Live Well After Divorce
Divorce is a hugely emotional time. Some feel devastated when a marriage dissolves, while others feel relieved. Some feel excited, others feel terrified. Many feel a mix of all these thoughts and feelings, plus many more.
Dismantling a marriage is tricky business, and it’s easy to feel lost, discombobulated and unsure how to start rebuilding. Despite being on the increase – every year in Australia, around 50,000 divorces are granted – divorce never gets easier for those going through it.
Former partners sometimes become foes as the daunting task begins of unravelling an intertwined web of finances. Given emotions run high during divorce, it’s vital you seek trusted advice at this time. Not only will it help you face the financial hurdles ahead, but will also ensure you set your own goals as a newly single person going forward.
Here, we look at the main challenges faced before, during and after divorce proceedings. We’ll offer some insight into how you can plan for life after divorce by exploring post-divorce financial goals (yes, you can live well in your fabulous new life!).
*This information has been compiled via research on industry publications as well as interviewing divorcees and professionals involved the divorce process. Thanks to everyone who kindly took part in these interviews.
Divorce – the facts
While we all go into marriage with the hope it will last forever, the reality is one-third of first marriages in Australia end in divorce. It’s even higher for second and third marriages, with 66 percent of second marriages and 75 percent of third marriages also ending.
Those facing divorce are often grieving and dealing with sadness or anger. This means they can often overlook important details that can impact both short and long-term financial concerns. To add further complexity, nearly half of divorces involve children. This complicates asset division even more, with housing, education and child support payments all needing to be carefully considered to ensure the children’s wellbeing remains at the forefront of all major decisions.
Most marriages that end in divorce last around 12 years, with men and women usually in their 40s when the marriage is officially dissolved. At this stage of life, incomes and assets within the marriage have often reached significant levels, so good financial advice to guide you through the process is crucial.
I cannot stress this enough – engaging a financial advisor you can trust is so important at this time. You may feel uncertain, confused and a little fragile and will need a good team around you. Your financial advisor can make sure all positions are thoroughly investigated and accurately reported, and help you create a strategy for independent financial security as you move forward with your new life. But he/she/they should also feel like a friend, an ally and advocate in your corner.
The First Hurdles
Our clients were unanimous is agreeing that divorce has three main challenges. These include:
- Changes in circumstances
In over half of cases, divorce papers are filed by one party. In this situation, the other partner in the relationship can be blindsided by the process and find the initial upheaval difficult to cope with.
- Understanding the settlement
For the less financially involved partner, the financial decisions required to successfully navigate the divorce settlement can be hard to understand and overwhelming.
- Ensuring financial security
A lack of understanding of the financial resources required for a lifetime of financial security can result in an inadequate settlement and an uncertain future.
Let’s examine these challenges in more detail.
Changes in circumstances
Problem #1: Asset transfer
Assets (in particularly cash assets) can be easily transferred out of joint accounts prior to, or immediately after, a separation request. This issue is potentially the greatest short-term challenge facing divorcees.
While assets can be recovered later through legal proceedings, this process takes time. This issue is particularly common where the divorce application is filed by a single party who has the inside knowledge and therefore time to prepare.
“[My wife] went online and removed a large amount of funds almost immediately when the separation was announced. It really was too easy to move assets.”
Problem #2: Additional expenses
When we asked our clients about the initial financial impact of separation, most said they were surprised by the dramatic increase of costs at the initial stage of separation. In particular, the additional expense of separate accommodation created an income drain for both parties.
Problem #3: Lack of a credit history
This problem is specific to people who have been financially dependent on their spouse. Often they are without a regular income or an established credit history, both of which are needed for things like rental tenancy applications and utilities.
“Once I’d left, I realised I was really out there on my own. I didn’t even know how to rent somewhere to live. I didn’t know what a bond was. I didn’t know you had to call the agent time after time to get things fixed.”
Understanding the settlement
“If I accept this settlement, what does it mean for me going forward?”
This is the big question facing many people as they contemplate divorce – and it’s even more important to independently assess in amicable situations, where parties are looking to negotiate in ‘good faith’ rather than undertaking a legal battle.
To ensure a fair division of assets during a divorce settlement, you need to consider several things. These include being aware of legal precedents and ensuring you have accounted for both your immediate and long-term financial requirements. Decisions made when structuring a settlement have substantial long-term consequences.
The first step in developing this understanding is to step back and revisit the future outcomes you’re looking to achieve. The second step is to then consider the proposed settlement from the perspective of “Can I achieve the outcomes that are important to me?” If the answer is yes, you can confidently move forward with the settlement. If the answer is no, then you need to revisit other options.
