No one wants to think of the possibility that we might lose our spouse through either divorce or death. And often we are not equipped to manage finances after loss. However, statistics show that seventy percent of all married women will be widowed, and marriages today have a 41 to 43 percent chance of ending in divorce. Will you be financially prepared? Let’s take a detailed look at how to manage your finances if you do end up experiencing the loss of a spouse in your marriage.
Managing Finances After Loss Through Death
A group of men spent three days together at a beautiful retreat setting in Montana. They planned, prayed, and dreamed together about the future.
One of the men was a pilot, and he invited three of the others to fly back to Dallas with him. One of the four was an entrepreneur with a young wife and two boys below the age of five. Another was a banker who had three boys, one of whom was in high school and two of whom were in college. The third was a surgeon with three grown children, and the fourth was a pastor who also had three children.
The small plane took off all right, but en route to Dallas, it disappeared. Several days later, when the wreckage was found, there were no survivors. In an instant, four women had become widows, and 11 children were left without a father.
I visited with one of the widows many months later, and she said her husband had always told her that in the event of his death, she needn’t worry because his best friend knew all about their financial situation. The friend was well prepared to help her cope financially with her husband’s death. Unfortunately, however, that friend had been one of the four men on the plane.
Death is rarely expected, so people rarely plan for it adequately. Yet when it occurs, it changes forever the lives—including the financial situations—of those left behind. Even couples who have discussed the financial implications of losing the other may discover their plans are no longer relevant because of those changing circumstances. Managing finances after the loss of a spouse can be challenging.
What To Do When You Are Widowed
Mental health experts estimate it takes about two years for a widow or widower to absorb what has happened and be capable of making major decisions again. The initial shock and numbness give way to a deep sense of loss and then a realization that those tasks that were once shared—including financial ones like tax preparation and insurance decisions—now must be done alone.
Because of that two-year period of psychological adjustment, I advised all my clients who were widowed not to make any major financial decisions during that time. However, the fear of being unable to maintain their standard of living often drives people to make major financial decisions too soon. In many cases, they make the wrong decisions.
You must make some decisions, of course, but be careful about making any big choices immediately. Here are the steps I recommend you follow to manage your finances after a loss.
Immediately
First, look for funeral directions left by your spouse. They may be found in a will or in a separate letter.
Second, order (either from the funeral director or the county clerk’s office) 10 to 20 certified copies of the death certificate. This needs to be done right after the funeral in order to claim the benefits due you from company pension plans, Social Security, life insurance proceeds, annuities, and so on. You’ll also need the documentary proof of your spouse’s death to change titles on cars and your home.
Third, arrange for someone to stay at your house during the funeral to protect your property. Unfortunately, unscrupulous people prey upon those who’ve been widowed, and a favorite ploy is to burglarize a home during a funeral.
Within the First Two Weeks
Have your attorney review your spouse’s will and file it in probate court if necessary. Collect any documents needed to claim death benefits (bank and brokerage statements, marriage certificate, and birth certificate). Contact your insurance agent, investment advisor, spouse’s employer and former employers, and the Social Security office to start the process of claiming benefits due to you.
Within One Month
Keep a record of your cash flow so you can determine where you stand financially and what your living expenses are likely to be.
As money from insurance or employers begins to come in, deposit it in a bank in short-term certificates of deposit (CDs) or money market funds. One strategy is to put the money equally into 6-, 12-, and 18-month CDs so that you’ll have money coming available to you every six months. At this point it’s not necessary to worry about missing out on “better” investment opportunities. Your primary focus now should be to ensure you can pay your bills as they arise.
Within the First Six Months
Update any of your insurance policies that name your deceased spouse as a beneficiary. Change any joint billing and credit card accounts that have his or her name on them. If you are the executor of your spouse’s estate, notify your creditors and satisfy the debts as they come due. If there are likely to be estate taxes, get professional advice to determine how much they’ll be and when they’ll be due.
Review all insurance coverage, especially medical insurance, to make sure you and your family are adequately protected. Have your will revised to reflect your changed circumstances. If you don’t have a will, then get one. It’s more important for a widowed or single parent to have a will than it is for a married couple. You may need to appoint a guardian for your young children or change the executor or trustee, since your spouse was most likely named as executor and trustee in your will.
Review your checking account or spouse’s checkbook and files to determine if you may be due benefits from sources you didn’t know about. Look for automatic checking account deductions for life insurance. Look for other possible benefits, such as a union policy, fraternal organization, credit life insurance, military benefits, or other life insurance policies.
