Before You Start Dividing Assets, Make Sure You Understand What You Have

 

Divorce can create an immediate desire to make decisions.

 

Who keeps the house? What happens to the investment accounts? Should we sell something? Can I afford to stay where I live? What will my retirement look like? How quickly can we get this resolved?

 

Those are understandable questions. But when someone is just beginning the divorce process, our first financial suggestion is usually much more basic:

 

Before making major financial decisions, get organized and understand your complete financial picture.

 

That may sound simple. In practice, it can be one of the most important parts of the process.

 

Divorce involves separating a financial life that may have taken decades to build. Bank accounts, investments, retirement plans, pensions, stock compensation, real estate, insurance, debt, taxes, estate planning, and household expenses can all be interconnected.

 

If you begin negotiating before you understand those pieces, it can be difficult to know what a proposed settlement may actually mean for your financial life afterward.

 

The goal at the beginning isn't to make every decision.

 

It is to understand what you are making decisions about.

 

Start by Building a Complete Financial Inventory

 

One of the first steps is gathering information.

 

For some couples, both spouses have always been involved in the finances and this process is relatively straightforward. In other households, one spouse may have managed most of the investments, taxes, insurance, and household finances.

 

If you have not traditionally been the financial spouse, don't be embarrassed by what you don't know.

 

Start learning.

 

Depending on your circumstances, your financial inventory may include:

 

• Bank and cash accounts
• Brokerage and investment accounts
• 401(k)s, IRAs, pensions, and other retirement benefits
• Stock options, RSUs, deferred compensation, or other employer benefits
• Real estate and mortgages
• Business interests
• Life insurance and annuities
• Credit cards and other liabilities
• Tax returns
• Employee benefits
• Estate planning documents
• Trusts
• College savings accounts
• Other significant assets or obligations

 

The objective isn't simply to create a list.

 

You also want to begin understanding how assets are owned, what they are worth, whether there may be tax consequences associated with them, and what role they play in your family's financial life.

 

Don't Assume Two Assets With the Same Value Are Financially Equal

 

This is one of the most important concepts in divorce financial planning.

 

Imagine a settlement discussion involving a $1 million retirement account and a $1 million taxable investment account.

 

On paper, they are both worth $1 million.

 

But that doesn't necessarily make them economically identical.

 

The retirement account may generally create taxable income when money is withdrawn, depending on the account type and applicable rules. The taxable account may contain investments with different cost bases and potential capital gains. The accounts may also have different rules governing access to the money.

 

Real estate creates another example.

 

Keeping a $1.5 million home is not necessarily financially equivalent to receiving $1.5 million of liquid investments. The home may come with a mortgage, property taxes, insurance, maintenance, and ongoing expenses. It also does not automatically produce cash flow to support your lifestyle.

 

This is why evaluating a divorce settlement based solely on the headline value of each asset can be misleading.

 

What you own after the divorce may matter just as much as how much you own.

 

Understand Your Spending Before Deciding What You Can Afford

 

Divorce often means taking one household and creating two.

 

That changes cash flow.

 

Before deciding whether you want to keep the house or agreeing to other significant financial commitments, develop a realistic understanding of what your life may cost after the divorce.

 

What will housing cost?

What will healthcare cost?

What expenses will change?

What happens to travel, childcare, education, or other family expenses?

How much income will you have available?

If you're approaching retirement, will the proposed settlement provide enough resources to support your long-term needs?

 

These questions can be particularly important for someone who hasn't traditionally managed the household finances.

 

A budget in this situation isn't about restricting your lifestyle. It is about understanding what your new financial life may require.

 

Be Careful About Fighting for the House

 

The family home can become one of the most emotional assets in a divorce.

 

It represents stability, memories, children, community, and familiarity at a time when almost everything else may be changing.

 

Wanting to keep it is understandable.

 

But before deciding that keeping the house is a priority, ask whether doing so works financially.

 

Can you comfortably afford the mortgage, taxes, insurance, maintenance, and future repairs on your post-divorce income?

Would keeping the house require giving up more liquid or retirement assets?

Would a large percentage of your net worth become concentrated in the property?

 

The right answer may still be to keep it.

 

The important thing is to make that decision based on what the house means for your future financial plan, not only what it has meant to your family in the past.

 

Taxes Should Be Considered Before the Settlement Is Final

 

Tax consequences can materially affect the economic value of different assets and strategies.

 

Retirement accounts, appreciated investments, employer stock, real estate, and other assets can have different tax characteristics.

