Rebuilding your financial life after divorce

Divorce can have devastating effects on one’s finances and rebuilding your financial life after divorce may seem like an impossible task. If you’re feeling overwhelmed by the state of your post-divorce finances and unsure how to proceed with the process of rebuilding, here are some points to consider.

Take control

As a newly single person, the first step is to separate your financial life and take personal control of your affairs. If you and your ex-spouse shared accounts, you will need to take practical steps to either move the accounts into your own name or set up new accounts in your name. Use the opportunity to simplify and consolidate your financial affairs, keeping in mind that going forward you will be wholly responsible for the financial management of your household. It makes sense therefore to limit the number of bank accounts and credit cards, create an easy-to-manage filing system, and take advantage of free apps centrally manage your finances.

A transition budget

The transition from dual-income to single-income household is massive and it may be difficult to anticipate the costs you will be faced with as a divorcee, bearing in mind that many of your costs will not necessarily halve as a result of your divorce. During this period, set up a transitional budget of your anticipated costs, but allow sufficient room to move as you adjust to your new life. Don’t let the enormous responsibility of shouldering your finances alone overwhelm you and, ideally, find a trusted independent financial advisor who can partner with you as you work to rebuild your finances. Remember, post-divorce there are likely to be some important financial decisions you will need to navigate which can impact your future financial security, so be sure to get advice.

Expenditure

Life immediately after divorce can be filled with uncertainties, bearing in mind that the sale and/or transfer of assets following the divorce order can take time to finalise. Ideally, avoid making large capital expenditures soon after your divorce or before the separation of finances has been completed. Keep in mind that there may be tax consequences when it comes to the sale or transfer of assets, and these need to be fully understood before you can take stock of where your divorce has left you financially. If you are to receive a lump sum pay-out as part of your divorce settlement, be sure to get sound independent investment advice before withdrawing the money to avoid unexpected tax and or capital gains tax liabilities.

Amend your life cover

If you and your spouse had life cover in place on each other’s lives, you will want to review the cover you have in place and amend your beneficiary nominations. If you have maintenance obligations towards your children in terms of your divorce order, you must ensure that these financial obligations are prod for in terms of your life cover. If you have minor children, be aware of the implications of nominating them as beneficiaries to your life policy. In South Africa, children under the age of 18 do not have contractual capacity and are unable to inherit directly. If nominated, the proceeds of your policy will be administered by your minor children’s legal guardian who is likely to be your ex-spouse, which is unlikely to be your intention. To avoid this situation, it is advisable to set up a testamentary trust in terms of your Will with your children as the nominated trust beneficiaries. In this way, assets intended for your minor children can be administered by your nominated trustees until your children are old enough to receive their inheritance.

Short-term insurance

Once you are settled in your own home, be sure to take out short-term insurance in your name and reassess the cover you need. The division of moveable assets will likely mean that you have less to insure. Perhaps use this opportunity to create a new inventory of household effects and to shop around for more cost-effective cover.

Debt

Many recent divorcees find themselves ladled with debt, particularly in respect of attorney and other professional fees, and it is critical that you put a plan in place to settle this debt as soon as possible. Having a good credit score is important, so be sure to make your debt repayments timeously – keeping in mind that an adverse credit score can affect your ability to secure housing or vehicle financing in the future. If you do not have a credit card or retail account in your name, doing so and managing it responsibly can significantly enhance your credit record.

Develop a cash cushion

As the sole breadwinner, building sufficient cash reserves is important to ensure that you can continue to cover your monthly living expenses in the event of, for instance, retrenchment, reduced working hours, late maintenance payments, or the onset of a severe illness. With no second income to fall back on in the event of a crisis, having a cash cushion that can tide you over financially for a period of six months is advisable although naturally, this would depend on your unique set of circumstances. For instance, if your ex-spouse is a reliable maintenance payer with a secure source of income, your position could be regarded as less risky than if your ex-spouse is financially irresponsible or has an irregular income.

Income protection

An effective way to mitigate against the risk of disability as a result of accident or illness is to take out an income protector, keeping in mind that you no longer have a second income to fall back on if you are rendered unable to generate an income, either temporarily or permanently. Be sure to take out comprehensive income protection that is aligned with the level of emergency funding you have in place, remembering that generally, policies will have a one- to three-month waiting period before being able to claim. This means that you may need at least three months’ worth of living expenses saved in order to survive financially until your income protection benefit pays out. Also, make sure that your policy includes cover for temporary disability, bearing in mind that you are more likely to suffer from temporary disablement (such as a broken arm or heart attack) than from a permanent disablement. While securing income protection cover, consider taking out severe illness cover which is effectively lump sum insurance that pays out on the diagnosis of an illness (subject to a pre-determined list). Again, as the sole breadwinner, consider the financial implications of being diagnosed with a dread disease without the financial and physical support of a spouse, and consider the extent to which a lump sum pay-out will provide financial relief as you seek treatment and care.

Estate plan

Without a spouse, you will need to reassess your estate plan, keeping in mind that your estate is no longer subject to a matrimonial property regime. As mentioned above, if you have minor children, consider setting up a testamentary trust when updating your Will to ensure that any assets intended for them are housed in a trust structure when they as the nominated beneficiaries. When structuring your Will, keep in mind your financial obligations to your children in terms of your divorce order as failing to provide adequately for them can give rise to a claim against your deceased estate. Unless you are required to provide financially for your ex-spouse in terms of a valid divorce order, they will have no claim for maintenance against your deceased estate. Lastly, do not delay updating your Will after the finalisation of your divorce as you effectively have a window period of three months in which to do so after which, if your ex-spouse is a nominated heir, the courts will deem that it is your intention for them to inherit from your estate.

Retirement funds

Following your divorce, you will likely want to update the beneficiaries nominated on your retirement funds. However, keep in mind that there is no guarantee that those nominated will receive any benefit in the event of your death. This is because the distribution of retirement fund benefits is governed by Section 37C of the Pension Fund Act which dictates that it is the duty of the fund trustees to identify your financial dependants and to distribute the benefits in accordance with financial need. What this means practically is that in the event of your passing, the fund trustees will do an investigation to determine who is financially dependent (wholly or in part) on you, and this can include children, siblings, parents, or even an ex-spouse towards whom you have a maintenance obligation. Thus, even if you remove your ex-spouse as a nominated beneficiary on your retirement fund, it is possible that the fund trustees distribute retirement benefits to her if it is found that they are in any way financially dependent on you.

Marital home

If you intend to keep the marital home after your divorce, make sure that it makes financial sense for you to do so. Sentimental attachment to the marital home can blind you from making decisions that are in your financial best interest so, as hard as it may be, put your emotions aside and consider what it means to hold onto the marital home. Besides being an illiquid asset, give thought to the costs of upkeep, maintenance, municipal accounts, electricity, cleaning and pool maintenance. Remember also that property markets can be fickle which could affect the value you can realise from the sale of your property if you are forced to sell in order to access cash.

Develop a new retirement plan

As difficult as it may seem in the wake of a divorce, saving for retirement must become a priority. Being solely responsible for your future financial security can be overwhelming and it’s easy to become despondent. Our advice is to seek the advice of an independent advisor who can reset your retirement plan, keeping in mind that you may need to adjust your goals for retirement. Resetting your retirement plan will allow you to understand the extent of your funding shortfalls, maximise your tax deductions, revisit your vision of retirement as a single person, and put steps in place to gradually grow your wealth over time.

Have a lovely day.

Sue

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