I’ve been in the business for 16+ years now so I’ve seen a few interesting things over the years. When financial planning for someone who is either going through a divorce or has gone through the divorce process, I am always very picky about getting all the details. I want to see the MSA/Divorce Decree, confirmation of beneficiary designations and up-to-date investment statements. Some people may think I’m being overly dramatic and that I may have trust issues (think, “Why doesn’t she believe me when I say I’ve updated all my beneficiaries?!) but it is because of all the things I’ve seen over the years. Let this list of others’ mistakes be fair warning for you so you don’t make the same mistakes.
Beneficiaries not updated
We all have assets naming a beneficiary. We maybe remember the big accounts that have beneficiaries because they’re so obvious, but what about the not-so-obvious? I’ve seen beneficiary designations be forgotten so the ex-spouse is still listed. What may be most surprising is that I’ve seen it drawn out as long as 10 years post-divorce! Have you checked your pension beneficiaries? How about your life insurance through your employer? Or that really old 401k from 20 years ago that’s still out there? You know, the one you just remembered you have because I just reminded you of it?! Those are the plans I’ve often seen get forgotten. Why is this important? Can’t it just be assumed that you don’t want that person to inherit anything from you? No. In the eyes of the law, whatever you stated last is what you truly wanted. Why? Because of scenarios like my husband’s client. She remained best friends with her ex, and when he died several years after their divorce, he left her a really large life insurance benefit. It wasn’t done by mistake, it was 100% pre-meditated! Assumptions have no value in the court of law, nor should they for this exact reason. So, make sure to be deliberate and obvious with your intentions by having them properly documented through Change of Beneficiary designations and update your Will accordingly.
Beneficiary listed as ex-spouse and not the kids
Another beneficiary mistake is listing your ex-spouse (the co-parent of your children) as the beneficiary of your assets thinking they will use them to take care of the kids. I’ve seen it play out differently than originally intended. What if your ex remarries and then subsequently gets a divorce? The inherited assets could now be split with your ex’s new ex! But hey wait, those assets were supposed to go to your kids, right? Yeah, but the court doesn’t care about that! You named the benefactor as your ex-spouse, not the kids. So as far as they know, you wanted that money to benefit your ex only. You should have listed the kids as the beneficiary. Or, better yet, you should have created a Trust to take care of the assets for the kids until they’re old enough to manage it on their own. These are the only two ways you can ensure the assets will only be available for the child’s use. We also can’t forget that the assets, once owned by your ex, could be subject to creditor claims. That means if your ex loses their job and suddenly has debt collectors knocking on their door, the assets you left for your kids’ benefit could now be used to pay off the debt collectors. I can’t imagine that’s how you would have wanted to see your assets be spent.
Not updating Power of Attorney documents after the divorce
Unless you have maintained a good relationship with your ex, you most likely would not want them involved in making any health care or financial decisions on your behalf. A Health Care Power of Attorney listing your ex as your Power of Attorney (POA) means they could someday be in charge of making the decisions regarding your healthcare should you become incapacitated. If you’re not on friendly terms with your ex, I’m sure the last thing you would want is for your ex to know about what you’re going through, let alone do you want them involved in making the decision on whether or not you should undergo any life-saving procedures! Then there’s the Financial Power of Attorney, where your ex could be legally allowed to access your accounts without you knowing! That’s a very useful tool if applied appropriately, but you can see how disastrous it could be if neither of these documents were updated.
Ex takes forever to assume assets, misses out on growth
We have a client that went through a messy divorce several years ago. In the settlement it was decided that his ex would assume the value of his employer’s retirement plan as of the day the divorce was finalized. FOUR YEARS LATER his ex finally made claim to the account. In the meantime, the account grew substantially in the market, and she has no claim to that growth. Let’s pretend it was an even $100,000 that she was granted, and the market grew the assets by $50,000 over the next few years. Because she left if in the market in his account, he gets to keep the $50,000 whereas if she had moved it to her own account, she would have been able to keep that growth! She just missed out on $50,000 of market growth! That’s not the end of it, though, she missed out on all the future growth that will be earned on the growth she originally missed out on! She would have been much further ahead if she had moved the assets as soon as she possibly could.
Allowing ex to take everything (retirement, house, etc.) just to get out
I see it all the time- one spouse allows the other spouse to walk all over them and either take all the assets or forgo adequate maintenance for themselves. This could be because you just want out of the relationship and are willing to do so at any cost, or because you’re still in love with the person and you don’t want to upset them any more than is necessary. Regardless of the reasoning it is all too common and is often absolutely devastating in the end. Recently I had a client tell me some of the reason why she was divorcing her spouse, a police officer, was because he was never home with the family. Later in our conversation she mentioned his retirement accounts were huge because he put all his overtime pay into his retirement plan. So not only was her ex working at the expense of his family, but he padded his retirement account at their expense, too. But she just wanted out, so she said she didn’t want any of his retirement monies. I strongly urged her to reconsider. The money in his retirement account was family money. It was saved at the expense of her and the kids, and she deserved some of it just as much as he did. Thankfully her lawyer wasn’t going to let her walk away without some of it, but none-the-less, that wasn’t a healthy mindset. When you’re married everything one spouse does affects the other. That’s what being a marital unit is all about, so please remember that when negotiating.
Ignoring what’s in the MSA
Another recent case was regarding a decade-old divorce. In the Marital Settlement Agreement (MSA) the client was supposed to own life insurance listing the children as the beneficiaries. Instead, once the client remarried, he listed his new spouse as the beneficiary. When I reviewed the MSA I noticed this discrepancy and thankfully we were able to address it. This was not done as a malicious act nor out of greed, but simply out of oversight. Despite the reasoning, it could have meant the kids were unintentionally bypassed and his new wife could potentially be sued for the death benefit. Not only would that cost more in legal fees, but it would likely be catastrophic for the dynamic of the surviving family.
I’ve also seen it where the husband was supposed to maintain a life insurance policy listing his ex-spouse as the sole beneficiary. Over time the husband remarried and had children with his new wife. They had 20+ years of marriage before he passed away. I’m sure at some point within the 20+ years post his divorce the husband forgot he had made an agreement with his ex and cancelled his life insurance policy. Upon his passing his ex came knocking on his current wife’s door looking for her life insurance death benefit. Of course, his current wife had no idea what she was talking about, but that didn’t stop his ex from attempting to take her to court for that money. That was a very bitter taste to leave his wife with, despite it being unintended.
Of course, this list is not exhaustive of all the potential issues that can arise after undergoing a divorce, but they are the most notable that I’ve seen. My intention is that you can learn from these experiences rather than recreate them. Yes, your attorney will advise you with excellent perspective and great council, but they are only hired for the divorce process, not the post-divorce work. Once the divorce is finalized the work doesn’t end, as you can see. Some of the most important parts of the divorce are carried out after the fact. If you’re concerned about the potential for error, then you might consider hiring a Divorce Financial Consultant or use one of the checklists on my website to help guide you. The Divorce Financial Consultant will hold your hand through the process and make sure you complete all the steps so that you can rest at ease and be free to move forward in life. Once you’ve completed it all and have moved on then together, you and I will continue to uphold whatever long-lasting agreements were made in the MSA through our annual planning commitment. It sometimes takes a team effort to make sure you’re staying within the lines, but it’s always better to be safe than sorry!
It is not our position to offer legal or tax advice. Carrie Waters Schmidt is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Equanimity Wealth Planning and Investing is not an affiliate of Lincoln Financial Advisors.