10 Financial Truths High Net Worth Divorcees Need to Know
What to Expect and How to Plan for Your New Financial Reality After Divorce
If you are a high net worth individual and are thinking of getting divorced, there are at least ten things you should know with regard to your finances before you get too deep into the process.
For high net worth individuals, divorce is a lot more complicated financially than it is for the majority of people. And divorce is messy no matter what. Take our word for it – it’s even more messy when the finances are larger and more complex.
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First off – we’re sorry if you’re going through marital troubles. It’s not an ending that anyone wishes for when they first start out. But if that’s the place you find yourself and if you are a high net worth or ultra-high net worth person living in the San Francisco Bay Area, scan through these ten financial items to be sure you retain what’s fair, and to avoid getting blindsided when it’s too late.
1. Your Expenses Will Increase After Divorce
Everyone knows divorce itself is expensive, with all the lawyers and fees. But after divorce you’ll have more expenses as well.
Right now, you probably have two incomes paying for one set of expenses. After divorce, you’ll be on your own, paying all your bills and other costs yourself. Two people will be paying two sets of expenses. Prepare for this reality now by talking with a financial advisor such as Pillar Wealth Management and see how you might need to adjust your spending habits and lifestyle, at least until you get re-established.
2. Your Health Care Is On You
Depending on your situation, you may have to find your own health care coverage. Perhaps you are currently covered by your spouse’s policy. If so, that will change, and you’ll have essentially three ways to cover health care for yourself:
- Get coverage through your own employer
- Pay for it yourself using COBRA for a few years
- Find a plan on the health care exchange from the Affordable Care Act
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Depending on what happens with your kids, you may have to put more effort into taking care of their health care needs as well after the divorce.
3. You Will Pay Taxes. And Then You Will Pay More Taxes
Many of the financial events that occur as part of a divorce are taxable. If you receive a share of your spouse’s retirement plan, you’ll pay taxes on that. If you receive child support, you don’t have to pay taxes on it, but you also can’t claim it as a deduction if you’re the one paying.
So this will be a monthly cost without any tax benefits. Same with alimony, thanks to the new tax law. How you divide up other assets like the house, the car, artwork, and all the rest – all of these have potential tax consequences. When high net worth people get divorced, it is extremely unwise to do so without the help of a tax accountant or tax advisor.
This is another reason to work with a financial advisor who works exclusively with high net worth clients like you. Pillar Wealth Management’s service includes tax planning and this is all included in our single flat fee. It costs you nothing extra.
If additional expertise beyond us is needed in an area like tax accounting (or insurance – another issue you’ll have to work through in a divorce), we have strong relationships with several such experts around the Bay Area. This saves you the trouble of having to find and vet them yourself – something you certainly will not have time or patience for during a divorce.
4. You May Have to Cough Up Money for Part of Your Spouse’s Debt
It’s a frustrating reality. Just as assets must be divided in a divorce, so must debt.
Knowing this, it may be to your advantage to try to reduce your debts before initiating the divorce. However, just like the other items on this list, that decision heavily depends on the specifics, and is yet another reason to have an objective, independent, fiduciary financial advisor in your corner helping you minimize your losses from your divorce.
5. If You Keep Your House, It Will Cost You More to Stay
You’ll be paying all the property taxes and the full mortgage. You’ll have to cover all the maintenance, upkeep, and repairs. If damage occurs, you’ll have to deal with it. Your house may simply not be the ideal place for a newly single person, even one of high net worth.
Plus, housing prices fluctuate, so selling soon after your divorce and downsizing may be a smart move. However, once again this question depends on your financial assets, long term goals, income, and many other factors. Your head will be swimming from all the emotions and decisions related to your divorce. When it comes to your house, you don’t want to make rash decisions.
6. Plan to Spend on Therapy
Divorce can be emotionally traumatizing, even if you believe it’s the better option than remaining together. You’re still separating something that was once a good thing.
It is unhealthy to go through a divorce all by yourself. And after it’s over, your reward is that you get to be alone. Don’t be alone. Find a trusted professional to help you walk through this process, especially after it’s over.
Be prepared to spend some money on counseling, therapy, and perhaps medication, even if only for a time. You will come out stronger on the other side.
7. Know Your Finances – Don’t Get Blindsided
Typically, one spouse has more detailed knowledge of the household finances than the other. If you’re the other, that needs to change now, before you initiate any divorce proceedings.