With the introduction of superannuation splitting and the 2014 court ruling that settlement payments from a company are considered taxable dividend payments, it is not just the amount of any settlement which needs to be considered, but also the structure. And this can mean the difference between achieving or not achieving the best future outcome.
“I honestly thought that the divorce settlement would’ve been amicable but then he waged a war against me. It’s important to get all your ducks in a row, especially if you know the divorce is inevitable.”
Accounting for all assets
Homes and cars are obvious divisible assets, but one thing that can sometimes be overlooked in divorce is superannuation. It’s often a sizeable asset, usually the second largest after the family home, meaning it must always be considered during settlement.
Women especially need to be conscious of superannuation in settlement. Unfortunately, there’s a sizeable disparity between the average super balances for men and women.
Leading up to retirement age, the median super balance for women is around 25 percent lower than for men. And while in a perfect world each partner would be forthcoming with details of assets, by the time the relationship gets to the point of divorce, an amicable resolution is not always achievable.
“You have a generation, particularly of women, who are financially independent. The traditional course of events is that the husband takes on the property and the mortgage and gives the wife a payout, however that is changing. Now women often take on the property and mortgage and give the husband the payment.”
Perth-based Barrister specialising in Family Law
But what are the tax implications of settlement?
First things first – tax implications are SO important to know, particularly for more complex settlements that include the division of company assets. It’s crucial a trusted advisor organises a forensic analysis of your partner’s assets and liabilities to ensure any settlement is based on a true representation of each partner’s financial situation.
Understanding tax issues can make a huge difference to your final settlement. For example, a settlement split can be negotiated so one partner retains the family home. If that partner decides to sell after the conclusion of the divorce and settlement, the home will be exempt from capital gains tax.
Another benefit of accurate and immediate financial reporting is that the settlement process can be completed as quickly as possible. This is super important when one party is relying on the settlement to provide financial security in both the immediate and long term.
Ensuring financial security
Ideally, you’ll consult a trusted independent financial advisor to ensure your future financial requirements are met before settlement. But, if you haven’t, the ship hasn’t sailed. Post- settlement expert advice can also greatly reduce financial stresses in your life.
Some people never get involved in family finances and need a lot of guidance and support when they are living independently. A trusted financial advisor can help with everyday tasks such as organising banking and paying rent or advise how to invest money you received in the payout to ensure it lasts your lifetime.
If you plan to work (or even start your own business, as many of our clients do), seeking out sound financial advice will allow you to maximise the financial benefits, whether that’s setting up the best superannuation fund for you, or structuring your business as effectively as possible.
Case Study #1: Anna
At 36, and after 12 years of marriage and two children, Anna and her husband, Steven, separated and later divorced. Once the initial shock of her situation passed, Anna soon realised – with advice from her friends and family – that she needed some professional help at this difficult time. By her own admission, Anna had never been ‘financially educated’. In her marriage, she looked after the children and the house, whilst her husband was the salary earner and took charge of the family’s finances. She’d never had to worry about money.
Following the decision to divorce, Anna had the following concerns about her financial position:
- Initially, her head was ‘in the clouds’ so she relied heavily on professional financial and accounting advice to look after her best interests.
- Anna had lost trust during the divorce process and had concerns about entrusting a new person with her finances. Anna initially met with The Wealth Designers daily for two weeks in order to develop the necessary level of trust and understanding. Throughout this process, The Wealth Designers took the time to educate Anna about the reasons behind the financial decisions they recommended. As a result, Anna was comfortable having the final say on her finances. The Wealth Designers team also worked with Anna to encourage her decision to return to work and provided professional advice, both personal and business related, throughout the process of starting up her new venture.
- Because Anna had little previous experience managing finances, she understood she needed assistance and education around managing the divorce settlement monies.
- With no credit or work history, Anna was challenged by her existing bank when enquiring about a home loan.
Anna ended up running her own consultancy business and purchasing her own home in Claremont. The Wealth Designers manages all her financial affairs and regularly updates her budgets and cash flows to give her financial peace of mind. We provide the relevant information to Anna’s accountant so that all professionals are working together to give Anna the best outcome. She also appreciates that her financial advisors listen to her when it comes to decisions that are important to her.
Case Study #: Sandra
Sandra, 46, was married with three children. Her divorce appeared to be heading towards an amicable resolution but Sandra was caught off-guard when her husband turned vindictive. Sandra was used to managing the family finances but still had concerns regarding both finances and minimising the impact on their children.
