7 Things to Remember When Going Through a Divorce

Divorce can be fraught with financial risk under any circumstances. For high-net-worth couples, the challenge is magnified by the potential for contested claims involving real estate, investments, retirement accounts, business valuation, pensions and more. Anyone preparing to go through the process needs to approach it with a comprehensive plan in order to avoid mistakes that can have long-lasting consequences.

Here are seven ideas to keep in mind from the start of the divorce process:

1. Get your team together.

Given the complexity of high-net-worth divorces, you will likely need several people working on your behalf and coordinating as a team. Integrate your financial adviser, tax accountant and estate attorney early in the process to supplement the advice you’re getting from your divorce attorney.

Involving these other advisers will help you to better understand:

  • Tax rate arbitrage for tax-deferred, tax-free (Roth) and taxable assets with varying cost basis
  • The costs of establishing and maintaining two households
  • The future potential growth of different asset types
2. Make sure your financial adviser will stay on throughout the process.

 Choose a financial adviser you feel confident will remain on your team during the divorce. This might necessitate hiring a different adviser from the one you and your spouse have always worked with, or at least working with a different adviser team at the same firm.

3. Find and catalogue all assets.

Ask your financial adviser for a snapshot of all assets (a net worth statement is ideal) so you can ensure no assets “go missing” during the divorce process. Understanding your financial situation puts you in a better position to negotiate a fair divorce. And producing organized and easily digestible financial information at the start of the process can build trust between the spouses and lead to an equitable outcome.

It’s best to always stay engaged with your finances instead of leaving it to your spouse to handle and then trying to get up to speed on years of transactions when your marriage gets rocky.

4. Consider tax law changes affecting divorce.

Potential tax changes from a divorce are always an important consideration, but the tax legislation signed into law in December 2017 made this a critical factor to review.

Several changes made by that law can have a significant impact on divorce.

  • Alimony is no longer deductible for the paying spouse for divorce agreements executed after December 31, 2018, nor is it taxable for the receiving spouse.
  • The law eliminates personal exemptions, but provides higher standard deductions and higher limitations on child tax credits. So it’s important to think through who will get tax benefits related to children.

State tax laws, too, should be reviewed carefully as they can have an impact.

5. Don’t act hastily. Take the time to be thorough.

While few want to drag out a divorce, don’t rush it either, lest you agree to your spouse’s proposals without fully understanding the implications. By the same token, you should not make a proposal yourself before consulting with an adviser and getting up to speed on all relevant circumstances and possible outcomes. It is difficult to change agreements on such issues as property division, child support/custody or spousal maintenance once they are in place.

At Altair, we have sometimes helped clients apply the brakes on the process with a better outcome in mind. A client’s spouse once proposed changes to the split of retirement assets. Our client was skeptical and asked us to analyze the long-term impact of the changes, and we recommended an alternative approach that produced a more equitable result for our client.

6. Document acquisitions and keep properties separate.

Always keep detailed records of how assets were acquired during your marriage. The timing and source of funds used will be important documentation; having records on hand can allow the process to be completed more quickly and cost-effectively. This is the case, for example, with executives and their business records, where the burden of proof is with the executive to show that a stock award from before the marriage is non-marital property.

It also is essential to keep separate property from being intermingled with marital property. This is particularly important if you live in a community property state. (The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.)

 7. Update your beneficiaries.

Updating beneficiary and contingent beneficiary designations on life insurance, 401(k)s and IRAs to reflect a divorce may seem obvious, but it is a common mistake of omission. Also make sure to review estate planning documents – living trusts, guardianships and powers of attorney – to reflect your new situation.

Divorce is usually an emotional process, and those emotions inevitably spill over into the financial considerations. But if you heed these essential points, you should be able to avoid harmful mistakes and reach an outcome that is satisfactory and fair to both sides.

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.