Many couples only begin to grasp the full financial impact of divorce once they are deep into the process of separating. The short- and long-term consequences—both emotional and economic—can be profound. That’s why, before initiating divorce proceedings, it’s wise to meet with your financial advisor to address some of the more challenging questions. Below are key areas to reflect on before moving forward.
1. What does your marriage contract say about your assets?
Before you can start planning the possible division of assets, the first step is to understand the nature of your marriage contract and how this affects what you are legally entitled to in terms of law. If you are married in community of property, you and your spouse share a common, joint estate which will need to be divided into two. If you are married out of community with an ante-nuptial contract, you will need to give consideration to the commencement values stipulated in your contract, the extent to which your respective estates have grown during the subsistence of the marriage, and what the accrual calculation would look like in the event of divorce, amongst other things.
Good to know: Your marriage regime directly determines how your assets will be split during divorce proceedings.
2. Are you prepared for the financial cost of running two households?
The shift from running one household to running two households will invariably cost money, so it’s important to understand what your current budget looks like, how your money is being allocated, and whether there is room in the budget for the inevitable additional costs that will arise as a consequence of divorce. There are also more practical considerations to be contemplated such as how you and your spouse manage your day-to-day finances, who pays the bills, and in whose name the various accounts are registered. If you’re only barely managing to cover your monthly living costs, you will need to consider how you will survive financially when running two separate households.
Good to know: Post-divorce living expenses often exceed pre-divorce expectations—plan conservatively.
3. Can your income support your post-divorce lifestyle?
It is essential to take stock of how much you earn, what your future earning potential is, and how secure your job or income is going forward. Remember, while you may be able to claim maintenance as part of the divorce settlement, amending a maintenance order is a slow, frustrating process – meaning that, if your future earnings are uncertain or at risk, you need to consider how you will manage any potential cash flow shortfalls. The transition to a single-income household will invariably mean reigning in some expenditure and creating space in your budget for additional post-divorce expenses.
Good to know: Secure, predictable income is crucial when transitioning from a dual to single-income household.
4. Do you have emergency savings to fall back on?
The costs of a divorce can be difficult to quantify upfront. What may begin as a seemingly uncomplicated divorce can end up being drawn out, acrimonious and expensive. Having emergency money is therefore essential to ensure that you have access to funds should you encounter unforeseen legal costs, late interim maintenance payments, psychological assessments, or other professional fees.
Good to know: A dedicated emergency fund can be your financial safety net during drawn-out legal proceedings.
5. What will it cost to support your children?
While we all know that children are expensive, it takes time to quantify exactly what each child costs in terms of education, clothing, food, extra-curriculars, healthcare, transport, etc, as it is important not to underestimate these costs when claiming for maintenance. You might also want to consider whether there are costs that you can cut back on, such as moving your children from a private to government school, changing medical aid plan options, or reducing certain extra-murals.
Good to know: Accurately estimating your children’s expenses helps ensure realistic maintenance claims.
6. Have you listed your personal and joint assets?
Before entering into divorce negotiations, make an inventory of all assets held in your name, including assets jointly owned by you and your spouse. If you have any inherited assets, keep in mind that these will generally be excluded when it comes to the divorce settlement. Establish whether any assets were specifically excluded in terms of your antenuptial contract, and understand the legalities involved in the event that you have assets in a foreign jurisdiction.
Good to know: A thorough asset inventory helps avoid disputes and surprises during settlement talks.
7. What’s the status of your retirement funds?
There are very specific rules when it comes to the division of retirement fund assets in the event of a divorce, so knowing what type of funds you have in place is an important first step. Depending on how you are married, the spouse who is not a member of a retirement fund may have a claim for a share – known as a ‘pension interest’ – of the member spouse’s retirement assets. Once again, your financial advisor should be able to explain how the pension interest calculation would work in your situation.
Good to know: Retirement savings are not off-limits and may be included in the divorce settlement.
8. Do you have a clear picture of your spouse’s finances?
Determining what you could realistically expect in terms of divorce settlement means understanding what assets your spouse has. In a particularly acrimonious divorce, a spouse could attempt to hide assets in a trust or move assets offshore in the hope that they won’t be found. If you and your spouse own assets jointly, such as the family home, you will need to think about how these assets will be dealt with should you divorce.
Good to know: Full financial transparency is key to a fair and equitable division of assets.
9. Are your life insurance beneficiaries still appropriate?
Ask your financial advisor to pull a policy schedule for you, and ask your HR department to provide you with details of any group life or disability cover. Take stock of exactly how much cover you have and who your nominated beneficiaries are. Your financial advisor should be able to advise you on how your long-term insurance needs will be affected by your divorce and how best to structure your beneficiary nominations.
Good to know: Review all life cover and beneficiary nominations to avoid unintended consequences.
10. Do you know your current credit score?
If you haven’t checked your credit score in a while, be sure to do so, especially if you and your spouse are married in community of property. If your spouse has engaged in irresponsible financial behaviour, it is possible that this has adversely affected your credit score. Any damage to your credit score can affect your ability to secure vehicle or home financing later on.
Good to know: Divorce may impact your credit rating, especially if finances were shared.
11. Can you realistically afford to stay in the family home?
While your intention may be to hold onto the family home for sentimental reasons, this is often not the wisest course of action. You will need to consider whether your income will allow you to cover the running costs of the family home, or whether holding onto the asset as opposed to liquidating it will result in cash flow problems later on. Consider alternatives to staying in the family home, and do your research in terms of buying a smaller property versus renting appropriate accommodation.
Good to know: Sentiment should never outweigh financial practicality when it comes to housing decisions.
12. Have you accounted for all the hidden costs of divorce?
Do not underestimate the costs that may arise as a consequence of divorce. Running a joint household means enjoying the benefit of two pairs of hands when it comes to raising children, maintaining the property, and running the household. As a single parent, consider what additional expenses you would need to incur in terms of babysitting, aftercare, au pairing and tutoring, and child transportation. Take time to put together a post-divorce budget so that you know what you are realistically working towards when entering into divorce negotiations.
Good to know: The hidden logistical and emotional costs of divorce can have a big financial impact.
Have a fantastic day!
Sue
