In most marriages, one spouse takes the primary role in handling family finances – let’s call them the “FCS” or Financially Controlling Spouse. The role of the FCS goes beyond paying bills and balancing the checkbook. The FCS also controls retirement planning, savings, investments, insurance, borrowings, and spending.
During a divorce, the spouse that did not actively participate in this role, let's call them the Non-Controlling Spouse, or "NCS", has a lot to learn in a short amount of time. Most NCSs haven’t been informed about most of the financial aspects of their marriage. They may not even know how much money the FCS earns, or if they have enough saved for retirement, or whether they have the right mix of stocks and bonds, or whether they have enough insurance – health, disability income, long-term care or life insurance. Generally, during the divorce process an NCS relies on their attorney and/or their accountant to help them navigate this financial maze.
Here are 10 areas (in no particular order) that should be explored with an NCS during the divorce process:
- Risk Tolerance - The goal of any financial advisor is to learn their client's risk tolerance and provide their client with recommendations that potentially generate the greatest returns based on acceptable risks. A fundamental financial theory is that higher risks potentially yield higher returns. However, most NCSs have a risk tolerance much lower than their married peers - so the returns they can expect will generally be lower than average.
Financial planners that typically work with business owners and high-net worth clients frequently recommend moderate and aggressive investments commensurate with their client’s risk profile. This profile is usually not indicative of an NCS, whose risk tolerance is generally lower than that of the typical business owner or high-net worth individual. Because of this significant distinction in ability to withstand risks and the need for stability, an NCS should work with someone familiar with conservative investment options.
- Asset Allocation – Oftentimes, at the conclusion of the divorce, an NCS receives stocks and bonds that the FCS purchased during the marriage. In addition to determining the extent of any income taxes due upon the sale of these assets, it is imperative to compare the type of stocks and bonds received to the appropriate “asset allocation” for the individual. As described above, what once may have been the right mix of assets for the marriage may not be the right mix for the newly divorced.
- Retirement Plans - Individuals that have not reached age 59½ or older generally cannot make withdrawals from retirement plans without penalty. And, if an NCS is not in the workforce, they will not have enough “earned income” to be eligible to fund tax-advantaged plans. Therefore, the NCS must develop a plan to help maximize tax benefits through other retirement plans.
- Real Estate - Deciding if the marital home is "too expensive" is a decision that includes a combination of emotional and financial factors. Examining the finances alone can lead to a poor decision - one that impacts both parents and children. Financial planners may overlook the non-financial aspects of their plans. Further, an appropriate financial plan for an NCS must include an analysis of the existing mortgage (if one exists) to determine if the home is efficiently leveraged. A cash-out refinancing may create more post-tax income both now and in the future by utilizing tax advantages associated with the tax deductibility of mortgage interest.
- Life Insurance - Generally the spouse obligated to pay alimony and/or child support is required to maintain life insurance. However the determination as to the type and quantity of life insurance the NCS should obtain is highly dependent on the needs of the NCS (see #10). Too often financial planners are eager to recommend life insurance when it may not be the best product to accomplish long-term goals.
- Coordination of Advice – An NCS will generally seek advice from more than one source. It’s likely they will discuss their finances with: a close friend or relative, an estate attorney (see #10), an accountant, a financial planner, a stockbroker, and/or an insurance salesman. Different people with varying experience and areas of expertise are bound to make suggestions that clash with other’s advice. With today’s account aggregator technology (Internet-based software that collects real-time information from banks, brokerage accounts, insurance companies, and more), it is easy to provide a clear and current financial picture to all professionals. This helps coordinate advice, avoiding confusion and poor decisions.
- Long-Term Care (“LTC”) Insurance – The statistics regarding LTC expenses are shocking. Rising costs and increasing life expectancy serve to make many wonder what they should do to prepare. In response to this uncertainty, insurance companies have designed product after product to protect against many unknowns. An NCS should evaluate the costs and benefits of various LTC insurance for themselves, and, often, their parents.
- Health Insurance – If needed, unemployed NCSs may utilize COBRA for 36 months from the date of divorce. In some cases, this may not be best option. There are newer types of medical alternatives, such as “HDHP” (high deductible health plans) and “HSA” (Health Savings Accounts) that may be more appropriate for some NCSs.
- Budgeting – The historical marital lifestyle and/or Case Information Statement is a good starting point to develop a post-divorce NCS budget. Frequently, the standard of living once enjoyed by the parties is no longer available, and the NCS must evaluate which expenses should be minimized or eliminated. Making this adjustment can be very difficult, and a balance must be found between sacrifice and overindulgence.
- Estate Planning – An NCS faces the question of “what will happen with my assets when I die?” While everyone should have a Will (completed by the time they get divorced), an individual’s estate plan can/should change over time. Developing an estate plan should not be a one-time event – it needs to be reviewed periodically to help ensure that goals can be accomplished as efficiently as possible.
At the conclusion of the divorce process, an NCS faces a breadth of new challenges. The responsibility of managing assets and income can be overwhelming - irrespective of whether the financial settlement can sustain the historical lifestyle. Involving an honest and trustworthy advisor can help ease the burden of this new responsibility.
Noah B. Rosenfarb is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, Inc., member SIPC. Supervisory office: 1 Penn Plaza, Suite 2035, NY, NY 10019 (646) 473-4100. Insurance offered through Massachusetts Mutual Life Insurance Company and other fine companies.
The information in this article is being provided with the understanding that it is not intended to be interpreted as specific legal or tax advice. Neither MassMutual nor any of its employees or agents are authorized to give legal or tax advice. Individuals are encouraged to seek the guidance of their own legal or tax counsel.
CRN200906-91977
Asset allocation does not guarantee a profit or protect loss in a declining market. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio or that diversification among asset classes will reduce risk.
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