By the Second Year
By the second year, you should develop short- and long-term financial plans. Major investment decisions still do not need to be made, but it’s time to do the following:
- List all the assets you now have.
- List all debts.
- List all the life insurance covering you.
- List all sources of income.
- List all expenses, categorized by major area.
- List all insurance policies.
- Begin thinking about listing some long-term, major needs such as college education, lifestyle needs, debt payoff, giving, and so on.
In the second year and beyond, implement your financial plan, making decisions about housing, investments, insurance, and lifestyle. Managing finances after loss can take several years.
Managing Finances After Loss Through Divorce
Karen Loritts, a regular speaker at Campus Crusade’s Family Life conferences, tells the story of a different kind of loss – one that devastated another family. Karen was jarred awake one night by the ringing telephone. A friend of hers was calling in anguish over her marital breakup, which had shocked those who knew the couple. This woman and her husband were both hard workers, and the entire family was active in their church. As Karen listened to her friend pour out her feelings of grief, she silently prayed for words to comfort her friend – and shed some tears herself. “I felt her pain and cried at the prospect of having my friend struggle with this ‘death,'” said Karen.
What To Do When You Are Divorced
Please understand that I’m not advocating divorce. God hates divorce (see Malachi 2:16), and so should we. Marriage vows are taken far too lightly today; when couples say “Till death do us part,” they often mean, “Till we don’t feel in love anymore.” We need to take more seriously the warning of Deuteronomy 23:23: “Whatever your lips utter you must be sure to do, because you made your vow freely to the Lord your God with your own mouth.” The commitment to love in spite of feelings and circumstances is essential to upholding a marriage through thick and thin, and reconciliation should always be our goal if it’s at all possible.
Divorce is Loss
I have to acknowledge, however, that couples do divorce — even Christians — and say that if it appears to be a definite possibility in your case, you need to make some appropriate plans for managing finances after the loss of your marriage. Like a widowed person, a divorced man or woman faces enormous psychological, emotional, and financial adjustments. Therefore, if you go through a divorce, you should give yourself some time before making any major investment or financial planning decisions. Obviously, day-to-day concerns have to be taken care of, but choices like when and where to move, estate plans, and investment decisions (if any) should be delayed. You might delay those decisions anywhere from six months to two years.
Financial problems often contribute to divorce. In fact, more than 50 percent of the people who divorce indicate that financial problems fostered the breakup. Those problems may be only symptomatic of others, but they clearly add to the strain the family is under.
As we’ve already acknowledged, women are often more vulnerable financially in a divorce, so I now want to focus on the steps a woman needs to take to protect herself during a divorce.
Before the Divorce Becomes Final
The first step is to pick a competent and trusted advisor. You may want to choose a personal advisor as opposed to a financial advisor first. A friend, another woman who has gone through a similar situation, or the elders at your church may be able to guide you through the process of selecting an attorney to handle your side of the divorce. Your goal should not be to “get” your husband or take him for all he’s worth, but to be sure you and your children are provided for.
The Financial Cost of Divorce
The financial cost of divorce may be significant. Even a simple, uncontested divorce can cost from several hundred to several thousand dollars in legal and filing fees, depending on how much property is involved.
It’s possible to avoid attorneys entirely by using a do-it-yourself divorce kit found in many bookstores. I don’t recommend that approach, however, because you could easily overlook crucial details. Your situation may not be as simple as you think. Any time property or children are involved, the situation is complex. Also, each state’s divorce and property laws are different. The divorce can be further complicated if you’ve lived in more than one state or acquired property in more than one state. For the same reasons, you should never attempt to be your own divorce attorney.
The primary way to reduce the cost of divorce is to avoid contentiousness. The more contentious your split, the more expensive it will be. If your husband agrees, you might want to approach a service such as Christian Conciliation Service. See peacemaker.net. or some other mediating body that could help reduce costs and still provide competent advice.
Further Action to Take
In addition to choosing trusted advisors and legal counsel, you need to do the following during the divorce process:
Establish Credit in Your Own Name.
It’s almost impossible to function in our culture without a credit rating. If credit cards, bank accounts, and other accounts are in your husband’s name alone, you may have difficulty establishing your own credit. It’s therefore advisable to apply for credit in your own name at your bank.
List All Assets You Can Find, Along With How Those Assets Are Titled.
This includes cars, timeshare units, furniture, bank accounts, valuable jewelry, boats, life insurance policies, savings bonds, retirement plans, and brokerage accounts.
Notify Banks and Brokerage Firms – Wherever You Have Joint Accounts – of Your Intention To Divorce.
