2010-4-Divorce Proofing Your Finances
The most common cause for divorce is debatable but nearly all studies rank financial stress among the top five contributing factors. Couples who are entering a union that they hope will last, whether a common-law marriage, legal marriage or civil union, will be wise to plan the financial merger just as carefully as the ceremony.
Start by talking. The time to broach the difficult topics and reach an agreement is early on, when you are getting along with each other. It is critical to begin these discussions before you combine households. These conversations will reveal individual preconceptions and expectations that, when talked through, may deepen your relationship.
Discuss your individual goals for your union and make sure these goals are complimentary. Couples planning to merge two separate lives deal with different financial issues than couples planning to raise a family. Each objective has its own sets of financial issues, regardless of the type of union. Determining the objective of your union at the beginning of financial discussions will determine which set of issues need to be addressed.
Financial transparency is critical. You must make sure both parties have a clear understanding of the assets and debts of the other. Each partner should provide complete disclosure of the assets and liabilities they are bringing to the union. Financial transparency before a union not only prevents future feelings of betrayal and miscommunication but creates a starting point for financial planning as a couple.
Discuss future ownership of debts and assets. Once you have full disclosure, it is time to begin discussing which assets will remain individually owned and which assets will be jointly owned. It is important to have his, hers and theirs; it helps create a merger without total loss of self. Individual comfort with joint accounts differs depending on personalities. For some people, combining accounts would be giving up their independence. Every situation invariably differs and for that reason create a joint account for paying joint expenses, even if you are keeping most other accounts individual.
Discuss financial contributions to the union. Planning is straight forward when a couple starts with nothing or has similar amounts of assets, debts and income. Generally that is not the case however, making planning more difficult. When there is financial disparity between a couple, they should discuss how they will split income, expenses and debt maintenance. Such a division need not be 50/50 to be an equal split. One partner may be the major income earner and the other may be providing quality of life. This is different for each couple; the important thing is that you agree going into the union.
Discuss the day-to-day finances. Who will make sure bills are paid on time, keep track of tax information, and monitor savings and investments? Couples should approach this conversation by discussing comfort level and interest. Often with couples one partner is very skilled in money management and the other partner has no interest in being involved. This works well for some but there are other couples who enjoy paying their own bills and keeping everything separate. Whether accounts will remain primarily individual or be completely combined, this discussion should be held before you begin any financial changes.
Discuss the worst-case scenarios of death, disability and divorce. Here is a perspective that can make this conversation easier to start. All unions are dissolved, either during your lifetime or at death. First, confront the reality that your union will dissolve at some point. There will likely be similarities between how you want to dispose of your assets at death and should the union dissolve while living.
Talk about how things will be handled if things go perfectly and also if things do not go perfectly. These conversations need to cover how finances will be handled in the event of these specific instances and can include discussing actions the couple will take to minimize worst case scenarios. Agreeing upon a safe way to bring up financial topics can resolve issues before they grow into deal breakers. Potential solutions may include periodic state-of-the-financial-union meetings with someone at Contour, who acts as a neutral third-party.
Once you reach an agreement on the financial aspect of these unfortunate events, write out your agreement. Use a pre-nuptial agreement to outline how you will divide assets in the event of a divorce. Pre-nuptial agreements are probably not necessary for couples entering their first marriage with few assets but are essential for couples with more complicated relationships. Couples who are entering a second marriage, who already have children, or who have significant wealth disparity need to consider a pre-nuptial agreement. A pre-nuptial agreement requires complete financial disclosure, needs to be prepared by attorneys, and each partner needs to be represented by an attorney. If your situation does not require a formal pre-nuptial agreement, consider writing an informal agreement outlining the results of your conversation.
Use wills and trusts to make sure your assets are distributed at death in the manner you agreed. Every couple, regardless of wealth, needs to do estate planning and the less traditional the relationship, the more critical the need. Our firm has developed a checklist to assist you with this task. The intestate laws in most states tend to favor a married couple. If you are not married and don’t have children, the estate plan provided in most states is lousy. While these laws will not allow you to accidentally disinherit a spouse, you will likely disinherit a domestic partner unless you do special planning. Using a qualified estate planning attorney is the best way to make sure that what you agreed upon will actually happen. Include your motives in your planning documents, State your intent lovingly yet clearly so there can never be a misinterpretation by either family.
Use advance medical directives, living wills, and powers of attorney to outline your agreement on financial control and care in the event of disability. Especially when a couple’s relationship does not include marriage, preparing these documents and giving them to the appropriate medical and banking institutions is critical. Incapacity is becoming more and more of an issue; you must not only talk about what you want to happen but make sure that the intent is provided for.
These conversations may be difficult to broach with your partner. For many, money is a very personal topic and discussing it is emotionally charged. If conversations between you and your partner are not successful, I am available to help. These are the least romantic and the least enjoyable discussions you will ever have in your life, but there are critical reasons to do this; ask Paul McCartney.
Cindy Menker, CFP™, CPA, MBA is President of Contour Financial, Inc. The firm, located in Orland Park IL, specializes in fee-only financial planning and investment management. The context of this article was supplied by the Financial Planning Association. If you have any comments, please contact her at 708-460-3800, or e-mail her at cindy@contourfinancial.com.
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