How to manage the financial fallout from a divorce or separation
How do you manage the financial fallout of heartbreak?
By independent financial planner Tim Mackay.
It is a joy to share in the celebrations when two people publicly declare their eternal love and commitment. However, ‘eternal’ these days is not necessarily ‘forever’. Having advised clients through the financial implications of relationship breakdowns, it is not something I would wish for anyone. The sad reality is that a third of all marriages will end in divorce after an average 12.2 years. The average age for men is 44.1 and for women 41.5. What’s more, a recent US study showed that divorce rates spike around Valentine’s Day as people compare their own situation to their peers and to idealised notions in the press.
Once the emotional decision is made to end a relationship, depending upon your circumstances, a divorce can be quite a lengthy legal process. In working with our clients we focus on: ‘Financially, what does all this mean?’
“Divorce is a game played by lawyers” (Cary Grant)
Unless there is a binding financial agreement (BFA, aka the old fashioned ‘pre-nup’), then the financial split is often a series of negotiations. Once lawyers are involved costs will likely skyrocket. So an amicable asset split agreement is preferred to Kathleen Turner and Michael Douglas’s approach in the 1989 movie War of the Roses. BFAs can be entered into at any time and both parties must receive independent legal advice. Like insurance policies, BFAs provide a good Plan B – in the event things don’t work out, a BFA sets out what you both agreed to be fair and equitable.
“Divorce is the one human tragedy that reduces everything to cash” (Rita Mae Brown)
Start with an honest check of identifying and valuing all the assets, debts, income and expenses that you each hold individually and as a couple. For more complicated finances, this may involve assets held in a company, other structures and/or an SMSF. Everything is up for negotiation and your lawyer and financial advisor will need this information to ensure they can optimise your situation.
Don’t wait for the final settlement to be agreed before reviewing and changing the beneficiaries in your will, your insurance and your superannuation. Also check with Centrelink regarding the impact of your changed family status as you may be entitled to additional benefits.
Seek the house or super?
A common question is: “Should I go for the house or the super?”. To make this decision you really need to have a vision of your life after the settlement. Ability to access funds, tax implications, your expenses and your living situation are all key factors in this decision. Determining your new financial goals and strategies will enable you to make smart financial decisions through the divorce process.
In recent years Australians have been getting married later and staying married longer. So, if divorce happens, it typically involves more assets to split and for many, this involves splitting an SMSF. To undertake a capital gains tax effective super split within your SMSF you must adhere to strict super rules. Obtain professional advice from an SMSF specialist.
Seek financial advice early
On more than one occasion clients have told us they wish they’d sought the support and guidance of financial advice earlier in the divorce process. It’s important to have sound legal advice but it’s crucial to decide what mix of assets will best secure your financial future. Getting financial advice early in the property settlement negotiations is a smart move – don’t wait until it is all nearly all signed and sealed.
Focus on your future
To successfully rebuild your financial life after a divorce you have to go back to basics with a budget and a comprehensive financial plan. While your relationship with your lawyer will probably end with the divorce, your relationship with your financial planner will last many years. So choose one that you can comfortably share intimate information with, one you trust and who helps you get your finances back on track. They will assist you to surround yourself with the financial resources and assets that will help you and your family move forward in a positive direction and help you create and support the life you deserve.
Tim Mackay BEc (Hons) MBA CA CFP SSA
I am an independent financial planner, SMSF expert and company director. I thrive on providing independent, expert financial advice to my wonderful clients. With international investment banking experience at Deutsche Bank and UBS in London and New York, I was recognised as SMSF Advisor of the Year by Independent Financial Advisor Magazine.