ONE OF THE many challenging aspects of divorce is the fair division of finances. Discussing finances can be challenging for many couples but for those going through the huge upheaval of divorce, it can be especially tough.
Managing this element of a separation openly and honestly will minimise stress for both parties and help to work through the process as quickly as possible.
The Golden Rule for any couple is that both be completely transparent about their finances and to make sure they each understand the household financial position clearly.
While property and physical assets can be easy to track there may also be savings, pensions, life assurance policies or debt that are less apparent. It is the responsibility of both parties to ensure, as much as possible, that they are aware of all aspects of their shared financial situation.
The basics
If you are unmarried, your financial claims are limited to only what you own jointly. But children will have financial claims which can be made on their behalf, including child maintenance, lump-sum payments and property transfers.
Broadly, there are three main assets to be considered when separating or divorcing: property, maintenance payments and pensions.
Property is usually the most significant asset in a divorce settlement and can be the most complex. Options are to sell it and share the proceeds, one partner buy out the other, or in difficult circumstances, both parties continue to live in the property.
In cases where one spouse buys out another, a mortgage may be required. This is not always straightforward given the strict mortgage lending rules currently in place. Selling a property may also not be on the cards, as the split equity may not be enough to cover two deposits for new properties.
If there are enough assets, one spouse may be given the family home, with business or other assets making up the balance for the other spouse. Typically, this happens to support and look after younger children.
Financial pressure of divorce
The cost of financing two homes is the main reason that many divorces, in my experience, tend to happen when children are older, and possibly even finished school. It is just too expensive to divorce when children are young.
Pensions are often the next largest asset. Pension Adjustment Orders (PAO) are a court instruction on how to split and share out a pension fund. Once a PAO is in place, I recommend the ex-spouse transfers their share of the benefits to a Retirement Bond which separates their share of the fund.
I have seen some unfortunate cases where the pension was mismanaged after a divorce and the ex-spouse did not end up with the pension income they should have had. By using a Retirement Bond, they take control of their share. They can also access benefits from age 50, which may be useful.
Maintenance is usually an income paid by the higher-earning spouse to cover living expenses for their ex-spouse and dependent children.
It is important to be forensic when working out household expenses; look at everything that is needed to maintain family life – monthly expenses as well as irregular or once-off costs like motor expenses, education costs, club fees. It’s important to be realistic also; income will now have to maintain two households, so sacrifices may need to be made.
Children and financial plans
Payments for children are tax-free. Voluntary agreements are preferable where possible as they are non-taxable while a court-ordered maintenance payment is subject to tax at the marginal rate. The spouse making the payment can claim tax relief, while the spouse receiving the payments must pay income tax.
Where assets are not significant, they may be split 50:50 but this doesn’t always apply in higher net worth settlements.
Once a maintenance agreement is in place, life insurance and /or income protection should be considered to secure these payments in the event of the death of a spouse or being unable to work due to illness or injury.
The key with all of this, as much as possible, is to leave emotion at the door – by no means an easy task but the less emotion involved the better the outcome for all involved. Getting legal, financial or mediation support can be helpful in guiding couples through the process and making sure the outcome is fair for everyone.
‘DIY Divorce’
If the separation is amicable and both parties are prepared to ‘play fair’ then a DIY divorce without involving any legal or other advisors is an option. This can be a cost-effective and efficient way of agreeing on how your lives and assets will be split and is most often the route chosen by a couple who don’t have significant assets.
Something else to consider in such circumstances is that transfer of assets between spouses either as a gift or inheritance are exempt from Capital Acquisitions Tax (CAT). Separation does not affect this exemption, but divorce does so ensure assets are transferred before the divorce decree.
However, bear in mind that there is risk involved in not consulting legal advice that may have future repercussions, for example, if one ex-spouse decides to remarry or if assets are not fully disclosed or understood, leading to an unfair split.
Another consideration is a pre-nuptial agreement. While ‘pre-nups’ aren’t legally recognised in Ireland yet, they can act as a ‘record of intent’ as to what a couple would like to see happen to assets in the event of a break-up. Something to give thought to if substantial assets are involved.
Divorce can be a very difficult and traumatic experience and the financial repercussions can be significant. Beginning the process with a fair and reasonable outlook will help to bring closure quicker and allow both people involved to move on to a new and brighter future.
David Quinn is Managing Director, Investwise Financial Management offering financial planning, pension and investments advice to people wishing to invest in their future.
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