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Ten Financial Strategies Women Need to Know If Considering a Divorce
In the heat of the moment, it's easy for those going through a divorce to act out of fear and resentment and, therefore, end up making poor financial decisions. Here are some important things to know that may ultimately result in a more equitable divorce settlement for both parties.
1) Take Stock of Your Net Worth
Make a list of your family's assets and liabilities and indicate whether each one is yours, his or joint. Organize your financial file to include tax returns for the past five years, retirement account records, insurance policies (including life, disability, long-term care, health, homeowners, auto, and umbrella), investment account statements (including brokerage accounts, mutual funds, IRAs, SEPs, custodial and 529 plans), wills, living wills, trusts and powers of attorney and other important legal/financial documents. This will serve as a reference when assets and liabilities are divided.
2) Understand the Value of Assets
If one party owns a business, for example, it is best to have an objective business valuation performed, instead of relying on the estimation of the owner. If stock options are involved, have the value determined using the Blacke-Sholes method. If the business is deemed marital property and has not yet turned a profit but looks promising, the wife may consider waiting to receive a guarantee of a percentage of the future sales proceeds, profits, and/or income. That way, the business remains as a benefit to the family unit and the wife (who has more than likely contributed to the success of the business by supporting the husband and caring for the children) will also receive what could be rightly hers. Other hard-to-value assets include deferred compensation and defined benefit plans. Regardless of ownership, both spouses need to understand their true worth.
3) Account for the Cost Basis When Dividing Investments
A percentage of an investment's sales proceeds (the difference between the original investment amount -cost basis- and the sale value) is taxed and will reduce the final amount available. Different assets with the same value on paper can have vastly different net values once they are sold, unintentionally shortchanging one party.
4) Consider the Short- and Long-Term Impact of Dividing Assets
Gender and emotional attachment often play a role in asset choices. Women often let the husband take assets that will appreciate and provide long-term security, such as retirement accounts and, instead, keep the house and other personal assets that won't necessarily help their long-term financial security. Ten years later, the woman may be poor while the man is financially secure.
5) Insure Alimony and Child Support Correctly
Most divorce attorneys will insist that the person paying alimony take out a life insurance policy to assure payments continue in case of death. In most cases, the payor owns the policy and the spouse is the beneficiary. There is no assurance, however, that the payor will continue to pay the premiums or keep the spouse as the beneficiary. Making the alimony recipient the owner and beneficiary of the policy can protect against these problems.
6) Consider the Timing
The year the divorce decree is signed is the year each party files as a single taxpayer. By reviewing the tax implications, you can decide whether it is best to sign a decree before or after January 1. Reaching the 10th Anniversary mark? Marriages of ten years or more entitle both parties to payments equal to half of the other's social security benefits or 100% of their own, whichever is greater. Nine years, 11 months and 30 days does not.
7) Protect Your Credit
Protecting your credit should be a priority at all times. Request a credit report annually to catch problems and make corrections early. Debt that's in place during the divorce will be negotiated as part of the settlement. Many attorneys will recommend paying off the debt as part of the process, if possible. If not, it's important for each party to understand who's on the hook for the bill and prevent opportunities for one party to damage the credit rating of the other.
8) Remember to Change Your Name
Make sure all your financial and legal documents, from credit cards to insurance and wills, reflect the name change. It's just as important to change the beneficiary designations on retirement plans and insurance policies.
9) Keep Covered
If your health insurance is through your husband, you'll have the option of COBRA for 36 months. If you also work, talk to your HR person to find out when you can get into your group plan. Divorce may be a special trigger that allows you to get in before the annual enrollment date. Consider applying for individual coverage if you don't have a group plan to go to, even if just to identify insurability issues early on. At a minimum, you should secure catastrophic insurance.
10) Accept Your Lifestyle Changes to Avoid Getting into Debt
It's common for women to quickly get into debt because they are overcompensating for the loss and have not faced their new financial reality. It's best to build a new budget from the bottom up, rather than starting with the pre-divorce lifestyle and tearing it down. Pamper yourself in no- or low-cost ways like leaving work early to spend some "alone time" before the kids come home from school. Find an expense tracking/income management/budget system that can help you get organized. Consider connecting with an accountability partner, either a friend or through a divorce support group.
There is a silver lining to the gray clouds of divorce. For many women, it is the first time they take responsibility for their financial lives and become independent and empowered. Use this as an opportunity to learn how to save, invest and use your money as a tool that will help you achieve what you want in your new life.
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