. There are some circumstances where you may decide to have your former spouse remain the beneficiary. A CDFA can lay out your options for you.
- Taking status as a single individual for tax/other purposes. Many people will negotiate the date on which they will take status as single individuals. You might wait until the start of the year following your separation for any number of practical financial considerations. But beware unintended consequence. While you may save on federal income taxes for example retaining your married status and filing jointly for the entire year, it can affect the division of retirement accounts and the naming of beneficiaries of newly opened retirement accounts. Remember, if you aren’t “officially” divorced, your spouse is automatically the beneficiary of your retirement funds.
So you’ll need to get consent from your former spouse to name your children or someone else as your beneficiaries. Or perhaps you can reach an agreement for your former spouse to be the beneficiary only on a temporary basis. But if something happens before you are able to make a change, your ex could end up with money you didn’t want him or her to have.
If your ex–spouse balks, you may end up in court. Even if your spouse doesn’t put up a fight, he or she still ends up knowing your business and you may have the sort of interaction you were trying to get away from in the first place.
- Changing how your investments are managed. Maybe you just decide to wait. Waiting is difficult when you’re eager to get past your divorce issues and get a fresh start. But beyond your personal impatience, there could be some harm done by waiting. The major concern is the management of investments inside of the account. When transfers are delayed, the former spouse often manages the funds; sometimes an investment advisor you’d rather not be working with manages them.
For example, a client recently told me she would never invest in anything risky like Facebook’s recent Initial Public Offering (IPO). Imagine her shock when she learned her investment advisor had purchased 3,000 shares of Facebook in the IPO! The advisors used by a couple during marriage are rarely a good choice to continue working with both parties after the divorce. It’s simply hard not to choose sides, not to share information, and the advisor may not be familiar working with a newly divorced single individual. Can you trust the same advisor working with your ex–spouse? Without complete and unquestioned trust, an investment advisor has no business working with you.
Making this financial transition following a divorce can be complicated and uncomfortable. But it can also allow you to remake your financial future in a way that supports your ongoing comfort, security and dreams. It offers you the opportunity to take control of your finances as a single individual, and escape any smothering power-struggle.
Complications can have lasting effects on your life by allowing the power struggle to drag on after your financial agreements are reached. Don’t just hope it will all go away, or it will all somehow work itself out. Put yourself into the hands of an experienced CDFA professional during the process. Let him or her help you through the big decisions and obtain the most financially advantageous settlement possible for you. You’ll end up far more financially independent and empowered than you might have ever imagined. It’s an investment in yourself that will pay dividends the rest of your life.
Justin A. Reckers, CFP, CDFA, AIF is Director of Financial Planning at Pacific Wealth Management, Managing Director of Pacific Divorce Management, LLC, a Board member of the Institute for Divorce Financial Analysts and President of the Collaborative Family Law Group of San Diego.