Money and Divorce: 6 Financial Mistakes to Avoid

Divorce can be a lengthy process fraught with both financial and emotional strain as you make important decisions with significant long-term consequences under stressful conditions. But having the right advisors can help you make it through the process and avoid these six common mistakes:

Mistake #1: Delaying financial planning until after the divorce is final

Proper financial planning is a critical first step of any divorce proceedings. Your Financial Advisor, accountant and divorce attorney can help you get a complete picture of your marital finances so that when it comes time to divide assets and liabilities, you know exactly what you’re agreeing to.

Be prepared to provide the following documents so that your advisory team can fully evaluate your finances: 

• A prenuptial agreement, if you have one
• Mortgage, brokerage, retirement and credit card statements
• Tax returns for the prior three years
• Vehicle and property titles
• Employment or business partnership agreements
• Loan documents and applications
• Property and life insurance policies
• Estate planning documents, such as wills, powers of attorney, medical directives and trusts

Consult with your attorney about which household expenses, if any, you’re expected to pay in the interim. Work with your Financial Advisor to create or update your individual financial plan to help you identify any new financial needs and prioritize your goals for life after your divorce. 

Mistake #2: Agreeing to a settlement just to get it over with

You may be tempted to agree to a settlement out of guilt or simply because you’re ready to move on. But a hasty settlement can lead to an unfair division of assets. With the help of your advisory team, take the time to understand your rights and carefully comb through joint property ownership details so that you can secure the most advantageous settlement you’re entitled to.

Often a key issue is the division of marital property. In most jurisdictions, “marital property” includes everything of value acquired during the marriage, including real estate, investments, bank accounts, art collections, cars and boats.¹

Equitable distribution of marital property is the approach used in more than 40 U.S. states, with the goal of achieving fairness based on a range of considerations, including:

• the length of your marriage,
• any child custody expenses,
• how much each spouse contributed to acquiring and maintaining marital property, and
• the financial needs, circumstances and future financial prospects of each spouse.

In nine U.S. states,² property is divided 50/50 among spouses, regardless of its origin or the projected financial needs of either spouse.

Mistake #3: Overlooking future expenses

Tax planning is crucial in the midst of a divorce. With the help of your Financial Advisor, work to identify new expenses you may have to cover after the divorce, such as tax liabilities as a single person. While you generally won’t owe federal capital gains taxes on any assets that are transferred to you in the divorce settlement, you may owe taxes if you sell an asset later for more than the asset’s cost basis.

Other common future expenses are alimony and child support. While the laws vary considerably from state to state, in general, courts consider many factors when calculating child support payments, such as the cost of education, health insurance or special needs and the incomes of both parents. Alimony payments are also based on a number of factors, such as the disparity of income between the spouses.³

Mistake #4: Attempting to devalue assets prior to divorce

From the time you separate from your spouse to the finalization of your divorce, your finances will be carefully monitored and scrutinized. Be sure to consult with your advisory team before withdrawing money from joint accounts, moving assets around or making large purchases while the divorce is pending. This will help ensure you’re complying with your state’s laws and leaving your emotions on the sidelines.

The goal in every divorce is a fair or even division of assets, per state law. If one spouse is spending large amounts of cash or selling high-value assets before a settlement is reached, it could signal dishonesty and significantly harm their standing in a divorce court.

Mistake #5: Not updating your beneficiaries and estate plan

After dividing assets in a divorce, work with your Financial Advisor to review the named beneficiaries on your life insurance policies, retirement accounts, annuities, trusts and bank accounts. Update them if necessary, unless you have a personal reason not to do so or have been court-ordered otherwise. It may also be a good idea to remove your ex-spouse’s name from any documents or accounts that list them as an emergency contact.

You should also consult with an estate planning attorney to update your  will as well as any trusts, powers of attorney, and medical directives you created during your marriage.

Mistake #6: Not seeking all the help you may need

One of your most valuable assets during a divorce is your team of professional advisors. Having, at minimum, an attorney, a tax advisor, and a Financial Advisor working together to focus on the practical concerns can alleviate additional worries and keep you focused on the outcome.

At the end of the day, separating a household and dissolving a marriage can stir up significant emotional stress, and it’s a hardship no one should have to navigate alone. Your advisory team should work not only to help you reach an optimal conclusion to your divorce, but also to set you up for a prosperous next chapter.

Connect with your Morgan Stanley Private Wealth Advisor or Morgan Stanley Financial Advisor for help as you navigate this difficult process and request a copy of the Morgan Stanley report, “Divorce and the Ultra High Net Worth Family.”