Start spending time each week combing through your various statements. Find out what you have, what’s accessible, and what’s age-dependent in every account you have going, including:
- Standard bank accounts – checking, savings
- Certificates of Deposit – including their time horizons
- Brokerage accounts including mutual funds
- Retirement accounts – IRAs, Roth IRAs, 401k, 403b
- Business finances
- Online banks
- Stocks, including trading accounts like futures and options, online trading
- Life insurance
- Anything else being managed by a financial advisor
The point of knowing this information isn’t to use it as a weapon against your spouse. It’s illegal to hide assets during a divorce. But you don’t want to get boxed out on your share or have anything overlooked.
More importantly, knowing this information gives you more clarity on what to expect from your finances after your divorce. If you consult a fiduciary financial advisor before your divorce – which we strongly recommend – this information will give your advisor much greater ability to create your financial plan after your divorce finalizes.
It will also help them advise you during the divorce so the outcome adheres as much as possible with your best interests.
8. Don’t Neglect Paying Your Alimony or Child Support
However much money you end up with, you will have to negotiate one or both of these items during your divorce, and then honor the agreement afterward.
With the latest tax law, neither of these are now tax deductible. Alimony used to be. But you can face legal action if you renege on paying what you agreed. And the federal government can even garnish your tax refunds.
9. Get a QDRO to Fairly Divide Your Retirement Money
This is an especially complicated part of the process. If your spouse has any retirement accounts and you believe you should get a share of them in the divorce, the tool for achieving this is a Qualified Domestic Relations Order.
The primary purpose of a QDRO is to spell out how one spouse’s retirement funds will be disbursed in a divorce. But take note: Your divorce lawyer and the judge are not required to even mention this. It is up to you to ask for one, and have your lawyer prepare it.
What does a QDRO do? It divides assets held in places like an IRA, 401k, and 403b. It specifies when and how much money will be sent to the spouse receiving it. And it clarifies what the spouse may do with that money.
For instance, even though this is retirement money, the QDRO can make it possible for you to use some of that money to purchase a new house for yourself after the divorce. But you have to clearly state that in the document, and if that’s your plan, you don’t want to first put it in an IRA. If you withdraw it after that, you’ll pay a 10% penalty if you are younger than 59.5 years.
As you can see, the requirements for how a QDRO works are very specific. And while the lawyer is the one who prepares the QDRO, you need a fiduciary financial advisor who can recommend the course that is in your best interests.
For example, just because you can use the retirement money from your spouse’s accounts to buy a house doesn’t mean you should.Is that a smart move considering your age and long term financial goals and needs?
Remember – all your expenses will be higher after your divorce, and your income will likely be lower. Your lifestyle will likely need to make some major adjustments. Even for high net worth people, a divorce can cost you everything and you could run out of money in retirement if you aren’t careful. The decisions you make during the divorce will affect your finances the rest of your life.
As another example of how important a QDRO is, if your ex-spouse retires after your divorce, but you did not get a QDRO, you will probably get nothing from their retirement accounts. Whatever you do get, you’ll pay taxes on it. As you can see, this is not simple. It is not quick. But it is critical to get it right. 7 ways to protect your retirement during a divorce
10. Manage Your Remaining Finances Using a Fiduciary Wealth Manager
As a high net worth person preparing for a divorce, you must face the reality that your whole life is about to reset, including your long term lifestyle and retirement plans.
You will have less money coming in, and more money going out after your divorce. And unless you get remarried, this will continue for as long as you live. Without a plan, no amount of money is so great that it can’t be lost too fast or too soon.
A fiduciary wealth manager who only works with high net worth clients such as you puts only your best interests into all their investment planning and advice.
You may soon have about half the assets you have now. Can you still make those investments grow and perform well enough to rebuild your lifestyle and cement your long term financial security?
Yes! You can. But you have to make the critical decisions now, right in the midst of and immediately after this huge life transition. Wait five or ten years, and you squander years of potential investment growth.
Pillar Wealth Management helps high net worth investors reduce needless investment costs, optimize performance, and achieve long term financial serenity. We use an investment planning process that has no rival or equal.
Want a glimpse of what that looks like? See 3 guideposts that steer you toward worry-free finances after your divorce After a divorce, what we can share with you will be the best news of your year. You can schedule a chat with one of our wealth management experts by clicking here.