It’s probably safe to say that very few people plan on getting divorced when they walk down the aisle and say, “I do.” But the reality is that almost half of all marriages eventually end in divorce, according to some statistics.
Of course, there is a wide range of challenges and emotions associated with divorce. The financial challenges of divorce can be especially daunting, particularly for affluent couples and those that own a business together.
Financially Dominant and Non-financially Dominant Spouses
It’s not uncommon in some marriages for one spouse to be the primary earner and dominant financial decision maker. The other non-financially dominant spouse may face tremendous financial challenges related to getting divorced. Careful and diligent planning are required to help both spouses — but especially the non-financially dominant spouse — avoid making costly financial mistakes during and after the divorce.
To prioritize divorce financial planning, break the process into three different phases:
- Pre-divorce planning — The more time there is to plan and strategize financially before the divorce is final, the better. However, this factor cannot always be controlled. If a financially dominant spouse is not being cooperative, the non-financially dominant spouse will need to quickly learn as much as possible about every aspect of the family’s financial situation.
- Immediate post-divorce planning — Many lifestyle adjustments will probably have to be made during the first year or two of post-divorce life. However, the financial adjustments might be the most difficult. During this time, it’s critical to avoid making financial mistakes that could be costly over the long term.
- Planning for perpetuity — Long-term, lifetime financial security will depend largely on how well ex-spouses plan and prepare before the divorce, as well as the decisions they make and actions taken during the immediate post-divorce phase.
Objectives of Each Spouse
Often, the financially dominant spouse’s main financial objective in a divorce is to protect his or her future earning ability. If this spouse owns a business, for example, he or she will usually try to hold onto ownership of the company at all cost. This “cost” is often the bulk of current assets (especially the primary residence) and cash, which the financially dominant spouse may be willing to concede to protect the business or other source of future income.
This may be good news for the non-financially dominant spouse — if it is accompanied by wise planning and smart financial decision making during the immediate post-divorce phase. Unfortunately, non-financially dominant spouses sometimes fail to do either. For example, they sometimes decide to “splurge” a little when they receive a large divorce settlement.
After all, the ex-spouse and maybe the kids have been through a lot and deserve something nice like a fancy vacation or new luxury car after such an ordeal, the thinking often goes. While this might be understandable, splurging too much could seriously jeopardize an ex-spouse’s long-term financial security.
Another critical step during the immediate post-divorce phase is creating a new budget based on new levels of expenses and income. Ex-spouses will likely be facing a very different financial situation post-divorce — especially if they haven’t worked full-time or made important financial decisions since before getting married. The new post-divorce budget needs to reflect the new financial realities that each ex-spouse is facing.
Divorce and Business Ownership
If one or both spouses own a business, the distribution of the business upon divorce will be based on whether it is considered to be separate or marital property. If separate property, the business may not be included among the marital assets to be distributed between spouses. If marital property, the business likely will be viewed as a marital asset subject to distribution upon divorce.
The assets of a business that is marital property generally must be split up between spouses, unless the spouses are both active in the business and want to continue working together after the divorce. Or, the business could be sold and the sale price divided between the spouses.
Please contact us if you have more questions about planning for the financial impact of divorce.