Ask both the banker and the broker to allow no transactions in your accounts without written approval by both you and your spouse.
Close Out All Joint Charge Accounts.
If you don’t complete this step – and your husband makes charges – you are jointly as well as individually liable for that debt. Notify the creditors in writing that you’re no longer responsible for your spouse’s purchases. Creditors may agree to let you keep accounts open in joint names but only be liable for your own purchases.
Consider Setting Up a Savings Account in Your Own Name.
This will serve as a place to keep cash if your husband stops contributing to the payment of household bills. You’ll probably be liable for all utilities and household expenses if your husband decides to stop making those payments.
Make Sure You Understand the True Costs of Operating the Household.
The budget worksheets can help you identify many of the costs. Go through the check registers from the past two or three years and list your expenses by major category. This will help you negotiate the terms of divorce, such as child support and alimony payments. And it will be far less expensive for you to gather the information than to hire an accountant or your attorney to do it. In addition, you can review prior years’ tax returns to get some indication of money spent, investments made, and sources of income you may not have known about. The more information you have, the more you’re able to assist your attorney in negotiating a fair and reasonable settlement.
During The Negotiation Process
The last financial step in divorce, one that could take a long time, is the negotiation process. In that process, all assets will be divided; the responsibility for debts will be determined; child support amounts will be set; alimony amount and duration will be decided; and last and very important, visitation rights will be established. How well the negotiation is done will depend not only on the information you provide your attorney, but also on his or her skill as an advocate for you.
How well the settlement is negotiated will largely determine the tax consequences of the divorce too. What appears valuable before taxes may be far less valuable after taxes.
Child Support
One issue relative to child support is who gets to claim exemptions for the children on tax returns. Generally, the parent who has custody of the child for more than one-half of the year gets the exemption unless the other spouse signs a waiver. (Refer to IRS Publication 504 for more information on this topic.)
If your spouse is extremely well-paid, he should be especially amenable to signing a waiver because dependent exemptions are phased out anyway for single taxpayers with higher incomes. If your former husband fits that category, he’ll get no benefit from the exemption, so it should be used by you if you’re in a lower tax bracket.
This is all a moot issue, of course, if you provide more than half the support of your child, which can be determined by the family budget you’ve already prepared. In that case, you can just take the exemption on your return and reduce your tax liability accordingly.
Property Settlements
Property settlements can also have tax consequences. Generally, property transferred as part of a divorce settlement is treated as a gift between spouses, so no taxes are paid on the transfer. But certain assets, such as an IRA or 401(k), will have future tax consequences. Many women recognize too late that $20,000 in a savings account (not taxable) is much more desirable than $20,000 of their husband’s 401(k) (taxable upon withdrawal and not accessible until age 59½).
Although the transfer of most property without taxation sounds good, keep the following in mind. If property (stock, real estate, etc.) that originally cost $1,000 but is now worth $50,000 is transferred, you don’t have $50,000 available to you. When the property is sold, you will have a taxable gain of $49,000. The income tax on the gain will reduce substantially the amount of money available to you. If, on the other hand, property that cost $50,000 is transferred to you and you sell it for $50,000, you have no tax on that gain, so you really do have $50,000. Thus, the specific property transferred in the divorce settlement can change your cash flow significantly.
Another issue in the property settlement is the family home. If that’s transferred to you, you get the tax benefit of avoiding most or all of the income tax on the gain from a sale. Current tax laws allow you to exclude from income any gain up to $250,000 ($500,000 for a married couple) from the sale of your principal residence.
Finally, while the divorce is being negotiated, you need to review the medical insurance coverage you and your children will have.
After the Divorce is Final
By the time the divorce becomes final and all property transactions are completed, you should have your own bank and brokerage accounts and credit cards. Now, besides living in accordance with a financial plan, you need to rewrite your will, change the beneficiary for life insurance policies on your life, and review your children’s medical insurance coverage, which may have been provided by your spouse.
Those protections become more critical now than ever because you may be your kids’ sole support. These steps are too important to delay beyond the first few weeks after the divorce is final.
For further resources on separation and divorce, click here.
Final Thoughts on Managing Finances After Loss
While this is the approach I recommend, it’s not written in concrete. Depending on your personality, training, age, and income level, the sequence and time frame you follow may differ. Managing finances after loss is only a part of the healing process. I do strongly encourage you, however, to delay making major lifestyle and investment decisions to allow some time for grieving and adjustment. It may be nine months, a year, or two years. You need that time to adjust to the death of a significant part of your life.
