Authored By: Jane Ochsman Rowny, CPA, CFP®, CDFA® and Jordan P. Egert, CPA, CFE, CDFA®
COVID-19 is likely to be with us for many months to come. The pandemic has created new uncertainties and financial stressors. Couples who have contemplated a split up may be reluctant to add to the stress and uncertainty by commencing with a divorce, however continuing to live in limbo unhappily may be an option couples may not want to accept.
Whether you begin divorce proceedings now or wait there are factors to consider and steps you can take to facilitate a more efficient process and take some of the uncertainty out of the picture.
Steps You May Take Now
Parties may agree that it is not the time to take on the added expense of a second household and divorce process costs, particularly if there is employment uncertainty and volatility in brokerage and retirement accounts. Keep in mind that employment and the stock market are never completely secure and developing an understanding of emergency options is part of financial planning for divorce. Many people are not spending during COVID-19 as much as they normally spend. This is a good time to reassess your “wants” from your “needs” and develop a realistic budget of your expense needs going forward. You may find that you are in a better financial position than you thought and have a fair amount of discretionary spending that gives you the ability to control and manage your cash flow through times of uncertainty. In addition, if you are spending less than usual you may be in a position to save and build a reserve and or pay down expensive credit card debt.
If you’d like assistance with your divorce, please reach out to us.
The marital home and retirement accounts are often the largest assets to split in a divorce and ability to pay for future housing is one of the foremost questions of divorcing spouses. Parties may be reluctant to move during the pandemic but may be concerned about the future housing market. Realtors report that inventory for primary as well as vacation homes remains low and demand for the limited supply holds steady. Some mortgage interest rates were recently at an all-time low, making a home purchase more attainable and affordable for many homebuyers. While employment is consistent and steady, a purchaser is in a better position to qualify for a new mortgage. Keep in mind that if housing prices decline in the future a party who is buying in the future may be able to benefit from the lower housing values. There is much information to gather and consider in order to make the important decision on housing. Parties are well served to be proactive in collecting the information while they contemplate their marital decisions.
While staying-at-home it is a good time to get financial documents organized and copied. Common documents needed include tax returns for the past five years, current bank, brokerage and retirement account statements, credit card statements for the past two years, life, disability and long term care insurance policies and estate planning documents such as wills, trust agreements, powers of attorney and medical directives. The more complete your financial records are the more efficient will be your divorce proceeding.
The expansion of the COVID-19 virus has brought with it concerns that have been long foregone. We must remember though that while COVID-19 has changed the way we operate business, our jobs, and our lives – the economic and financial impact are not entirely unfamiliar. Going back to the Great Depression of 1929 to today, we see that each period generally followed similar patterns including an increase in unemployment rate, declines in gross domestic product, and other related financial emergencies. What we often overlook is historically, with every slump, comes a recovery (which may be a short or long term one). When we look only at these specific points in time individually it causes a large degree of strife with the range of fluctuation, especially when we are in the midst of a crisis. Our financial lives are not specific to one point in time though, rather an accumulation. Thus, instead of being fraught due to these specific points we can help address our concerns of uncertainty by considering an approach that also looks at the midterm, long term, and holistic contemplations.
When a marital estate holds several asset classes such as houses, cash, brokerage assets, retirement accounts, and even business interests then there is inherent risk and uncertainty. The way we address these uncertainties comes in two parts: 1. Identifying your goals 2. Analyzing the impact your financial decision has on them. It is important we do not make knee jerk reactions simply based only on asset values today.
For example, a $500,000 house and a $500,000 retirement account hold the same intrinsic dollar value on paper (excluding tax considerations). However, they hold far different financial and even emotional uncertainty values. In a deeper dive we can ask ourselves and identify the caveats of each asset and in doing so may absolve much of our concerns on uncertainty. We might ask:
- How far away from retirement am I – is this enough time for the asset to reappreciate?
- Will I live in the house? Sell the house? Turn the house into rental property?
- Can I afford to maintain the house?
- Are there additional assets available for my utilization that would prevent preemptive utilization of retirement assets and/or tapping into a home equity line of credit?
- What are my financial goals this year, in five years, in ten years, in twenty years …. ?
One area we want to highlight are investment accounts. Many of us currently perceive heightened uncertainty surrounding such assets and our concerns are not unfound as to what tomorrow brings. What we want to bring to your attention is the need to avoid simply looking at your account or asset value as doing so will only amplify your stress. We must view this asset holistically and evaluate it’s other components including dividends, interest, and capital gain distributions to help weigh out the asset’s volatility and meaningfulness to you. It is very well possible that such additional components have not materially changed even though the asset value itself has decreased (such as certain fixed income holdings and securities with increasing dividends). Investments may even prove valuable to shorter horizon liquidity concerns by utilizing these components directly, instead of reinvesting them. As a side note – there is no guarantee in life, there is no free lunch, there is no get rich quick scheme however one can find solace that even amongst current uncertainty – the American stock market has returned an annual average of 10% since 1927 (S&P 500 index).
Hopefully at this point you are catching the gist, uncertainty is not a dreadful concept! Rather, it provokes better strategy and planning consideration for one’s goals and notions before, during, and after a divorce. There is no doubt about it – we live in very uncertain times and will repeat these times again in the future. From an economic and financial standpoint, however, they are no different than the bumps in the road of years past. We cannot address divorce and separation matters simply by taking a here and now approach. Instead we must have a holistic mindset, one that involves mid to long term reflections, considerations, and approaches.
If you’d like assistance with your divorce, please reach out to us.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.