Divorce: How to Navigate the Financial and Legal Hurdles

While there is no getting around the fact that divorce can be deeply stressful, there are some helpful ways to navigate this life-changing event.

Here, we offer steps you might consider taking before you marry, when a separation is on the horizon, and after a divorce to potentially lessen complications and discord — at least financially. And settling money matters more effectively just might help lower temperatures overall.

Before You Marry

Do you have a prenuptial or postnuptial agreement? While these agreements may not be an option for you now if you don’t already have one in place, it can still be helpful to understand their potential benefits — if not for today, then perhaps in the future for yourself or your children. We touch upon them briefly here; for more information on the subject, please read “Premarital Agreements and Their Alternatives: What to Consider.”

For anyone with an upcoming marriage, it can make sense to consider a prenuptial agreement (also known as a premarital agreement or, colloquially, as a prenup). While a prenup isn’t romantic, it is a “just in case” measure that could provide valuable financial protection and minimize heartache and legal expenses later.

But what, precisely, is a prenup?

A prenuptial agreement is a legally enforceable contract that a couple executes before marriage detailing what should happen to their current and future assets as well as their debts should they ever separate or divorce, or a spouse dies during the marriage.¹

Prenups typically require full financial disclosure of assets from both parties. However, if you are a trust beneficiary, you should first talk to your attorney (ideally both a family law attorney and an estate and trusts attorney), financial advisor, and tax professional about the need to disclose trust assets and trust provisions.

Child support may be addressed in a separate contract but will ultimately be decided by what a court determines is in the “best interests of the child.”

What can be included in a prenup? You could decide who will own the pet, art, cars and other tangible assets post-divorce, agree upon potential alimony (what one partner pays the other after divorce) or a waiver thereof, and even foresee specific assets or a sum (whether lump sum or a sliding scale based on the years of marriage) that you will automatically receive from your spouse’s estate or give from yours in the event of death or divorce. A prenup can also address non-asset specific issues as well — including, but not limited to, requiring the filing of a joint income tax return, agreeing to split gifts made by each spouse, designation of fiduciaries in your estate planning documents or requiring your estate to elect portability for any unused estate tax exemption at death.

That said, state laws govern prenuptial agreements, so local attorneys are needed to draft the agreement with attention being given to the laws of the state where you are domiciled at the time of marriage. Also, each partner should hire and pay for a separate attorney (to avoid potential conflicts or future accusations of lack of representation or undue influence). And, if one or both of you are not proficient in English, consider hiring a translator, requesting the prenup agreement be translated into your primary language, or both.

Give yourselves enough lead time to discuss the terms of the contract, as there may be complex, delicate matters to negotiate, depending on each person’s finances, prospects, and temperament. Ideally, to avoid the appearance of pressuring, the agreement should be finalized at the latest one month before you marry. That means the contract is signed by both of you, in front of your attorneys with appropriate witnesses, and possibly a videographer. Each state has its own requirements for proper execution of the prenup, and attorneys may request even stricter signing ceremonies depending on the circumstances.

If you marry without a prenup or your financial circumstances change after the wedding (e.g., you start or sell a business), you might want to consider a postnuptial agreement (also known as a postnup).

A postnup is similar to a prenup, but it is a marital agreement executed after the marriage rather than before. Most states generally honor these contracts, although 15 states currently impose greater restrictions on them.²

When Divorce Is on the Horizon

Perhaps you are still married but have been considering divorce or have already begun the divorce process. Here is a suggested action plan:

Get help. Consult with a divorce attorney and be sure to get any other professional assistance you may need during this difficult time. Speaking with an attorney does not have to mean that you will definitely get divorced. It does mean you will be better informed about what’s involved.

Protect yourself. Many of your responsibilities as a spouse, including the financial, continue after a divorce petition is filed and until the divorce is finalized (and some divorces take years to be finalized).

• Joint accounts: Although you likely cannot change the title to jointly owned assets, you should understand that, if you or your spouse should die during the pending divorce, such joint assets would pass to the surviving spouse. You should speak with your matrimonial attorney to determine any obligations that exist with respect to joint assets during the divorce.
• Credit: Check your credit rating and consider freezing your credit until the divorce is finalized. Joint account holders are both responsible for the standing of an account. Consider negotiating closure of any joint accounts and opening your own bank account to develop and protect your own credit.
• Passwords: Many spouses share passwords to digital accounts (for example, banking and social media sites). Consider changing your passwords to protect access to these accounts. If these passwords are saved on your computer for easy access, consider changing the password to unlock your computer.

Review your pre- and/or postnuptial agreement(s). Look at your contract(s) with your attorney to help determine your rights and obligations. But be prepared: A court might declare your prenuptial or postnuptial agreement invalid in certain circumstances, such as the following:

• Differing state laws: The state in which you are divorcing has different requirements for pre- or postnups or doesn’t recognize the validity of the agreement you have in place.
• Fraud: You or your spouse failed to disclose all assets or attempted to hide assets.
• Coercion/duress: You or your spouse used undue pressure to get the contract signed or did not give the other spouse enough time to properly review the document.
• An unfair/inequitable agreement: The document favors you or your spouse unfairly, for example, by leaving the other spouse little or nothing.