 

There may also be decisions involving filing status, estimated taxes, investment gains and losses, and other tax matters depending on your circumstances.

 

This is one reason it can be helpful to involve your financial and tax professionals before agreements become final rather than afterward.

 

Once a settlement is complete, some planning opportunities may no longer be available.

 

The goal isn't necessarily to minimize every tax.

 

It is to understand the potential after-tax consequences of the decisions being considered.

 

Don't Make Investment Decisions Simply Because You Want a Fresh Start

 

Divorce can create a powerful desire to simplify everything.

 

Close the accounts. Sell the investments. Get rid of anything associated with the old financial life and start over.

 

Emotionally, that can be understandable.

 

Financially, it deserves careful consideration.

 

Selling investments can potentially create taxes. Changing an investment strategy during a stressful period may also result in decisions that don't align with your longer-term goals.

 

Unless a decision is necessary as part of the divorce process, it may be helpful to distinguish between changes that need to happen immediately and changes that can wait until you have greater clarity.

 

Not every financial decision needs to be made at once.

 

If You're Close to Retirement, Look Beyond the Settlement Date

 

A settlement can look reasonable today and create very different outcomes ten or twenty years from now.

 

This is especially important for couples divorcing later in life.

 

How will the proposed division of assets affect retirement income?

What happens to pension benefits?

How might Social Security factor into your retirement plan under applicable rules?

Will you have enough liquidity?

What happens if markets decline?

How could future healthcare or long-term care expenses affect the plan?

 

The objective isn't simply to determine whether a settlement is equal today.

 

It is to understand how it may affect your ability to support yourself in the future.

 

Financial modeling can sometimes help compare different settlement structures and illustrate potential long-term tradeoffs.

 

Understand Your Employer Benefits

 

For executives and other highly compensated employees, employer compensation can make divorce significantly more complicated.

 

There may be RSUs, stock options, deferred compensation, pensions, bonuses, or other benefits that have not yet been received or are subject to future vesting.

 

Understanding what exists, when it was earned, when it may vest or become payable, and how it is treated under applicable law can be important to the process.

 

These questions may require coordination among your attorney, financial professional, tax professional, and other specialists.

 

Do not assume that the assets visible in your bank and investment accounts represent the entire financial picture.

 

Don't Forget Insurance

 

Insurance can become surprisingly important during divorce.

 

Who currently provides health insurance?

What happens to coverage after the divorce?

Are there life insurance policies?

Who owns them?

Who are the beneficiaries?

Is life insurance being used to help secure certain financial obligations?

 

What happens to long-term care or disability coverage?

 

These questions should be addressed intentionally rather than discovered after coverage has changed.

 

Estate Planning Should Be on the Post-Divorce Checklist

 

Divorce can also make an existing estate plan outdated.

 

Your will, trust, powers of attorney, healthcare directives, and beneficiary designations may have been created around a marriage that is now ending.

 

Applicable laws can affect what can be changed during the divorce process and how certain documents or beneficiary designations are treated, so changes should be coordinated with qualified legal counsel.

 

But once appropriate, estate planning should be part of rebuilding your independent financial life.

 

Ask:

 

• Who should make financial decisions if I can't?
• Who should make healthcare decisions?
• Who should inherit my assets?
• Who is named on my retirement accounts and insurance policies?
• Does my existing trust still reflect what I want?

 

A divorce settlement divides the financial life you had.

 

Your updated estate plan should reflect the financial life you have going forward.

 

Build Your Own Financial Team

 

Your divorce attorney plays an important role, but divorce involves financial questions that may extend beyond the legal process.

 

Depending on the complexity of your situation, your team may include:

 

• Divorce or family-law attorney
• Financial advisor
• Certified Divorce Financial Analyst® professional
• CPA or tax professional
• Estate planning attorney
• Insurance professional
• Other specialists as circumstances require

 

The purpose of having a team isn't to make the divorce more complicated.

 

It is to make sure important financial, legal, tax, and planning questions are being evaluated by the appropriate professionals.

 

Don't Let the Desire to "Win" Drive the Financial Decisions

 

Divorce can understandably become adversarial.

 

But financial decisions made primarily to win a particular asset or prevent the other spouse from receiving something may not always produce the strongest financial outcome.

 

A house you fought to keep can become financially burdensome.

 

An investment you refused to give up can decline.

 

A retirement asset that looked less attractive today may have been valuable to your long-term plan.

 

Whenever possible, try to bring the decision back to a simpler question: "Does this help me build the financial life I want after the divorce?"

