[Editor's Note: This is a guest post from Alex Kilian, a wealth manager at AKT Advisors. He submitted it last February, but given the backlog in posts around here, it took me this long to get around to publishing it. We have no financial relationship. Alex asked that I remind you that neither this post, nor anything else on this site for that matter, constitutes personalized legal or financial advice.]
February; the month that encompasses President’s Day and Abraham Lincoln’s birthday spawned the idea that I incorporate my love of history into this article.
The ratification of the United States Constitution occurred over two hundred years ago, after which Benjamin Franklin assuredly declared the certainty of death and taxes. The same certainty could not yet be bestowed upon the newborn nation. While most are familiar with Franklin’s famous quip, the reality of the assertion could not be more evident than to those that practice medicine.
In this world, nothing can be said to be certain, except death and taxes.- Ben Franklin
Physicians are surrounded by life, death, and everything in-between during the daily grind. One’s eventual demise is not only apparent, but a given reality. And, come April 15th, many physicians are left scratching their heads as they ponder what could have been done differently to minimize last year’s tax bill. In many cases, around half of income has gone to taxes. [Presumably, Alex is counting property and sales taxes along with the usual income and payroll taxes in this total, as it would be extremely unusual for a physician to pay 50% of his gross income in just income and payroll taxes-ed.]
Divorce is not a guaranteed certainty, but is arguably the most devastating of the three and affects roughly one-third of physicians. Many times the affected party is left in shock and awe; panic and anger ensue, the mind races with questions, and the realization that financially, your retirement plan has just derailed.
The emotional impact can be lasting. Often emotion clouds over reason and rational thinking takes a leap out the window. Divorce proceedings become costly and never-ending, custody disputes lead to favoritism among children, and nobody ends up better off.
An amicable divorce can occur, and almost every time it leads to a quicker financial recovery and a better outcome for both parties. Consider utilizing a mediator; collaboration is key. And, even if divorce has never been discussed, consider a postnuptial agreement while the two of you are still getting along. After all, marriage is a financial contract.
1) Balance Sheet
Who owns what? Build a balance sheet. Gather statements on all assets and liabilities, and determine what is owned jointly or community, and what is separate. Whether you live in a community property or equitable distribution state will help guide you through this exercise. There are currently ten community property states; Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
2) Divide by Two
Now assume that all assets and liabilities stipulated as joint or community will be split 50/50. But, is that fair? That depends. What is fair generally comes down to the accustomed standard of living, the earning capacity of each party, and quite frankly, the morality and honesty of each party. In reality, the higher earning spouse will generally be awarded less to much less than their “fair” share and be obligated to transfer a portion of their retirement accounts to the lower-earning spouse. This may involve a QDRO (Qualified Domestic Relations Order).
When it comes to personal property, don’t be petty. You may each have items that hold significant value to you personally, but if it can be replaced easily, avoid the conflict and let it go. An impartial team of professionals can help guide you or force you through the asset division process.
3) Spousal Support (Alimony)
If you are the sole earner in the family, you will probably be required to pay monthly spousal support to your ex-spouse. In addition, you may be required to purchase a life insurance policy on yourself with your ex-spouse listed as the beneficiary to cover the alimony payments should you predecease the full payout of the obligation.
The good news is that alimony payments are tax deductible for the payor (and taxable to the payee.) The amount you are required to pay depends on how much you earn, how the assets were divided, and the earning capacity of your soon to be ex-spouse. The duration is generally left up to the court to decide, but alimony is meant to be rehabilitative, not permanent, and can be challenged if the receiving spouse remarries.
4) Child Support
Unlike spousal support, child support is not tax deductible for the payor but is tax-free for the recipient. In addition, there are a variety of factors that are included in calculating the award; the amount of time spent with each parent, the needs of the child, and their age. In most states, child support ends at age 18 or the age of majority, with exceptions.
“I walk slowly, but I never walk backward.” – Abraham Lincoln
As the dust settles, and reality sets in, it is imperative for the new divorcee to move forward. Whether you find yourself divorced in the accumulation phase, pre-retirement phase, or retired phase of life will greatly dictate the possibility to build anew a firm financial foundation, or make repairs to the damage.
5) Create a budget
There is now (most likely) only one adult in the household. What does it cost you per month to live (the essentials)? If the house was sold, or you’re no longer living there, are you financially able to afford a new home? Are you planning on renting in the interim?
6) Update your estate plan
The beneficiaries on ALL accounts, insurance policies, etc. should be updated to reflect your wishes. Your estate planning documents should be reviewed in detail with your attorney to amend any changes brought about by divorce. Who do you have in mind as your new heirs? Your children? Charities?
