Going through a divorce is more than just change in your personal life — it also can have a profound impact on the legal status and financial situations of everyone involved.
Marriage fundamentally changes each spouse's rights to wealth and property, creating a complicated “yours, mine and ours" set of claims. In this respect, a divorce is not only an emotional trauma — it is also a complex, court-supervised unraveling of those claims, one that can be made easier to navigate with some thoughtful preparation.
One way to prepare for the possibility of divorce is by creating a prenuptial agreement — a legal contract defining each spouse's rights to the combined assets and support in a marriage in case of divorce. This agreement determines whether assets are held as community property, joint tenants, tenants in common or as the separate property of one spouse.
A complete and equitable picture of assets is essential. It's important to go beyond the “lump sum" approach and instead define the present and future value of significant assets. What might appear to be an equal distribution can change dramatically when tax and retirement consequences are considered.
A complete financial picture should also take into account the risk and volatility of any assets, especially when one person may end up with too many post-divorce eggs in one basket.
Finally, a settlement should aim to maintain both spouses' living standards and provide for their short- and long-term needs for income.
The division of real estate, particularly the family home, is often the most contentious issue in a divorce. But careful analysis can ease the way. You need to know the tax implications of property sales or transfers. In addition, if you or your spouse wants to buy a new home, the ability to qualify for a mortgage should be determined.
The rules governing division of IRAs and qualified retirement plans are complicated. Professional advice may be essential. For example, splitting a pension or qualified retirement plan may require a court to issue a formal qualified domestic relations order.
Income, gift, estate and generation-skipping transfer tax planning can be significantly impacted by a divorce. Proper tax planning is essential to avoid mistakes that may not become apparent until years after the divorce, and that could lead to substantial taxes, penalties and interest.
Managing Your Wealth After Divorce
Divorce can dramatically affect your finances. You may need help in managing your assets or crafting a financial plan. If your spouse had been primarily responsible for your finances, you might feel unprepared to make financial decisions, especially during the wrenching experience of dissolving a marriage. As a newly divorced person, you might need help and advice — whether related to something as simple as opening a new investment account or as complicated as setting up a trust.
After a divorce, it's especially important to review your estate plan. Among the things to look at are:
- Changes in income, gift, estate and generation-skipping transfer tax laws
- State laws and the potential elimination of provisions that favor the former spouse
- Changes to spousal designations as executor or personal representative, trustee, attorney-in-fact or health care agent
- Beneficiary designations
- Estate liquidity
- Gifted or inherited assets, or beneficial interests, whether vested or contingent
Wealth Planning for Families of All Kinds
Families today come in many different varieties. Although the financial benefits of marriage are not available to people who have children but don't marry, they frequently can be replicated for such families. Trusts, for example, can play a critical role. They are more durable than wills and less prone to challenge, which is particularly important if other family members object to the estate arrangements.
When the financial benefits of marriage are not available, families need a legally recognized estate plan. This plan is often supported by:
- Durable powers of attorney
- Health care proxies
- Wills and trusts
- Living wills
- Partnership/co-habitation agreements
- Beneficiary designations
An Experienced Partner
BNY Mellon Wealth Management has a long history of helping individuals and families manage their wealth and protect their assets. We can show you how to navigate life events in ways that meet your specific needs, and work with your legal and accounting advisors to develop comprehensive wealth management plans. Whether it's designing a prenuptial agreement, a divorce settlement, or a trust to provide for your family, BNY Mellon will work collaboratively with your other advisors to help you make the right decisions at the most important moments in your life.