Four Financial Mistakes to Avoid in a Divorce

Divorce is emotionally challenging enough before you factor in its financial implications. But from legal fees and asset division to potential alimony and child support payments, the fiscal aftermath of divorce can extend far beyond the dissolution of the marriage.

Fortunately, you don’t have to do it alone. Amidst the complexities of divorce, financial planners can be invaluable allies, offering expertise and strategies to navigate the monetary aspects of separation.

Here are four ways financial planners can help their divorcing clients circumvent financial pitfalls throughout the process.

Locate All (Yes, All) Your Financial Assets

You might not think so at first—but like knickknacks and kitchenware, financial assets can accrue over the course of a marriage. You may have more on your hands to deal with than your home(s), earnings, and workplace retirement plans.

Brokerage accounts, life insurance policies, intellectual property, memorabilia, health savings accounts (HSAs), future bonuses and royalties, business interests, interest in vacation properties, websites and domain names, rewards points on credit cards, and even pets can all be tagged as forfeitable assets in divorce litigation—just to name a few examples.

While most couples who live in a common-law state may assume that their solely owned, inherited property held before marriage is off-limits, that’s not always the case. If this property has been commingled with marital assets, it may well be considered marital property now—which means it might be claimed by your ex-spouse during litigation. In community property states, like California and Texas, all property owned by either spouse is generally considered up for grabs. It’s good to be aware of these designations ahead of time to avoid an unpleasant surprise during a trying time.

Working with a financial planner or a Certified Financial Divorce Analyst (CFDA) can help you compile a comprehensive list of your assets and income.

Properly assessing your marital assets and income can also help you determine their value to ensure a fair and equitable distribution (or non-distribution) of the property.

Update Your Financial Plan

While you’re likely trying to minimize stress during this time of separation, your comprehensive financial plan, on the other hand, may need it. Updating your financial plan will allow you to run scenarios based on your recent life changes—in other words, you’ll be able to stress test your new goals.

In simple terms, a stress test evaluates the resilience of your future financial circumstances. The test artificially imposes many adverse and challenging potential scenarios—and determines your plan’s probability of success. The process can give you an idea of whether or not your new financial plan is viable—let alone on the safe side.

Plus, a stress test can give an ex-spouse confidence when going into divorce negotiations, since they’ll be armed with a clearer understanding of their financial situation and potential trade-offs or leverages. This can help them advocate for their interests effectively and negotiate from a position of strength.

Quite frankly, a stress test may be the single secret ingredient to your success during and after the divorce.

Discussing Education Planning

For the academic year 2023-2024, the cost of attendance for a public four-year university in Georgia can reach up to $93,000 for state residents—and up to a staggering $123,000 for an out-of-state student. For a private university, this figure can run upwards of $157,000. And it’s not just higher education that’s costly these days. A private elementary and high school education tuition can cost nearly $145,000 between kindergarten and 12th grade. In short, tuition can rack up quite the tab!

But education planning is often overlooked during divorce, whether it be due to the age of your children at the time of split, uncertainty over geographical living arrangements, or ambivalence over the child’s eventual college matriculation.

Although debated by many of today’s pundits, education remains one of the primary ways Americans can ensure a prosperous life. In 2023, the typical earnings for those who’ve earned a bachelor’s degree (and beyond) were 84 percent greater than those who’d stopped at a high school diploma. A financial planner can help divorced spouses predict and prepare for school-related costs by creating savings goals and enacting tax-incentivized strategies such as 529 plans.

Review Your Beneficiaries

All too often, account-holders see naming beneficiaries on their accounts and insurance policies as a “one-and-done” process—a mistaken perception that couldn’t be further from the truth.

Beneficiaries need to be updated regularly, even when you’re not going through major life changes—and especially during a divorce. Some of the assets and documents to review include:

  • Life insurance policies
  • IRAs
  • Pensions
  • 401(k)s
  • Bank and brokerage accounts
  • Medical and financial power of attorney documents

This is not even an exhaustive list.

Unfortunately, it’s not unheard of that an ex-spouse unexpectedly passes away after a divorce—and the child’s or new spouses’ claims over any assets can’t be honored because the beneficiaries were not updated in a timely manner.

A financial planner can help you identify the accounts where a beneficiary needs to be named or updated, and a good one can even help you sort out which beneficiary to name on them.

All in all, the role of a financial planner in a divorce proceeding cannot be overstated. By providing personalized guidance, comprehensive analysis, and strategic recommendations, fiduciary professionals empower individuals to navigate the complexities of divorce with confidence and clarity. At Felton and Peel, we aim to provide you with a sense of comfort throughout the process. Schedule a consultation with us today.

Malik S. Lee, CFP®, CAP®, APMA®
Malik Lee is the Managing Principal of Felton & Peel Wealth Management. A CERTIFIED FINANCIAL PLANNER™ with more than 15 years of financial services experience, he is a Guest Lecturer at Morehouse College, serves on the CFP Board Council of Examinations, and is a Board Member for the FPA of GA.
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