7) Delay retirement
Many of us don’t want to work any longer than we have to, but in the case of divorce, the higher earning spouse (if still working) will typically need to work longer in order to maintain a similar standard of living. Consider delaying the collection of social security benefits. If you’re retired, consider going back to work or taking on a part-time job in another field to minimize the drawdown on your portfolio.
8) Increase your savings
For those that are still working, if you’re the one that ended up with the smaller half, look for places in your budget that you can cut back. Or, opportunities to create additional income such as picking up additional shifts. You need to save as much as you can now while you have the ability to earn meaningful income in order to make up for the assets that were forfeited. Live cheaply now, in order to live well in retirement.
10) Relax
Focus on your passions, your hobbies, children, and extended family. Volunteer, remain active and consider joining social groups. Divorce often spawns loneliness and depression; this is especially prevalent in those that are retired or have been in long-term marriages. This is the time to start over and find a renewed sense of purpose.
What do you think? Are you divorced? What was your experience like? Have you tried to implement a pre-nuptial or even a post-nuptial agreement? What tips do you have for someone else facing a divorce? What did your divorce agreement mandate you do? What percent of your assets did you lose? How was custody determined? How was alimony determined? Comment below!
I’m not sure I could start a bigger fight with my wife than if I suggest a postnuptial agreement
I ain’t saying she’s a gold digger… 😉
Out of all the women I’ve dated, not one of them has been open to a pre-nuptial agreement because it is “unromantic.” I’m curious as to anyone who actually got a significant other to sign one. Also, what’s the basic difference between community property and equitable distribution? Say if you have a Vanguard account with just your name on it (non retirement account). What would happen to it in the different categories of states?
I have two female physician friends, both of whom had their husbands-to-be sign prenups, at my suggestion. There was not much resistance, from what I hear. Perhaps it’s easier to get men to sign them. On the other hand, I know a female physician without a prenup who had to pay alimony to her ex-husband.
I refused to get married without a prenup. I would never marry someone who used scare tactics like “unromantic.” If your spouse loves you, they would sign a fair one. Remember a prenup or postnuptial gives you two the ability to discuss how you would divide the assets. It is much easier to do when you both love each other and can come to an agreement. It is also a hell of a lot cheaper to do now then in the future going to court.
If 50% of all marriages end in divorce then not getting a prenup or postnup just seams irrational. Remember you can have a prenup say whatever you want. You can have it split with >50% going to the spouse. This is just your opportunity to alter the prenup that is already dictated to you buy the state you reside in.
50% of marriages end in divorce, bit 70% of new marriages end in death.
My understanding is that it depends on what money is in the Vanguard account; separate or marital. If it was money that spouse 1 earned during the marriage, and they live in a community property state, then spouse 2 is entitled to half of that asset. Even though spouse 1’s name is on the account. As for an equitable distribution state, all else being the same, spouse 2 is entitled to a “fair” share. I should also add that Alaska is an opt-in community property state, which can make things even trickier. Furthermore, if separate property is co-mingled the division can get even more complex.
I had a prenup before my marriage a few years ago.
I was 49, never married before and had a very large total investment portfolio. In addition, I was to far along in my medical career to ever recover financially from a divorce.
It was drawn up by my attorney, then bantered back and forth with her attorney. Very important that your fiance has her own legal counsel, or it can be thrown out as invalid.
Because of required changes, we could not sign the “pre-nup” until after the wedding. After watching me deal with the drama caused by the first wife, my current wife demanded that we sign a pre-nup. If we ever split up, she wants a clean break and not a long, drawn-out, emotional fight.
I’m not so keen on a post-nup either. But, if you don’t have success with “one house, one spouse”, it is important to get through the divorce as quickly as possible. A friend spent two years in emotional turmoil and misery fighting over about $200K, which she lost anyway and now has super-high attorney’s fees on top of it.
So sad. Her emotional recovery and ability to move, change jobs, move on with life, stop being harassed and bullied, etc. was significantly delayed, and IMHO, that’s much, much, more important than money.
WCI, per your admission, maybe it is time for you to start doing 4-5 posts a week to avoid the dated feel?
I get a dated feel from having to scroll past all the old stuff to see new stuff.
Welcome new readers and WCI classics need to be below new articles…
That was a deliberate part of the website redesign. The “fancy homepage” view isn’t for regular readers who are a tiny minority of those who come to it. That “classic blog view” link on the right is designed precisely for you. I do need to update the featured articles though. Just been busy.
