How to Financially Plan for a Divorce

A divorce is always emotionally and mentally taxing. And, without good financial planning and preparation, it can leave you feeling financially taxed as well. There’s no getting around it: The transition from living as a couple to living as individuals will impact both ex-spouses’ standard of living. But, as the old saying goes, “Proper preparation prevents poor performance.” (Or “poor outcomes,” in the case of divorce.) This is why financial planning and preparation in any divorce are such critical, albeit often overlooked, components of the process.

Let’s talk about how you can plan and prepare your finances for divorce.

What Is Financial Planning For Divorce?

Think of financial planning for divorce as your effort to identify the whole picture of your marriage’s financial landscape. I encourage people to create a detailed timeline of marital assets that lists the properties or assets, the date of acquisition or ownership, the named owner, and their current value.

If you’re not sure whether an asset qualifies as marital property (which we’ll cover in a bit), go ahead and add it to your timeline. You want to cast a broad net and, in the case of financial planning for divorce, more is more.

Preparing Finances For Divorce: Knowledge Is Worth Its Weight In Gold

Be sure your timeline reflects all assets and their titles, whether held jointly or in the name of one spouse. There are some common and less-thought-of assets that should definitely make your list. Apart from the basics of checking and savings accounts, vehicles, and the marital home, these other common assets include secondary income, other real estate, after-tax brokerage accounts, annuities, CDs, trusts, inheritances, and retirement accounts.

Let me say more about two of the terms above, so no asset is left behind. Secondary income is income generated from rental properties, private investments, and portfolio accounts, and Social Security and pension benefits. Retirement accounts include all 401(k) or 403(b) plans, IRAs, inherited IRAs, and pension accounts. Exclusion of any asset creates the potential of leaving money on the table, or in real terms, losing out during the asset division process.

How Do Courts In South Carolina Divide Property in Divorces?

In South Carolina, there is a two-step process to dividing property (and debt) during a divorce. The first step is determining which properties are marital and which are non-marital. The second step is to allocate the properties in accordance with the “principle of equitable distribution.” Marital debt allocation undergoes the same process.

Step One: Identify Marital vs. Non-Marital Property

Marital property, by law, is property acquired during a marriage. This definition remains true regardless of “who owns it,” meaning how it is titled, and typically includes, but is not limited to, wages earned, homes and vehicles purchased, new businesses, existing businesses that grew during the marriage, and contributions made to retirement accounts.

Non-marital property is any property or asset that was either acquired before the marriage, gifted to one spouse (either by the other spouse, through an inheritance, or similar circumstances), and excluded by any existing prenuptial agreement.

But, is it possible for non-marital property to become marital property?

How Can Non-Marital Property Become Marital Property?

When would non-marital property be treated as marital property under South Carolina law? The legal term for this recategorization is “transmutation.”

Let’s walk through what that means in real terms.

Transmutation typically happens in a handful of scenarios:

• One spouse makes a gift of non-marital property to the other spouse;
• There is a commingling of non-marital property with marital property, meaning that assets are combined in such a way that it’s impossible to determine the current value of the non-marital property;
• Spouses use non-marital property in furtherance of the marriage, which occurs when there is a clear intent from both spouses that the asset or property was to be enjoyed by both during the marriage;
• Property was retitled during the marriage from one spouse as the sole owner to both spouses as joint owners; and
• A non-marital asset increases in value due to the efforts of the non-owner spouse, in which case the increase in value could constitute a marital asset.

Step Two: The Equitable Distribution Principle

South Carolina law follows the “principle of equitable distribution” when allocating property in divorce cases. While many people believe this means an even 50/50 split between spouses, this percentage split is not required.

What is Required is That the Division Meets a Standard of Fairness

When considering the equitable distribution principle, the court ultimately seeks to divide marital property fairly. Factors that could persuade a court to award more property to one spouse include significant differences in income, contributions, and physical health, as well as practical considerations for the care of minor children. The court can also consider the duration of the marriage, non-economic contributions by one spouse, and spousal misconduct during the marriage.

In financial planning for divorce, it may be helpful to consult with professionals such as appraisers, accountants, and investment advisors. You want the clearest picture of what your assets are truly worth. This point is especially true for more complex assets, such as businesses and investment accounts, where current valuations do not always reflect the entire picture. There are other equally important considerations, like growth potential and tax treatment.

Think about retirement accounts and cash, for example. While you may have a 401(k) currently worth $100,000 and $100,000 in a bank account, the tax treatment of each of these assets will undoubtedly be very different. And, the 401(k) account will likely outpace even the best savings account. These facts are not only relevant but crucial to ensure fairness in the property allocation portion of a divorce.

Preparing A Post-Divorce Budget

Spoiler alert. Your Netflix subscription counts, as do all the other online subscriptions that you’ve set up on autopay and likely forgotten about. In a year, these costs can add up to thousands of dollars. Bottom line: No expense is too small to add to your budget.

The benefits of a well-crafted budget are two-fold: Your budget lets you know what you realistically need to live (and where you need to trim expenses), and it provides critical information for use during the negotiation stage of divorce. Be thorough with your budget, even if some things seem silly to incorporate at first. Again, more is more when planning and preparing financially for divorce.

Take Control of Your Financial Future

Just like with any other component of a divorce, it’s best not to go it alone. If you need assistance preparing and planning for the financial aspects of a divorce, no matter where you may be in the process, our team of experienced attorneys is here to help. Reach out to schedule your consultation today.