Financial Planning
Need help? Explore our related services
May 11, 2023

Finances in Divorce

A divorce can have a significant impact on your financial future, especially if you don’t have a strategy in place.
Stewart Willis
PRESIDENT & HIGH NET WORTH ADVISOR
Get In Touch

Divorce is emotionally exhausting and mentally draining, but it can also be financially devastating, especially if you go through the process without a plan. Many people think once you’ve made the decision to divorce, you find a divorce attorney, handle the legalities and you each go on with your separate lives. 

It’s definitely important to have good legal counsel; in fact, this is an area to avoid bargain-hunting! A good attorney is worth the money, if for no other reason than that they’re unlikely to artificially prolong the process to raise their billable hours! 

But an attorney is only one half of the expert team you should have in place in order to get through a divorce with as little damage to your financial situation as possible. There are a number of monetary issues to consider, and even the best divorce attorneys aren’t always familiar enough with the intricacies of financial instruments to make sure you’re getting a fair deal in the split.

Even Splits Aren’t Always 50/50

A common perception of a “fair” divorce is one in which both parties walk away with asset values that are about equal. But even when the divorce looks like an even split on paper, it may not be quite so equitable in practice.

Consider this scenario: A divorcing couple has $2 million in assets, evenly split between IRAs and Roth IRAs. If one partner got all the IRAs while the other got all the Roths, on the surface, they each get $1 million in assets. However, the person with the Roth accounts doesn’t have to pay taxes on them, while the person with the IRAs does. It’s suddenly clear that one party got a much better deal than the other! 

We had one client whose soon-to-be-ex tried to keep liquid assets for themselves, while our client would be given 10-year annuity contracts that would generate a penalty when cashed in. On paper, it was an even split, but the real-world results would have been anything but even. We quickly nixed that idea and worked toward a more equitable outcome for our client!

Divorce assets should not be treated as merely entries on a ledger with set dollar amounts. It’s also important to consider how those assets work; are some only available decades from now? Do some generate tax events while others do not? These are questions that must be considered in a truly equitable divorce, and many attorneys don’t know enough about specific asset classes to ask them. 

Social Security Counts

Many divorcees fail to take Social Security into account. If one person in a marriage contributed to Social Security while the other did not, it’s common for them to not consider Social Security benefits when they divorce, which can result in an uneven split.

This recently happened to us at Asset Preservation Wealth & Tax: A client came to us for help with her divorce. Her husband ran a business in which she was a partner. Their income was structured such that he received money from the business as income, but she did not, and therefore never had to contribute to Social Security with her portion of the ownership. This means all of the potential income from Social Security will go to him. You can’t split Social Security in a divorce, which means we needed to make sure that future income would be accounted for in determining how to divide other assets.

Divorce is a Business Transaction

The idea that divorce is not an emotional or relationship procedure might sound strange; after all, divorce almost always stems from emotional dissatisfaction between the partners. But once the decision is made to divorce, it’s very important to flip that switch and go into business mode. 

Leave any anger or upset feelings behind and approach the process as a business decision that requires rationality. Don’t hurt yourself to hurt your ex, and don’t hurt yourself just to get the divorce over with. Allowing emotion to drive financial decisions in divorce won’t serve you well.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.

Ready To Get Started?

You spent all your working years accumulating this wealth. Now it’s the time to make the most of it with effective tax and wealth management.