Develop a parenting plan. If you plan to co-parent with your spouse, consider speaking with an expert to develop a comprehensive parenting plan, which can include who sees the child and when (and possibly where) and for how long. Also, determine who is allowed to make decisions for the child; who will meet the child’s medical needs; who can claim the child as a dependent on tax returns, and so forth.

Review all legal documents. You may want to change your beneficiary designations and/or revoke rights:

• Core estate planning documents: With your attorney, examine and update your will, any trusts, insurance policies, retirement plans, and other key documents, such as a power of attorney, healthcare designation, living wills, and HIPAA forms. Discuss whether and when you would be legally able to name someone other than your current spouse as the beneficiary.
• Irrevocable trusts: Determine whether the spouse can be removed as trustee or beneficiary; or if the trust can be decanted — that is, when an irrevocable trust’s assets are transferred (or “poured”) into another trust whose terms may be different from those of the first trust (for example, excluding the spouse as a permissible beneficiary). Some irrevocable trusts even include provisions that indicate what happens to the spouse’s interest as a trustee, beneficiary, or other power holder in the event of a divorce or separation.
• Fiduciary appointments: Decide whether you want to make changes to such appointments as executor, personal representative, trustee, or agent under a power of attorney or healthcare documents.
• Charities: Consider changes to any charitable board designations (e.g., advisor on a donor-advised fund, trustee/director of a private foundation). Review any existing gifting/pledge arrangements.
• Digital accounts: Social media sites such as Facebook and storage sites such as iCloud offer the option of naming a so-called legacy contact who may be able to alter or delete some or all information stored digitally by a deceased person. Consider changing these designations.

Account for all types of assets and liabilities. As divorce forces a separation of finances, you’ll need to understand what you (and your spouse) own and owe:

• Liquid versus non-liquid: Review your financial assets to understand the liquid vs non-liquid nature of assets. Generally speaking, liquid assets are cash or cash equivalents, such as a money market fund; non-liquid assets — such as real estate, private equity, and minority shares of a closely held business — are not easily turned into cash.
• Separate versus community property: If you have lived in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, or Puerto Rico during your marriage, discuss with your attorney what property is considered your “separate property” and what property is considered “community property.” Whereas separate property assets are generally owned by one spouse, community property assets may be deemed to be owned 50% by each spouse regardless of how the asset is titled or how it was acquired. The characterization of assets as separate or community property will impact the way such assets are divided in a divorce.
• Taxes, fees, and payments: When negotiating settlement agreements, consider any tax consequences related to the division of assets, potential alimony payments, marital settlement agreements, child support payments, attorneys’ fees, and so forth.
• Trusts of which you are a beneficiary: Determine if there are any existing trusts for your benefit from which you receive mandatory or discretionary distributions and consider whether such distributions can or should be deferred until the divorce is finalized.
• Homes: Don’t assume you have to sell marital residences immediately if such a sale would be costly in the prevailing market. Further, consider the impact of the divorce on the mortgage and insurance. Discuss alternatives with your attorneys.
• Cost basis: When dividing assets, remember to take into account your cost basis (the price originally paid for assets): Low-basis assets may have a significant tax consequence when sold.
• Budget: Review your family’s annual budget to understand your past expenses and how those might change with separation.
• Fertility matters: If you or your spouse have stored eggs, sperm, or embryos, consider your options regarding their continued use, storage, or disposal.
• Pets: If post-divorce ownership isn’t included in a prenup or a postnup and a couple cannot agree, a judge may determine ownership based on who paid for the pet, who has time to care for the pet, who the pet prefers, and other relevant factors.

Anticipate a “cooling off” period. After a couple files for divorce, some states require a minimum waiting period (sometimes called a cooling off period) before their divorce can be finalized. The waiting period in California, for instance, is 180 days. In Florida, it’s 20 days. New York and New Jersey have no waiting periods.

Do what you can to avoid a contested divorce. When couples fail to agree to the terms of their divorce, financial and emotional costs can be high. Do not hesitate to ask therapists and attorneys to help you find compromises that both of you can live with in the years to come.

After Divorce

Once a divorce is finalized, there may be additional steps to take to ensure each of you honor the financial (and childcare) agreements while embracing new lives. Accordingly, consider whether you are required or if it is advisable to:

• Obtain any life insurance.
• Procure any new auto, umbrella, home, medical, dental, and vision insurance.
• Plan for and pay any taxes you may owe on the finalized settlement.
• Prepare and execute new estate planning documents.

Bessemer Can Help

Clearly, in addition to the potentially difficult emotional and other issues that must be navigated, there are many complex financial considerations related to divorce — we’ve explored some of them here. But you don’t have to go it alone. Working with a team of trusted advisors can provide valuable support and make matters a bit more manageable during a difficult time. Bessemer’s experienced tax and estate planning professionals are available to assist you with this process, providing guidance on prenuptial and postnuptial agreements and all other aspects of wealth planning during and after divorce.