Separating your finances from your soon-to-be former spouse requires a division of assets—and often, a new mindset. "For many years you probably thought of yourself as part of a financial unit," says Aimee Kwain, an advanced planner with Fidelity. "Now that you're on your own, you need to think as an individual." That freedom can be liberating but also may provoke feelings of anxiety, says Ribika Mohapatra, a director with Fidelity in the Financial Solutions group and herself a divorcee. "It is the fear of the unknown that is often the most intimidating, especially if you were not the primary decision maker in the relationship," she says.
Planning for an independent financial future is important, especially for women. A study from the US Government Accountability Office found that women who divorced experienced an average 41% loss of income, nearly twice that of men. But shouldering the responsibility of providing financial security for yourself and perhaps your children comes with benefits: "Putting yourself in control will put you in a much better place and can set the foundation for future success," says Kwain.
The steps below can help you make a clean break, protect your finances, and move forward with confidence.
1. Put decision-making on pause
"Whether it's driven by anger or grief, emotion makes us do impulsive things," says Kwain. Be especially wary of making big purchases or investments shortly after separation.
Another reason to give yourself some breathing room: You'll likely need sufficient liquid assets to cover your living expenses for a certain period, until your separation agreement is complete—and the divorce process often takes much longer than anticipated.
2. Take an inventory of everything
"Getting organized is paramount as it will help you make better decisions," says Mohapatra. Make a list of all assets you jointly own, including checking and savings accounts, retirement accounts and real estate, of course. Include other investments like a business and valuable personal property such as art and collectibles that you might divide, and income received from a trust. In addition, take stock of any debts including business or personal loans and mortgages, since those could get factored into divorce agreements. Order a copy of your credit report to ensure that there are no debts that you may be unaware of. And don't forget to factor in taxes. Fidelity's Marital Split Calculator, which provides pre- and post-tax valuations of assets and liabilities, can help aid in the decision-making around splitting assets.
Also consider any joint accounts your spouse may have access to, and speak with your attorney about how to best protect these assets, as well as ways to protect your credit from any debt your spouse could accrue post-separation.
3. Assemble a team
For the most part, the laws around divorce are regulated by states. Some states, for example, have community property laws that generally require a 50/50 split of all assets acquired during the marriage. At minimum you'll need a family law attorney who is well-versed in the laws of your state, and familiar with any specific expertise you may need (for example, business ownership).
In addition to a family law attorney, depending on your circumstances, you may also want to consider working with other professionals such as a financial consultant, an accountant, a trust and estates attorney, and a valuation specialist, who can best handle the challenging task of calculating the worth of non-liquid assets such as privately held businesses, art, or other collectibles.
4. Update key documents
Review, and if necessary, update your estate planning documents. Make sure to include health care directives and your durable financial power of attorney, which can control who would make medical decisions on your behalf and have access to your accounts if you were incapacitated. Also review beneficiary designations: Neglecting to update beneficiaries on bank and retirement accounts and life insurance policies is one of the most common mistakes Kwain has seen clients make. "Those designations even supersede wills and trusts," she notes. "So it's important to make sure they are consistent with your estate plan."
5. Don't assume you'll keep the family house
It's common to feel emotionally invested in your primary home, especially if you raised kids there. "But keeping the home can sometimes be much more costly than getting paid out for half the cost, especially if you factor in maintenance and other ownership costs over the years," says Mohapatra.
Moreover, if you're ultimately going to sell the home, it may be financially advantageous to do so sooner rather than later, suggests Kwain. As long as you're still legally married, you can jointly claim a $500,000 capital gains exclusion on the sale, compared to $250,000 as a single person. Your team of professionals can help determine what might work best for your situation.
6. Consider your income needs
Especially for high-net-worth clients, calculating an equitable division of assets can be complicated, explains Kwain: "For example, would a large award of cash and assets mean no spousal support or spousal maintenance, or vice versa? Which offers a better long-term plan?" A financial professional can help you run the numbers for your projected income and expenses post-divorce. "Numbers sometimes sound great until you start plugging them into your cash flow," explains Kwain. Child support, for example, is usually based on a formula that varies by state, but you may find that it doesn't apply to your situation.
7. Lay the groundwork for a path forward
You and your ex will likely need to divide your retirement accounts, which may include IRAs, 401(k)s, or pensions. Working with a financial professional can help you file paperwork correctly, so you don't incur unexpected tax consequences resulting from a transfer. After your divorce is complete, you can consider a long-term savings strategy that takes into account your age, goals, and ability to handle risk. "While you're going through the process, focus on getting through it," counsels Mohapatra. "Once things begin settling down, you can think about moving forward."