You Said “I Do”, But What If One Day You Say “I Don’t”?
In a previous article, we discussed the advantages of a prenuptial agreement when anticipating marriage. Today with the divorce rate over 50%, it is a good idea to consider what happens if you married without a prenup and your marriage doesn’t work as planned.
While divorce is not the most pleasant subject for an article, it’s important to know some basics should it happen to you or someone you know. Recently, Rob Kaercher spoke with Bill Ordway of The Ordway Law Group asking what he considers top financial considerations when preparing for a divorce settlement. Bill is an experienced Family Law attorney who deals with high asset divorce cases. He has seen the advantages of proper preparation and the ramifications of poor planning. Here are Bill’s Top Five Financial Keys to a Positive Settlement:
- Prepare Early and Build a Strong Team of Advisors: Bill says, “Marriage may be long or short but divorce is forever.” Therefore, you must get your settlement right the first time. From the start of your case, or earlier, you need to take steps to prepare for the outcome. Bill further notes that your goal is to enter the settlement process with a full understanding of what your settlement should look like, and why. First, he recommends that you hire a lawyer with who has both vast experience in complex high-asset divorce work as well as one who will listen to you. Other key advisors include a Financial Planning/Wealth Advisor who can help you determine which marital assets will benefit you the most in your post-divorce life and will develop a post-divorce financial plan for you. If the divorce involves a family business, self-employed spouse or high worth spouse, he strongly recommends including a forensic accountant on your team. The forensic accountant’s role is to determine the value of the business, and whether any assets have been hidden. You may also be well served by engaging a CPA or tax lawyer to determine tax consequences of the settlement. All of your advisors must be willing to put your best interests first.
- Know the Marital Assets and How to Take Them: Your lawyer will determine which assets are marital and subject to equitable distribution. Develop a Marital Balance Sheet showing what marital assets go to each party. Understand which assets are most beneficial to you moving forward and which hold risks. For example, receiving cash provides immediate liquidity and can be invested to best fit your future needs. If dividing vested stock options, a pension or retirement assets what is the liquidation value after selling these assets?
- Establish a Post-Divorce Financial Plan: Before settlement, have a realistic financial plan and budget detailing how much it will cost you to live moving forward and for how long. How will you cover these needs from your portion of the settlement? Having this plan will help in determining what marital assets you should put on your side of the marital balance sheet.
- Consider Tax Consequences: When determining what particular assets you wish to receive, you must know what taxes and penalties may be involved. For example, if receiving a portion of your spouse’s 401(k) do you take it in cash (taxable) or can you roll it over into your own 401(k) or IRA (non-taxable)? What about investments from taxable accounts? Receiving and liquidating stocks with a low cost basis will have a greater capital gains tax than stocks with little appreciation. Should you accept periodic alimony payments (taxable to the recipient and tax deductible to the party paying) or accept a lump sum property settlement with no tax consequences? Each situation is different and what might be good in one circumstance might not be the best choice for another.
- Make Sure Ongoing Obligations are Insured: If one party is to receive child support, alimony payments, or other payments toward an equitable portion of marital property over a period of years, what happens if the other party dies before the obligation is met? You should make sure the Settlement Agreement requires the party with the ongoing obligation to insure his/her life in an amount covering the obligation in case of death or disability.
According to Ordway, addressing these five considerations before entering into a Divorce Settlement Agreement should help produce a much better settlement outcome, reduce the stress and uncertainty inherent in the divorce process, and provide you a significant return on any investment in experts used during the settlement process.
Smith & Howard Wealth Management works with our clients to create a complete financial plan, including a detailed outline of all assets, investments and liabilities. We frequently work in concert with attorneys to review this information prior to the attorney drafting a Settlement Agreement. Our advisors, in our role as your family CFO, also connect clients with other experts to build their team of advisors and reduce the amount of stress involved as much as possible. Please call us at 404-874-6244 or email Rob.