7 Ways to Mitigate the Financial Fallout from Divorce
November 7, 2014
Over the past several months, you may have read about billionaire hedge fund manager Ken Griffin’s divorce proceeding with his wife, Anne Dias-Griffin. His company Citadel is one of the world’s most successful hedge funds, she was the founder of her own hedge fund, and the two of them were Chicago’s undisputed power couple. There are millions — perhaps billions — on the line in this divorce.
For the rest of us, divorce probably means even greater financial pain because we have far scarcer resources. Depending on your source, the average cost of a contested divorce is $15,000 to $30,000. But that’s just the direct court costs and legal fees. Inevitably, there will be indirect costs such as therapy, financial advising, Realtors, new mortgages and so on. There will now be two households to support, a far more expensive prospect than one. The pot of money for retirement must be divided, again diminishing buying power. Insurance — be it health, dental, vision, home or auto — is cheaper when offered on a family plan or when policies and property are pooled.
Simply put, together is far more cost-effective than apart and divorce drags down everyone’s living standard.
Here are some ways to prepare for — and hopefully mitigate — the financial fallout from a divorce.
If you’re single and have substantial assets, consider a Domestic Asset Protection Trust (DAPT) before marriage.
A prenuptial agreement isn’t ironclad and can cost a lot in legal fees proving its legitimacy. A DAPT allows the trust creator to become a discretionary beneficiary of the trust while also assuring protection of trust assets from the creator’s creditors. If you’re already married, it’s too late for a DAPT. To discover if a DAPT is right for you, do some research and talk to a lawyer.
Have a job.
It sounds harsh, I know. And I assure you, no one admires and understands the commitment and hard work of stay-at-home parents than I. But the truth of the matter is that a job, marketable job skills and the ability to cover basic living expenses are advantages that every divorced non-employed person rues not having. Margaret Klaw, family law attorney and author of “Keeping It Civil,” summed it up in the Wall Street Journal earlier this year: “There is just no question that money is power and the power dynamic in divorces where one person is financially dependent on the other is dramatically different from those where both spouses have the ability to pay the rent.”
Have a good support team.
It’s universally understood that in divorce you need a good lawyer. But what many don’t realize is a good financial adviser is just as essential because divorce is about dividing assets, dealing with debt and securing your children’s future. You may require a therapist, accountant and child psychologist as well. As Nashville-based certified divorce financial planner Sandy Arons describes it, “Divorce is 45 percent emotion, 45 percent finance and 10 percent law. You need an expert for each, and that’s three, separate, full-time professions.”
Be as amicable but strategic as possible.
Rise above the resentment and injury for two reasons: the bill and, should you have children, future goodwill. The No. 1 factor for cost in divorce is how long the case lasts, so don’t drag it out. Furthermore, that person remains a parent of your children, and you’ll be seeing them at birthdays, graduations and weddings the rest of your life. That said, make sure you get your fair share of the assets and are thinking long-term. The retirement account, or a bigger share of it, could be smarter than the house, for instance. For that matter, it may make more sense to sell the house. “Too many people in divorce are short-sighted,” says Arons. “Don’t accept an offer until you fully understand the tax issues and financial implications for the next 5, 10 and 15 years.”
Prior to the divorce, open accounts in your name.
Apply for a credit card in your own name while household income is higher. Establishing accounts in your name protects your credit.
Remember big-ticket kid expenses.
Outline in your settlement how expenses like braces, summer camp, cars and tuition will be paid for. If you’ll be due alimony or child support, insist your spouse get life insurance to ensure payment.
Review your taxes and estate plans.
Only the custodial parent can claim kids as dependents, typically. Alimony is deductible to the payer and taxable to the payee, so remember to include these figures in your negotiations. And finally, be sure to revise all estate-planning documents such as your will, living will, powers of attorney (general, durable and medical) and trusts.
If you and your spouse are divorcing, seek financial as well as legal advice.
Phoebe Venable, chartered financial analyst, is President & COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.
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