The problem is I don’t have time to edit more than 3 a week. I could hire someone else to do it for me, but that seems silly when writing and publishing new content isn’t a money-generating activity. The actual business of WCI has little to do with what I enjoy most- blogging and interacting with regular readers. The other two issues with going to 5+ a week is that people will be less likely to read everything (and just pick and choose due to their own limited time) and that quality may go down. I could do it for three months and clear the backlog of posts I have now, but then I’d have the pressure of deadlines to make in addition to the above issues.
Good luck on a post-nup.
In many states a judge has to sign off. This can include making both spouses appear in court, sometimes represented by separate counsel, and being put on the witness stand and questioned by the judge as to intent and understanding. In my experience I’ve only seen a handful and half of them were more expensive and time consuming than the client would have liked.
And in all of those cases, the clients were only doing it for estate planning purposes, not out of concern for an impending divorce. Bringing up the post-nup after the nup is liable to put you in divorce court.
A pre-nup, on the other hand, is far easier. As far as being unromantic, there’s a very simple solution: don’t get married. Call the bluff. Blame it on your attorney or your family. It’s very easy to prolong an engagement, far harder to find another big-income to support you.
And a prenup shouldn’t be one-sided. Your spouse should hire the best attorney that you can afford to represent her (or him) in reviewing and negotiating the agreement.
State law in all states provides a default prenup that protects either party’s pre-marriage assets, so I don’t really see the value in proposing one. Lots of really intelligent people drafted these laws in a way that are designed to be fair and protect both parties’ rights. Also, why wouldn’t you just put a family trust together for estate planning purposes, rather than a post-nuptial agreement? Unless the marriage is already failing, then asking your spouse to sign a prenup seems like a terrible idea. It signals a lack of trust and love. I guess if there are already big problems, then go for it, but otherwise, no.
” Lots of really intelligent people drafted these laws in a way that are designed to be fair and protect both parties’ rights. ”
Good one!
not sure about “spelled out” default prenups by state. but i looked at the will that my state has by default. then very promptly i went to rocketlawyer.com and actually made something for myself that i wanted. my husband did the same. and we did the same for the prenup. both prior to getting married. we didn’t like the default option provided by the state. not at all. default options may work ok for people entering a relationship with no assets in their teens or early 20s, or no previous dependents/ children/ other family members/ second marriages/ second set of kids, etc. default options will not work for more complex family situations or assets accumulated prior to marriage.
for example, by default the state where i reside would have made my assets my husband’s assets, if i were to croak. my husband is capable of fending for self and makes a decent salary. instead i chose parents to inherit my assets, as on some level i consider them dependents. i will most likely change this once we have kids. but to have my husband by default inherit my assets, which he does not need or want and has good earning capability for decades (unlike my parents), because the state made that the default option, and was making this decision for me, was maddening. i do not like anyone else deciding what happens with my assets, especially our state legislature.
for what’s it worth, i’m the only person i know with prenup. i’m the physician. husband, not, but high enough earner. he had more assets going into marriage, i had more earning capacity.
Bookmark the “classic blog” and it’ll start off at the latest post and avoid all of the “welcome new readers” and classic stuff
https://www.whitecoatinvestor.com/classic-blog/
We didn’t do a prenup, but I’m gonna do my best to ensure my daughters have them. To take marriage from being a ridiculous unenforceable contract (the terms of which a judge helps determine if you decide to separate/divorce) to one with a preagreed upon fair plan for the, sadly highly possible, exit. Want fairness for both parties while they are thinking well of each other, and with cooler heads (lawyers and parents) weighing in. Most of all I want any inheritance I give my kid to go to her kids (or if none back to her sister), not her husband if he isn’t there long term. (Yeah that may be something I need to arrange in my own estate plan- not her prenup.)
I like the folks who describe a temporal buy in- eg that if (poorer) spouse is gone in 1 year, get only 2.5% of richer spouse’s assets but increases with years together. If the couple sticks it out to 20 years, the split would be an even 50% maybe if they’re normal upper class humans, not Warren Buffett/ Bill Gates rich.
I sort of did a postnup- told hubby if he stayed in the Army long enough so I’d get Tricare even if we divorce (20 years of active duty intersecting with the marriage) he/we’ll save money- I won’t make him pay for my health insurance if he leaves me. Also got me 50% of his pension if we part, but I expect a judge would give me that anyway after our several decades together, almost 2 of them prior to his being eligible to retire, especially since he’d get half of my retirement savings.
Now about enforcing the ‘you will never gain weight, and you will give me at least one foot rub/ back rub/ erotic act of my choice each week until your doctor gives you a handicapped parking placard’ part of the contract….
Are there any particular recommended books for financial guidance during and after the divorce process?
I don’t know of one, I’m sorry. Be sure to search Amazon though, there may be something. If not, write it in a couple of years!