MAY 18, 2017
Widowed or Divorced? These 5 Steps Can Help You Navigate Your Financial Future
Whether divorced or widowed, moving on from a marriage is never easy, as strong emotions make it understandably difficult to focus beyond your loss. There are a few financial steps you can take, however, that might alleviate some of your distress should you find yourself coping with either situation.
Lynne Knox, an investment counselor at Capital Group Private Client Services in Los Angeles, often finds herself working with divorced or widowed clients. “It’s my job to help them focus on the most critical parts of their finances, before and after a life-changing event, so they can move on to the next stage of their lives,” she says.
These five steps can benefit anyone who needs to take charge of their financial life.
1. Think ahead.
Knox warns against making abrupt financial decisions in highly charged situations, such as the dissolution of a marriage or death of a spouse.
Ideally, you should be engaged in your finances throughout your marriage. However, many of Knox’s clients ceded control of the family’s financial affairs in the past and suddenly find themselves shouldering the responsibility.
Often the person in charge of handling the finances would like their spouse to be involved, but has difficulty handing over the reins. “I’ve seen people, literally on their deathbeds, who can’t give up that control,” she shares. “It’s hard to face mortality and let go.”
Make an effort to have an ongoing dialogue about finances, rather than waiting until your marriage is faltering or your spouse is ill.
2. Openly discuss your finances.
It is essential for couples to have financial transparency regarding debt incurred both before and after they marry. Family attorney Cari Rincker relates, “If someone enters a marriage with significant student loans, for instance, he or she may be taking marital income to pay down that debt.”
In most states, all debt accrued by either party after the date of the marriage is considered marital debt, while that incurred prior to the marriage is considered separate. Spouses are generally jointly liable for the debt of the other person during the marriage and upon death.
In the case of divorce, a prenuptial agreement could help prevent such situations.
“It can be especially beneficial for couples who don't have much in terms of assets and debt, particularly because divorce litigation can be very expensive,” Rincker emphasizes.
In most states, the law requires that marital property be divided equitably, as opposed to equally. Couples can spend a considerable amount of money arguing over what is "equitable.”
Adds Rincker, “If the prenup specifies that marital assets or debts will be divided equally, such as 50/50 or some other predetermined way, there will be much less up for discussion.”
3. Share passwords and plans.
Transparency is key. A spouse may not even know an investment account exists, particularly if their partner manages the bulk of the financial matters. In the case of death, the surviving spouse can have a very difficult time gaining access to online accounts.
Knox was able to help a client obtain the passwords for online accounts from a dying spouse. Another client, a widow who was diagnosed with Alzheimer’s, had not yet assigned anyone to make major financial and medical decisions on her behalf. “She hadn’t updated her estate plan in 25 years,” recalls Knox. “She didn’t have health care directives, and she hadn’t designated power of attorney.”
4. Reassess your investment strategy.
Your investment strategy should be age- and goal-oriented. Make certain that your financial plan is still aligned with your objectives.
“No matter how sophisticated or wealthy, many investors have flaws in their plans,” Knox explains. “I’ve seen very concerning gaps — whether it’s an inadequate liquid reserve to carry them through market declines or not enough insurance to protect them in the face of any legal claims.”
She recently met with a couple in their late 70s who were facing the husband’s cancer diagnosis. While he hopes to recover, his wife is working on getting their affairs in order. “She let her husband handle all their finances because he had considerable experience in that area, but their portfolio — containing many illiquid assets and complex partnerships without a strong cash reserve — resembled the investment strategy of a couple in their 40s or 50s.”
In other words, don’t wait until you find yourself alone to do a comprehensive evaluation of your household finances.
5. Consider living conditions.
One of the biggest decisions to be faced in the aftermath of a death or divorce is whether to sell the family home. Given the inherent emotional pain, avoid any hasty decisions. According to Knox, many people are initially inclined to go in one direction, only to change their minds a year or two later as the personal turmoil subsides.
People who want to stay in their homes must look closely at their assets to determine if they have the resources to support their previous lifestyle. In some cases, clients choose to sell their homes to free up cash for other uses. For example, one of her clients, a surviving spouse in her 40s, chose to move to an apartment to ensure she had enough money to pay for her child’s education.
“People often have difficulty imagining what their new lives will look like,” Knox says. “The best move is to give yourself the time you need to make decisions.”