- Sandra was keen to maintain the family home for the stability of her children. She required financial planning advice to understand whether her proposed settlement would be enough for her personal future goals and aspirations.
- She needed a new accountant as the couple’s existing accountant was advising her husband.
- Sandra was initially hesitant to seek professional advice, hoping the situation could be resolved amicably. Unfortunately, this wasn’t the case so she sought the advice of The Wealth Designers. A review uncovered that the family home was owned by a company her husband controlled. This created complex tax matters relating to capital gains and income tax for the transfer to Sandra. The Wealth Designers helped her to obtain strategic advice to ensure that her settlement was structured to include an additional cash component to meet the necessary tax obligations and allow her to maintain the family home.
- Sandra had experience buying, renovating and selling properties but admitted that investing in markets was not her area of expertise. To provide adequate diversification, The Wealth Designers helped Sandra to establish an investment portfolio consisting of shares, bonds and cash to provide a passive income stream.
- Although Sandra was used to managing the family finances, she realised she needed assistance in managing the investment and tax minimisation strategies required for a large settlement.
Sandra ended up starting her own health-related business and delegated all her personal planning and advice to The Wealth Designers. Sandra remains in control of her finances, but by delegating the day-to-day management and advice, she is able to spend time on what’s most important in her life, such as being there for her children as they grow up.
Case Study #3: Andrew
Andrew came to us as a partner in a large Perth engineering firm. After being married for 25 years and with two young adults, he found himself dealing with the prospect of divorce at 53.
Following the decision to divorce, Andrew had these concerns:
- Saving and investing for the future became more intense as there were only so many years of earning income to replenish savings. Andrew was also forced to focus on building his superannuation as he lost a lot of his savings.
- Andrew had to reconsider his children’s needs around finishing university, getting jobs and stepping out into the world.
- The Wealth Designers gave Andrew strategic advice about his superannuation and long-term financial planning. He was advised to salary sacrifice the maximum amount into his superannuation and set up a SMSF so that The Wealth Designers could roll over the benefits from his expensive retail fund. As Andrew liked to invest directly into the market, his investment strategy within the fund was designed to incorporate this and to provide him with more future flexibility.
- Andrew was also advised to set up a family trust to allow his wealth to grow outside of super and be accessible if he needed it for a house or for the children. This advice also allowed for tax-effective income allocation to his children as they were over 18 and on a very low income whilst both at university.
- Andrew couldn’t make a final decision about the house size until he knew whether or not the children were going to live with him. Finances also affected this decision. Before the divorce, his priorities had focussed on a big house and expensive holidays.
Andrew received the peace of mind that his finances were back on track. He continued to work closely with The Wealth Designers, knowing this would give him the best chance of achieving his goal of retiring from his business at age 65 with a tax- effective passive income stream.
What you should ask when looking for a financial advisor
- Does the financial advisory firm have comprehensive experience and knowledge of the issues involved in all aspects of divorce, from the initial stages, through settlement, to ongoing strategic advice?
- Does the financial advisory firm work to simplify your affairs, give you certainty about the future and provide personal attention to all aspects of your finances?
- Is the firm focussed on you living well, both now and in the future?
- Does the advisory firm take the time to get to know you? And to truly understand the outcomes that are most important to you? Do they steer their advice so it gives you the best chance of achieving these desired outcomes?
- Does the financial advisory firm work with other professionals to provide you with the top expert professional advice?
- Do the firms involved offer one transparent annual fee based on the value they’re providing every year, rather than commission-based advice?
- Does the financial advisory firm offer day-to-day, year-to-year guidance, regular reports and reviews and accountability for the advice they provide?
- Australian Institute of Family Studies (22 August, 2023) https://aifs.gov.au/research/facts-and-figures/divorces-australia-2023
- Births, Deaths and Marriages, The Australian Bureau of Statistics (ABS), (26 November, 2014), http://www.abs.gov.au/ausstats/abs@.nsf/mf/3310.0
- Divorce is Costing the Australian Economy $14 Billion a Year, news. com.au, (July 6, 2014), http://www.news.com.au/lifestyle/relationships/ divorce-is-costing-the-australian-economy-14-billion-a-year/story- fnet09y4-1226979027353
- An Update on the Level and Distribution of Retirement Savings, The Association of Superannuation Funds of Australia Limited (ASFA), (March, 2014), http://www.superannuation.asn.au/policy/reports