 

That doesn't remove the emotion.

 

It gives the financial decisions a clearer objective.

 

Give Yourself Permission Not to Have Everything Figured Out

 

Divorce can create pressure to know what your new life will look like immediately.

 

Where will I live?

When will I retire?

How should I invest?

What should I do with the house?

What will my lifestyle look like?

 

Some decisions will need to be made relatively quickly.

 

Others won't.

 

There can be value in creating financial stability first and allowing larger long-term decisions to evolve as your circumstances become clearer.

 

Your post-divorce financial plan does not have to be completed on the same day your divorce is finalized.

 

It can be built thoughtfully over time.

 

Questions Worth Asking When Starting a Divorce

 

As you begin the process, consider discussing questions such as:

 

• Do I understand everything we own and owe?
• Do I have copies of important financial records?
• What does our household currently cost to maintain?
• What might my independent lifestyle cost?
• What assets would provide me with appropriate liquidity?
• What are the potential tax characteristics of the assets being divided?
• Can I realistically afford to keep the house?
• How could different settlement structures affect my retirement?
• Are there pensions, RSUs, options, deferred compensation, or other benefits I need to understand?
• What happens to my health and life insurance?
• Which estate planning documents may eventually need to change?
• Who should be on my financial team?
• Which decisions actually need to be made now, and which can wait?

 

Frequently Asked Questions

 

What is the first financial thing I should do when considering divorce?

A useful starting point is gathering and organizing your financial information so you understand your assets, liabilities, income, expenses, insurance, taxes, and employee benefits. Your attorney and appropriate financial professionals can then help you determine what additional information may be required.

 

Should I hire a financial advisor during a divorce?

Depending on the complexity of your finances, a financial professional can help analyze cash flow, assets, taxes, retirement implications, investment considerations, and potential settlement scenarios. A financial advisor does not replace a divorce attorney or provide legal advice.

 

What does a CDFA® professional do?

A Certified Divorce Financial Analyst® professional focuses on the financial issues associated with divorce and can help evaluate the potential short- and long-term financial implications of different decisions. Legal questions and settlement terms should be addressed with qualified legal counsel.

 

Should I try to keep my house in a divorce?

There is no universal answer. Before deciding, consider the home's ongoing costs, your future income, liquidity, retirement needs, tax considerations, and what assets you may need to give up in exchange for keeping the property.

 

What financial decisions can wait until after my divorce?

That depends on your circumstances and any legal restrictions or deadlines. Some investment, lifestyle, estate planning, and other decisions may not need to be made immediately. Your attorney and financial professionals can help distinguish urgent decisions from those that can reasonably wait.

 

Key Takeaway

 

If you're beginning a divorce, you do not need to have your entire financial future figured out.

 

But you should understand your starting point.

 

Before negotiating over individual assets, build a clear picture of what you own, what you owe, what your lifestyle costs, how different assets are taxed, and what you may need to support yourself after the divorce.

 

Then evaluate decisions through the lens of your future rather than simply the division of your past.

 

The objective isn't just to get through the divorce with a settlement.

 

It is to emerge with the foundation for a financial life that works for you.

Final Thoughts

 

Divorce is both an ending and a beginning.

 

At Cypress Wealth Services, we believe one of the most valuable things someone can do at the beginning of that transition is resist the pressure to make every financial decision immediately. Start by getting organized, understanding the financial picture, identifying the decisions that matter most, and surrounding yourself with professionals who can help you evaluate them.

 

A divorce settlement will eventually become a legal document.

 

But the assets, income, taxes, insurance, and financial responsibilities within that settlement will become your real life.

 

Understanding what that life could look like before making irreversible decisions can help you move into the next chapter with greater clarity and confidence.

 

 

About the Author

 

Bill Gordon, CDFA® is a Senior Wealth Advisor with Cypress Wealth Services. As a Certified Divorce Financial Analyst®, Bill works with individuals and families navigating divorce and other significant life transitions. His approach focuses on helping clients understand the financial implications of important decisions, including cash flow, investments, retirement, taxes, insurance, and long-term planning, while coordinating with attorneys, tax professionals, and other appropriate advisors.

 

Life Transitions is an educational series focused on helping individuals and families navigate major life events through thoughtful financial planning and compassionate guidance.

 

 

Divorce laws, property division, tax consequences, employee benefits, insurance, and estate planning considerations vary based on individual circumstances and applicable law. Individuals should consult qualified legal, tax, financial, and other professionals regarding their specific circumstances before making decisions.