Female Advisor Perspective | Empowerment in Divorce: Financial Literacy Made Easy
In divorce, the cash value of assets is key.
S. Dahl
Understanding the basics of your financial picture is well within your grasp and is an important part of navigating toward empowerment during the divorce process. Over the years, we have found that woman often have a natural talent for many of the foundational elements of good financial stewardship.
Image by Edgar Chaparro
This series is intended to dig into the powerfully positive impact ‘the money’ piece can have during divorce. The basics are straightforward, easy to understand once explained and prioritized properly, and can ultimately create comfort rather than anxiety.
This series is divided into parts, all with the central theme of being intentional about leveraging the divorce process to gain control and accelerate into your next chapter.
Foundational Decision-Making Framework
Financial Organization for Control
Empowerment in Divorce: Financial Literacy Made Easy
Budget, Cash Flow, Values, and Outcomes
Roadmap for the Future
A recap on what the series has covered so far:
Foundational Decision-Making Framework – was the first installment in the series and focused in on creating a framework for decision-making. Getting a specific plan for progress in motion early in the process can have a profoundly positive impact on outcomes, both financial and emotional.
Breathe, Organize, and Accelerate out of Divorce – laid out a plan for getting the information and documents you need, putting together a team, and getting organized.
In this paper - Empowerment in Divorce: Financial Literacy Made Easy – we drill down to the essential elements of financial literacy, the ones that will put you in the driver’s seat. The basics are straightforward and easy to understand once explained and prioritized properly.
“Over the years, replacing my fear with curiosity has helped me separate my emotions from my actual financial situation.”
ASSET STUCTURE
Image by: Giulia May
The seeming complexity of the various pots of financial assets can in and of itself often feel overwhelming. Try this. When you think about the big picture structure of your financial assets, it is often easiest to imagine them like a house.
Custodian
The custodian is simply the ‘house’ that the assets live in. There are frequently multiple custodians holding marital assets, so multiple houses.
As an example, some of the assets might ‘live’ at Fidelity, some might be at Schwab, or Vanguard. Banks such as Bank of America are also custodians, they hold assets. Carta is a custodian for many private equity holdings.
The custodian/’house’ simply holds the accounts and the assets.
Account Type
At each custodian you can set up different types of accounts. The accounts are like rooms in the house. There can be an IRA (individual retirement account) room, a joint account (with your name and your x-spouse’s name listed) room, a 529 room. Each house can have many types of rooms. You can also have the same type of account with two different custodians, same room in different houses.
The type of account is important because some accounts, such as retirement accounts, have restrictions on when you can get the assets. This means that their value in a divorce settlement would be less than non-retirement account where access to the money is immediate. More on this below.
Investments
Investments (such as stocks, bonds, or cash) reside within the account, or ‘room’. Many types of investments can be in each one of the rooms. You can have stocks and bonds and cash in a retirement account (IRA). You can have stocks and other investments in a 529 account. You can have cash in a retirement account. The list is endless. The account type does not define the investment. There is lots of flexibility in what type of investment can be put in each account type/’room’.
CASH VALUE
In divorce, the cash value of assets is key. The money you have available to live your life post-divorce, without restriction, is a critical piece of planning. It is important even if you do not intend to liquidate all the assets, as it impacts ‘fairness’ when assets are divided.
The type of investment (e.g. stocks, bonds, cash) can impact growth and value as you move on to the next chapter in your life. We discuss the different types of investment and their impact on long term planning in more length in our final installment, Roadmap for the Future. A brief overview here:
Stocks/Equity tend to have more growth over the very long term but can be more volatile in the short term, so if you need the cash immediately this is important. You can own stocks/Equity directly, or through a mutual fund, or Exchange Traded Fund. Long term capital and growth assets are a powerful ally in tapping into the power of compounding (earning money on your money) over the long term.
High quality bonds tend to be more stable than stocks in the short term. They can provide cash flow and some financial flexibility. You can own bonds directly, or through a mutual fund, or Exchange Traded Fund.
Cash provides the most financial flexibility.
Image by Tachina Lee
A few things that frequently impact cash value during the divorce process, and are often overlooked, include: Debt, Taxes, Liquidity, Withdrawal Penalties, Risk, Transaction Costs. Remember, especially in divorce, cash value is key.
Debt
Many houses have mortgages, a loan taken to buy the home. Investment accounts can have debt too, via margin loans. Be sure the debt on any asset is recorded and excluded from the value of the asset as it will have to be paid back if the asset is sold. The amount of debt on an investment account, as an example, is noted on the statement.
Taxes
If an investment has gone up a lot in value and you plan to sell it after divorce, there might be taxes due on the gain. This means that in divorce you need to know the value of the asset today, but also the tax that would be due if the investment was sold for cash. When dividing marital assets, be sure an after-tax value is placed on assets in order to achieve a fair division of assets. This is true even if you do not plan to sell the asset.
Liquidity
Many types of investments cannot be sold immediately. This is true of investments like private equity, venture capital, and angel investments as well. Identifying investments that have liquidity constraints is important, as a discount should be applied to the value of these asset when assets are divided in divorce. Cash value is key.
Withdrawal Penalties
Certain account types (‘rooms’) can also have liquidity restrictions. Retirement accounts, as an example, often have a penalty if assets are withdrawn before a certain age. The cash value of these assets, after penalty, is the number that is most relevant when thinking about cash value.
Risk
Some types of investments are riskier than others. Venture capital investments, as an example, tend to be more speculative. From a cash perspective, this additional risk is important as it impacts the likelihood you will get the dollars you expect.
Transaction Costs
Some investments, such as a home, have significant transaction costs if sold. These costs should always be factored in when assigning value to assets. As an example, if the plan is to sell the home this cost should be deducted from the value before marital assets are divided. Even if you do not plan to sell the house this should be considered.
A focus on cash value, and a foundational understanding of the building blocks of financial assets, is a meaningful start in strengthening your power as you move through divorce. It helps during the process, it helps in the launch of your next chapter, and it is also a terrific foundation for the next installment in our series - Budget, Cash Flow, Values, and Outcomes.
Simplicity, purpose, control
Part Four In this Series Coming Soon
Female Advisor Perspective | Budget, Cash Flow, Values, and Outcomes
ABOUT THE AUTHOR
Susan Dahl is a well-regarded executive, female industry leader, and dedicated client advisor with over twenty-five years of experience. Susan writes on topics such as investing, strategy, and divorce. She is the author of the blog series Female Advisor Perspective, a look into the unique strategy, process, and planning insights that emerge when problem solving is viewed through the unique lens of experienced female financial advisors. Susan’s deep and diverse background extends from global investing to risk management to change leadership. This background has laid the groundwork for an approach that asks more of wealth. She shares some of her most recent work in a talk for TEDx, Can Happy Make You Money?
