High net worth people going through a divorce may or may not be aware of all the pitfalls that can come from the process. Unfortunately, divorce is almost always an emotionally charged event, and even in the best of circumstances, it can get sticky when dividing assets. Hopefully, this is the only divorce you ever go through, but we’ve been through it with many clients. In our years of experiences, there are some things we have learned that may be helpful, and are possibly items you haven’t thought of yet.
Go on a scavenger hunt.
This is our least favorite part of planning, but if you are not the one who initiated this divorce, chances are your ex-spouse may have been preparing. You may need to do some digging through credit reports, old tax returns, bank accounts, loan statements, business profit and loss statements as well as the balance sheet. You’ll want to call all advisors and ask them if they know of other assets and income streams besides what you have documented already. A little work can reap big rewards.
Not all assets are the same.
Some assets depreciate, like cars and personal property. Some assets are more for consumption than for income (such as your home). Some assets are taxed by capital gains (like brokerage accounts) and some are taxed as ordinary income or tax free (like 401ks or Roth 401ks). Some assets are liquid immediately (like a savings account) while some are not (like IRA accounts). If you and your former spouse split these all 50/50, that may be the most equal. If you are not aware of the differences in these assets and how they will affect you, even an equal 50/50 split may not help you the way it could by thinking through needs versus resources. You must understand these assets and determine which type will be able to support your unique needs. Take the time to educate yourself.
Know what your needs will be.
You shouldn’t be splitting up assets and deciding on income until you can establish what you will need long term to maintain your lifestyle. You must determine what resources you have on your own (your income and future social security for example), as well as your needs, before you can decide what you need from the marriage. Once you know your needs, you can go back to the asset list to determine which combination will fill the gaps most effectively.
Your house and personal assets may no longer be affordable.
Many people like to keep the house and other personal items that were part of their lifestyle. These items may no longer be affordable after the divorce and taking on the expense can deplete other assets quickly and leave you with nothing. Think long and hard about these attachments, and whether you should you keep the house. Be sure to have it appraised- you may be surprised at how much or little it is worth.
Get valuations on everything that is not liquid.
Pensions need to have present value as well as future values calculated. Businesses and real estate should be appraised. Without professional valuations you may be leaving valuable assets on the table. Some valuations may be expensive – such as those on long term privately held businesses. Start first with a good accounting firm to help you understand the cost and process to do this. Present and future values of pensions as well as real estate will likely be much more affordable to value.
Consider your risks.
If you have substantial maintenance and/or child support coming, consider insuring your ex-spouse or taking over an existing insurance policy to make sure you don’t lose this necessary income if your ex-spouse dies during the term. Be sure that you understand where health insurance for you and your children will come from and our ex-spouse agrees. If possible, be sure you separate with enough cash to fund an ample emergency fund for yourself, especially if your income is low and your other assets are all illiquid or in retirement accounts.
Be sure you agree who will pay the legal bills of the divorce. Be sure you agree, in writing, who will pay any taxes due on the final return, plus any back taxes should you be audited. Before the divorce is settled, be sure the qualified plan sponsors approved any QDRO paperwork. Don’t miss stock options and other bonuses or income that could be owed but not yet paid to your ex-spouse. Negotiate future funding for the kids for items like college, as well as living expenses as they transition to adulthood. These may seem like small things, but they can really add up.