Financial Planning
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

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.

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