Divorce Financial Planning: What to Do Before, During and After Divorce

Going through a divorce is emotionally and financially challenging. Whether you're considering a divorce, in the midst of negotiations, or adjusting to life afterward, a solid financial plan can help you move forward with confidence. This guide includes a financial checklist for divorce and advice about what actions to take right away versus long term.

How to Financially Prepare for Divorce

Divorce is expensive. Legal costs can be as low as $500, but the average cost is $7000–$11,300. 

Some people believe there is a strategic advantage to being the “first to file,” but this is rarely true. Having a clear plan of action and money set aside can give you an advantage during negotiations.

Even if you and your spouse are on good terms (relatively speaking), finances can be a major source of conflict. Even in happy relationships:

• 45% of partners argue about money 
• 25%+ of couples say money is their greatest relationship challenge

Source: Fidelity’s Love & Money report

Divorce Preparation: Financial Checklist

If you’re thinking about a divorce or legal separation, here are the first steps to take:

1. Take Inventory of What You Own and Owe

Make a complete list of all your assets and debts, including:

• Home, vehicle and personal loans
• Joint bank and credit card accounts
• Investment accounts including IRAs, 401(k)s, and brokerage accounts)
• Valuables such as jewelry, artwork and collectibles

2. Gather Important Documents

• Tax returns for the past three years
• Insurance policies (auto, home, life, medical and dental)
• Phone, utility, and streaming service bills
• Titles and deeds for property, vehicles and other valuables

You’ll need the documents above for legal proceedings and many will need to be updated when your divorce is finalized, so it’s worth having them close at hand.

3. Build Your Support Team

Before you speak to your spouse about separating, it’s a good idea to consult with:

• A divorce attorney: to understand your rights and obligations
• A financial advisor: who can help protect your assets and credit rating
• Trusted friends or family members who can offer emotional support

4. Establish Separate Finances

• Open a personal checking and savings account
• Apply for credit cards in your name alone

Post-Divorce Financial Checklist

Close joint banking accounts and open new accounts in your own name. Including:

• Savings accounts
• Checking accounts
• Investment accounts

Remove your name from recurring bills you will no longer be responsible for:

• Electricity
• Gas
• Water/Sewer
• Trash and Recycling
• Home Security
• Cable/Internet
• HOA
• State property taxes
• Quarterly or annual services (HVAC, pest control)

Apply for individual:

• Vehicle insurance
• Home/renters insurance
• Mobile phone plans
• Streaming services

Miscellaneous:

• Update emergency contact information with your employer
• Revoke any power of attorney authorizations your spouse may have
• Retitle jointly-owned property (homes, vehicles, etc.)

Update beneficiary information for:

• Life insurance plans
• Long-term care insurance
• Retirement accounts (401k, IRA, etc.)
• Pension plans
• Certificates of deposit
• Living trust or will 

Note: The list above is for illustrative purposes only. You may need to take additional actions based on your individual circumstances. Contact us for personalized recommendations.

Estate Planning and Divorce

If you have assets you want passed on to your children instead of your former spouse, be sure to update the beneficiaries on all your accounts, including savings, checking, certificates of deposit, investment and retirement accounts. Updating a trust or will is not enough.

That said, it IS important to update your trust or will. Any property listed in the trust must be retitled (homes, vehicles, boats, etc.). Even if you designate children or other relatives to receive assets when you pass away, if your ex-spouse is still on the deed, a court may override your wishes.

If your ex-spouse is currently the executor of your will or the trustee of your estate, you have a few options.

• Leave things as they are.
• Replace your ex-spouse with a friend or family member.
• Designate a team of professional trustees (such as a CPA and a lawyer).
• Choose a corporate trustee.

Learn more about the role and responsibilities of a trustee.

Retirement Accounts

Retirement savings accounts and pensions are often divided as part of a divorce settlement. Divorce is considered a major life change so, once things have settled down, it’s a good idea to meet with a financial planner who can help you update your retirement savings strategy. 

In the immediate term, there are tax pitfalls to avoid. Here’s what you need to know:

401(k) and IRA Balances

Assets can be transferred between spouses without an early withdrawal penalty if proper procedures are followed. Financial institutions need specific documentation to initiate the transfer.

• For employer-sponsored plans such as 401(k)s, you’ll need a legal document known as a QRDO (qualified domestic relations order) is required.
• IRAs, including Roth IRAs, require a divorce decree or a property settlement agreement that clearly defines the IRA asset division. 

To avoid penalties and income tax, assets must be transferred from one account to another. If you are under age 55 (401(k) plans) or 59 ½ (IRA accounts) and don’t follow the correct procedures, withdrawals will be taxed at your regular income tax rate in addition to a 10% fee.

Here are a few more tips:

• Consider dividing assets by percentage instead of dollar amount. If the stock market experiences a sharp decrease, the divorce agreement may need to be modified which will incur additional legal fees.
• To ensure a smooth transfer, your divorce agreement should include the account numbers and financial institutions where assets will be transferred to or from.

IRA assets transferred into your account from an ex-spouse don’t count toward your contribution limit for the year. That said, if you are a high-income earner who contributes to a Roth using the backdoor method, you’ll need to open a new “clean” IRA to continue converting assets. 

Pension Plans

Pensions work differently than 401(k) and IRA accounts and rules vary from employer to employer. Generally speaking, the pension-holding spouse can either buy out the non-participant spouse or have a set amount distributed to their ex monthly or bi-monthly.

Social Security Benefits

People married at least ten years can collect Social Security benefits based on the ex-spouse’s income. Some couples delay their divorce filing 6-12 months to reach the ten-year mark rather than lose this benefit.  

Longer-Term Considerations

As mentioned above, your retirement savings strategy may need to be updated after your divorce. Living expenses may increase and your tax status will change. A financial expert can help you make adjustments and plan for the future.

At Assembly Wealth, we take pride in helping clients navigate difficult times and guide them to a brighter future. If you’re considering a divorce or recently experienced a significant life change, we can help update your investments, answer questions and act as a sounding board. 

Please contact us online or give us a call at (415) 541-7774. We’re here to help.

Related Reading:

• Retirement Planning Tips for Singles and Single Parents
• The Smart Way to Leave Assets to Your Heirs 
• Financial Planning for the Sandwich Generation
  
  

Disclaimer:

Assembly Wealth (“Assembly”) is an SEC registered investment adviser; however, this does not imply any level of skill or training and no inference of such should be made. The opinions expressed herein are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. We provide historical content for transparency purposes only. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Mention of a security should not be considered a recommendation or solicitation to purchase or sell the security, and any securities mentioned may be held by Assembly for client portfolios. 

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