Divorce Financial Planning For HNWIs

Navigating the divorce process is one of life’s most difficult chapters, incurring both an emotional and financial toll. It’s common to have dozens of questions, and we’ve written this article as a blueprint to help address the most common concerns we hear from clients. 

Divorces are highly complicated and vary based on a wide range of factors, especially for high-net-worth individuals (HNWIs).

If you’re preparing for a divorce (or are in the middle of one), then we’d recommend speaking directly with an ARQ Wealth financial advisor who will be able to provide much more personalized advice. Otherwise, continue reading to learn what you need to know to navigate this difficult chapter. 

Gain a Full Understanding of Your Assets

The first step when preparing for a divorce is to gather key financial documents to gain an up-to-date understanding of your and your partner’s assets and liabilities. You’ll want to gather records for assets like:

• Current financial accounts (individual checking, joint checking, savings accounts, credit accounts, investments, retirement savings, etc.)
• Properties (either your permanent home or investments)
• Vehicles 
• Other property or items of value
• Life insurance policies 

You’ll also want to assemble all relevant paperwork that you’ll need throughout the divorce, as you’ll need it to provide up-to-date values of your assets and income. This includes:

1. A prenuptial agreement, if you have one
2. Statements for your financial accounts (bank accounts, individual accounts, brokerage, retirement)
3. Credit card statements
4. Tax returns for recent years
5. Pay stubs, W-2 statements, or other income statements
6. All documents related to outstanding loans
7. Vehicle and property titles
8. Employment or business partnership agreements
9. Property and life insurance policies
10. Estate planning documents (wills, powers of attorney, trusts, etc.)

These documents will be necessary throughout the divorce to help determine how you and your former spouse will divide your assets. You should be prepared to note which assets are considered marital assets (or marital property) and which are separate. 

Marital property is any property that was acquired during the course of the marriage, such as a home that you bought together that has both of your names on the title. 

These assets are usually divided equally between spouses, although this depends on the terms of the divorce and state law. Any property that belongs to just one spouse is considered separate property and usually isn’t included in the divorce proceedings. 

After dividing your assets, you should start preparing for how your expenses might change once the divorce is final. This includes budgeting for child support, alimony (AKA spousal support), and taxes.

Prepare for Future Expenses: Child Support, Alimony, Taxes

Child support, alimony, and taxes are particularly important because they’re ongoing expenses. You only need to divide your assets once, but you might have to pay child support, alimony, or a higher tax bill for years into the future. 

Child Support

If you and your former spouse have minor children, then you may need to make regular child support payments to your former spouse if your children become their responsibility after the divorce. On the other hand, you can expect to receive payments if the children will become your responsibility.

This extends to health insurance as well, with both spouses expected to contribute to premiums and deductibles related to a child’s health insurance bills. Again, this could vary based on negotiations during the court proceedings.

Alimony

Alimony, often referred to as spousal maintenance payments, is arranged when one spouse makes substantially less money than the other. 

If you were the primary earner in your marriage, then you may have to provide financial support to your former spouse following the divorce (and vice versa). 

However, this is not always a given and can depend on the terms of the divorce.

Taxes

After a divorce, your tax filing status will likely change from a joint filer to a single filer (or head of household if you qualify). Here are three implications of this tax change:

1. You’ll have a much lower standard deduction: The standard deduction for joint filers is $30,000, compared to $15,000 for single filers and $22,500 for head of household.

2. You’ll have less favorable tax brackets: Joint filers have wider tax brackets, allowing more income to be taxed at lower rates. Single filers have narrower brackets, so you might face a higher tax rate even with the same income once you legally become a single person. 

3. You may lose certain credits: Transitioning to a single filer status could cause you to lose credits like the Child Tax Credit or Earned Income Tax Credit, as well as education credits, dependent care credits, or spousal IRA deductions. This will all vary widely depending on the circumstances of your divorce, such as whether or not you have children.

With so much going on in your life, tax planning may seem like an afterthought. 

However, these small details are highly critical to plan for when navigating your divorce, as they will have a dramatic impact on the rest of your life. Again, this is why it’s so important to have a trusted advisor in your corner who can account for these financial considerations while you focus on the bigger picture.

If you’re going through a divorce, then please be sure to contact the team at ARQ Wealth. Our team of talented financial advisors will be able to work alongside your divorce proceedings in case your circumstances change.

Consider Taking These Steps

The bulk of divorce proceedings focus on splitting assets and custody between you and your former spouse. However, it’s equally important to start preparing for your post-divorce life. The sooner you start preparing, the easier things will be once the divorce is finalized. 

Here are a few steps that you can take to set yourself up for success financially:

1. Open a new individual checking account: This can help you track your income and expenses separately from any joint accounts you may have, which can help you establish a post-divorce budget.

2. Update relevant bills so they’re in your name: Change the name on any relevant bills so they’re solely in your name and continue making payments on time. This will ensure you don’t accidentally fall behind on bills during the divorce (which could hurt your credit score). It can be easy for joint bills to get lost in the shuffle.

3. Make appropriate changes to your estate plan: This can include updating wills and trusts, as well as changing beneficiary designations on insurance policies, IRAs, annuities, and retirement plans.

If you haven’t started the estate planning process yet, then be sure to read our 3-Step Financial Planning Checklist.

Finally, you’ll also want to do your best to avoid common mistakes during the estate planning process. A small mistake or oversight during divorce negotiations can potentially hold you back for years to come.

3 Divorce Financial Planning Mistakes to Avoid

There are three common mistakes to avoid when it comes to navigating a divorce:

1. Don’t delay your financial planning until after the divorce: Many people tend to treat their divorce as a separate issue from their personal finances, aiming to finalize their divorce before turning their full attention back to their career, business, or financial goals. However, your divorce is greatly intertwined with your personal finances, and it’s best to treat these two topics as one and the same. 

2. Rushing decisions just to “get it over with”: It can be tempting to make hasty decisions (like agreeing to an unfair divorce settlement) out of a desire to move on from the relationship. But a hasty decision can lead to lopsided asset distribution, which can hold you back financially for years. This is especially true for HWNIs, where a small percentage of assets can still be worth tens or even hundreds of thousands of dollars. Negotiating for the equitable distribution of your assets is highly critical.

3. Attempting to navigate the process alone: The most valuable asset you can have during a divorce is a trusted financial expert on your team. For HNWIs, it’s recommended to have at least one attorney, tax advisor, and financial planner on your team so that each advisor can focus on their respective area of expertise. At ARQ Wealth Advisors, we provide access to an entire team of advisors and financial planning services under one roof. 

To learn more about how you can navigate divorce financial planning, please contact the ARQ Wealth team by calling (480) 214-9572.