Updated: May 3, 2013 12:14PM
Originally published: April 18, 2004
Consider the odds. When there’s risk, you should take action to protect yourself. That’s why you buy homeowners or auto insurance well in advance of a catastrophe. Statistics say there’s a good chance your marriage will fail. So it pays to understand the risk and take some steps to insure that if divorce comes, it will be handled in a manner that is financially fair and emotionally reasonable.
Here are some things to consider before and after the marriage ceremony:
* A prenuptial agreement. It’s not unromantic to consider a prenuptial agreement. The time to consider the worst is when you love the most. A prenuptial is valuable even if neither party has a lot of assets at risk going into the marriage, because over a number of years those assets can grow.
To have a valid prenuptial, each party must be represented by a separate lawyer, and must fully disclose all assets. If the agreement specifies that those assets are to be kept separate, you might want to place them in a revocable living trust.
The next step is to deal with what happens to assets acquired during the marriage, and how those assets will be distributed in the event of a divorce. The prenup can also spell out in advance an agreement on terms of financial support after a divorce. And the agreement can be designed to protect assets at death so they will be distributed to children of a previous marriage. Both parties should then create complementary wills and estate plans to carry out that agreement.
If you didn’t do a prenuptial agreement before you married, it’s not too late. The same agreement, signed after marriage, is called a “post-nuptial”agreement. If you just laughed and said your spouse would never consider that kind of arrangement now, then you might soon be in need of the following advice for those who are considering divorce.
* I’m often asked whether women have special financial needs in divorce. If a woman has no work history or lacks the skills to maintain a reasonable lifestyle, or if a woman has the additional responsibility of rearing young children, then a special circumstance is created.
But it takes more than a good divorce lawyer to deal with these issues. That’s where financial planners, mediators, and even insurance agents can add tremendous long-term value. And if their advice shortens a divorce battle, they will pay for themselves out of the lawyer’s bills you would otherwise run up contesting these issues.
The reason many people seek the services of a financial planner in creating a divorce settlement is that it’s always difficult to figure out what’s really fair. For example, if the house is worth $600,000 and there’s the same amount in his retirement plan, it is hardly “fair” to give the house to the wife, so she can raise the children there. The dollar amounts may be the same, but the house will need ongoing repairs, and home ownership exposes her to rising tax payments and utility bills. At the same time, his retirement plan will grow in value, with gains tax-deferred.
It’s important to look behind the current numbers, and evaluate the long-term value and carrying costs of the assets.
**Health care insurance. This is one of the least considered, and most important, issues in divorce. If the family has used one spouse’s insurance at work, the other spouse may be left without health insurance after a divorce.
COBRA laws should allow that spouse to pick up coverage for 18 months, but it depends on the company insurance plan, and in any case, COBRA insurance is enormously expensive.
Children may still be covered under the parent’s company plan, but check to see if that applies when the child is not considered a dependent for income tax purposes on that parent’s tax return. And, of course, a divorcing spouse with pre-existing medical conditions may find it difficult -- or very expensive -- to get coverage for that condition.
When you consider the potential cost of an uninsured illness, or coverage for an ongoing or previous medical condition such as cancer, it might change your mind about the divorce itself. At the very least, the costs should be considered before making a settlement.
* Retirement plans. Depending on state law, the assets of a pension or 401(k) plan or IRA might be divided as part of an equitable settlement. To make that official, the judge will issue a Qualified Domestic Relations Order, known as a QDRO. There may be some difficulty in getting that order enforced -- especially if one spouse is covered by a municipal, state or union pension plan.
If the working spouse has not retired yet, or is under age 591/2 when assets can be distributed with a tax penalty, the QDRO will instruct the pension or retirement plan trustees to separate assets and hold them until the appropriate age. But the spouse who is waiting for the distribution typically does not have any voice in the investment of the 401(k), 403(b), or IRA assets.
Before agreeing on a division of retirement plan assets, the recipient should contact the trustees and get their policy in writing. Ask when you can expect payment, how much or what percentage of the ultimate monthly check (in the case of a pension) will be sent, and how you can make sure of your rights when the assets are to be distributed years in the future.
* Life insurance. Sometimes a portion of the divorce agreement will be backed by a life insurance policy. For example, if the father promises to pay college tuition for the children, the court may order him to carry life insurance to carry out his part of the bargain if he should die before that time. A planner can help you factor in the rising cost of college for today’s young children, so an adequate amount of insurance is required to be purchased.
Here’s a critical ingredient: If the husband is required to buy life insurance, the wife should be the owner of the policy. That allows the ex-wife to be sure the premiums are being paid, and, most importantly, it keeps the ex-husband from changing the beneficiary.
These are just a few of the issues that can be easily overlooked in the heat of a divorce battle, while lawyers are ringing up their bills. Getting angry is not the best way to get even. In fact, it probably assures that both parties will be losers, while the lawyers divvy up the money that could be better spent on the children.
Using financial planners and qualified mediators will help reach a financial settlement that ends in smiles, not in tears. That’s The Savage Truth.
Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast. Distributed by Creators Syndicate.