Part 2: Navigating Divorce with a Solutions-Based Mindset
May 25, 2022 •Scott Logan, CFP®, Wealth Manager
The process of divorce litigation can be unpredictable and oftentimes unique to each couple or individual. This makes it difficult to list definitive steps to pursue once the decision to litigate has been made. However, there are some clear steps to take in preparation for divorce--- which can be found in part one of this series.
The process of divorce can extend over a varying expanse of time depending on your situation, and it is normal to be mentally and physically fatigued after the divorce decree has been signed. After this big moment, it’s very common and understandable to want to take a hiatus from completing any tasks, but there are some things you should do as soon as possible to make sure you place yourself on the correct path financially.
Below are nine post-divorce financial related action items as you officially begin this new and previously unanticipated stage of your life's journey.
- Open new credit card accounts
While certainly not an advocate for misuse or even overuse of credit, looking out for your personal credit is important during and after a divorce. This is especially relevant for people with little or no credit or who are now living without the safety of an emergency fund. It is essential to secure your own personal credit line via a credit card while you make the transition to post divorce life.
- Close accounts held jointly with your ex-spouse
The last thing you want to deal with post-divorce is an over drafted joint bank account or charges to a joint credit card to which your ex-spouse is still connected. Close joint accounts immediately.
Inform the respective credit card company in writing of legal obligations for you or ex-spouse to pay off the balance and notify them that no additional charges are allowed to be made on the account. You may also negotiate for leniency regarding repayment terms for an agreed upon period. Communication is important here---your credit score could be at risk if not properly handled.
Also, it would be prudent to request your free credit report and monitor your credit score at all 3 credit bureaus. Promptly report any discrepancies and move towards resolution so you don’t end up paying more for loans and insurance or put yourself in a position of being declined for renting a home/apartment or even for future employment.
- Open new checking accounts
Opening new checking accounts, and establishing automated payments is tedious work, but it needs to be completed. If you have not yet executed an estate plan (possibly a revocable trust), post marriage, it’s also advisable to add “POD” (pay on death) to your newly established bank accounts. This will ensure these specific accounts will be assigned to the correct individual in the case of an emergency. Additionally, if you had a trust drafted while married, you will likely want to register your new checking account in your name only until you have updated your estate planning documents.
- Open new investment accounts
If you had investment accounts held jointly with your ex-spouse, you will need to open a new investment account in your own name to receive your share from jointly held brokerage accounts. The same advice applies as above regarding brokerage accounts but instead of a “POD” designation, “TOD” (Transfer on Death) is used by custodians.
If your investment accounts were registered in the name of a revocable trust with your ex-spouse, you will need to temporarily place those assets into an account in your own name, using the TOD feature as mentioned above with POD, until you establish your own living trust.
Don’t forget to also view your home with the same investment mindset. Make sure the title and all legal or binding documents, including your mortgage, are updated.
- Create a new estate plan
If you had powers of attorney for healthcare and finances, your ex-spouse was likely included in these documents. Whether or not you have children, you will need to work with an estate planning attorney to ensure these documents are updated to meet your current needs and reflect trusted relationships.
In situations where you and your ex-spouse had a revocable trust together, you will also need to create a new document.
- Update beneficiaries
People sometimes forget to add beneficiaries to retirement accounts like 401k’s, Roth or Traditional IRA’s and other tax deferred retirement accounts. This can be an innocent mistake, but it can also be a costly one because IRS rules dictate that the estate will become the beneficiary. This could result in a lengthy and expensive probate process, in the loss of tax deferral planning options for your intended inheritors, and in the possibility that the people who end up inheriting the asset may not be the ones you preferred.
Even if you had named beneficiaries for your retirement accounts, you probably listed your ex-spouse as the primary beneficiary. Investment custodians can’t read your mind, nor will they look to a decree to assume you wouldn’t want your ex to receive your share, so it is incumbent upon you to complete the appropriate forms identifying the new beneficiaries. You will have options to list primary and contingent beneficiaries. If you have established a new “post-divorce” revocable trust, ask your estate planning attorney who/what to include on this form.
Likewise, remember to update beneficiaries on any personal or work-related life insurance.
- Update your financial plan and investment strategy
In most situations, one spouse handled most of the financial aspects of the marriage. Life transitions are typically a good time to make sure you are on the right track, and divorce certainly fits into that category.
Regardless how the finances were handled in your marriage, you are now on your own. Your appetite for risk may be different; your needs for investment safety or growth are now your own; and your financial plans to support your unique needs, wants, wishes are yours to create.
A solid financial plan will involve a strategy to build and maintain an emergency fund, invest for intermediate term goals and retirement, maximize tax efficiency, and design an estate planning strategy based on your new family structure.
(If you and your ex-spouse used an advisor, it’s possible for the same advisor to serve both of you while maintaining a commitment to confidentiality. Occasionally, this doesn’t feel comfortable to one of the spouses. If you choose to seek out another advisor, be sure to search for a fee-only Certified Financial Planner ™ professional who serves clients in a fiduciary capacity. https://www.napfa.org/find-an-advisor (include link to NAPFA)
- Adjust your insurance coverages
Generally, employers don’t provide health insurance coverage for ex-spouses. You may, however, be able to use COBRA for up to 36 months while you look for a more permanent solution. COBRA is generally available to ex-spouses if the company sponsoring the plan has more than 20 employees, and you must notify the company of your intent to remain on COBRA within 60 days of divorce.
You will also need to contact your insurance company to update your homeowners, automobile, and liability coverages.
Take inventory of your post-divorce assets and collectibles.—There’s no reason to pay insurance premiums on assets you no longer own. Make sure to consider an umbrella policy as an inexpensive asset protection solution.
Depending on your driving record and emergency fund, you may consider adjusting your deductible to reflect your specific needs. Reducing premiums could free up cash flow to aid in the establishment of an emergency fund, pay down debt, or allow you to save more in a tax deferred retirement account.
- Contact the Social Security Administration (SSA)
If you change your last name after the divorce is finalized, contact the SSA. More information can be found at https://faq.ssa.gov/en-US/Topic/article/KA-01981.
This sounds like a lot of work, and truth be known, it is a lot of work. But it’s beneficial work, and it’s work that can be shared between you and your trusted advisors.
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