Divorce can be one of the most challenging and emotional times in anyone’s life.
For expats, the complexities multiply with a global footprint, assets in different jurisdictions, international laws, and unique financial circumstances.
In this week’s article, we discuss five key things to remember about your finances during a divorce, to help you navigate this difficult period.
1. Cash Flow Modelling
Cash flow modelling is essential in helping you understand your financial position – before, during, and after divorce.
Your financial situation is likely to change, and you need to understand how this will impact your trajectory towards your future goals, as well as how it might impact your desired lifestyle both now and in the future.
Cash flow modelling involves creating a detailed analysis of your income, expenses, assets, and liabilities to give you a clear picture of – and a roadmap towards – your financial future.
Cash flow modelling will:
- Allow You to Predict Your Financial Needs: Cash flow modelling helps predict your financial needs post-divorce, ensuring you can maintain your lifestyle or make necessary adjustments.
- Provide You with a Framework for Decision Making: it provides a solid foundation and framework for making informed decisions about asset division, spousal support, child maintenance, etc. Having a clear view of the big picture will help you to make well informed decisions during the divorce process.
- Ensure You Avoid Any Financial Pitfalls: by understanding your financial position and the trajectory you are on, you can identify any financial pitfalls in advance, then take action to either prepare for them, dampen their impact, or avoid them entirely – thus ensuring long-term stability.
2. Handling the Main Home
In most cases, pensions and the main home are the two most significant assets under the spotlight during a divorce.
Starting with the family home, this is often both an emotional and significant financial asset.
Deciding what to do with it can be complex, especially when you’re living abroad or if other family members – such as children – are involved.
Options to Consider:
- Selling the Property: Selling the home and splitting the proceeds can be the cleanest strategy and a straightforward option. However, this may not always be possible and could come with emotional or non-financial challenges – perhaps you have young children and want to avoid the disruption and instability that would come from selling their family home, or perhaps the home has been in the family for generations and has a huge personal/sentimental value to one party. Of course, there could also be financial challenges too, such as taxes, or the transaction costs involved with selling and replacing the home.
- One Party Keeps the Home: One party may choose to keep the home, potentially buying out the other’s share or offsetting against other assets. This requires careful consideration of affordability and future financial stability (again, cash flow modelling can be crucial here).
- Co-Ownership: This is rare, but in some cases, co-ownership may be a temporary solution until a more permanent decision can be made.
When considering what to do with the family home, make sure to consider your future plans and how the property fits into them, any legal and tax implications of property division (consider the implications both where the property is located and where you are tax resident), and the conditions of the real estate market where the property is located.
3. Dealing with Pensions
Pensions are often one of the most significant assets in a marriage and can be complicated to divide, especially for British expats who may have a combination of workplace pensions, UK pensions/SIPPs, or overseas pensions.
Below are a few key considerations when it comes to pensions and divorce:
Start by checking your pension valuation(s).
For your own planning purposes, it’s ok to check your online accounts or recent statements initially, but make sure you get a formal valuation from your provider – this will be needed by the courts.
Once you know the value of the pension, you can start to consider your options – and it’s important for you to understand what these are:
- Pension Earmarking Order: this “earmarks” some of the future pension benefits for the former spouse and requires a share of the pension benefits to be paid out to them when the time comes. This usually refers to retirement income being withdrawn from the pension, or lump sum benefits on death of the member. Pension earmarking can be easy to implement as no money changes hands at the time of divorce. However, it’s important to note that pension earmarking means that the pension continues to belong to the member. This means that there is no clean break between the two parties, as the member retains control over the investment decisions and the timing of when pension payments start, and pension earmarking can be impacted by future death or remarriage.
- Pension Sharing Order: this effectively splits the pension in two and provides a clean break at the time of the divorce. This means that each person can decide on what to do with their own share of the pension and take full control of their own pot moving forwards (and won’t be impacted by future death or remarriage). This does offer the “clean break” and independence most people are looking for post-divorce. However, note that in return for the pension share, the former spouse will likely receive less of the joint/marital assets. It’s important to consider whether this will have any financial implications – for example, it could cause financial stress if they are below pension age and the pension sharing arrangement represents most of their assets post-divorce (thus, they do not have access to their assets and could struggle to fund their lifestyle despite a relatively healthy net worth).
- Pension Offsetting: this is more common when both parties have pension assets. It effectively “offsets” pensions against other assets to ensure a fair division of assets from an overall perspective. Typically, the individual assets & liabilities of each party are weighed up (including their individual pensions), then the marital assets (like the family home, or any other joint assets). Then, a greater proportion of the marital assets are allocated to the party with the smaller pension, to balance things out. This can provide a clean break and is straightforward to implement (provided one party’s pension pot does not drastically outweighing the other, in which case pension offsetting can become impractical).
However, it can mean giving up tangible assets (like your house or your car) to keep your pension. It can potentially lead to other financial pain points, for example if you are left the house but no longer have enough income to run it or maintain it (again, making cash flow modelling an imperative part of your planning and decision-making process).
It’s crucial to seek professional advice and work with a Financial Planner to carefully review your options and ensure any pension agreements are right for you and your long-term plans.
4. If You Own a Business Together
If you own a business together, this will add another layer of complexity to divorce proceedings.
It’s crucial to handle business assets with care to ensure both parties can move forward successfully.
There are several steps you should take if you find yourself in this position:
First of all, it’s a good idea to get a professional valuation of the business to understand its true worth. This is always the best starting point.
Next, you need to decide on business ownership:
- Will you continue to run it together?
- Even if one party agrees to step back from the day-to-day, what happens if you both retain an equity stake (and therefore some element of control in how the business is run)?
- Will one party buy out their former partner’s share, or offset this against other assets in the divorce process?
- Will you sell it and divide up the proceeds?
There are lots of options when it comes to a business, but think about how involved you want to be with a business and your ex-spouse moving forwards – options that result in a clean break are usually preferred.
And finally, once you have come to a decision, make sure that all agreements are legally binding and clearly outline each party’s rights and responsibilities relating to the business.
On top of this, it’s important to consider how the divorce might impact the business itself, and plan ahead to minimise this impact.
For example, will key people be leaving the business? How might this impact the day to day operations or the wider staff?
If the plan is to sell the business, will there be tax implications?
5. Get the Right Professional Help
Navigating divorce as an expat requires specialised knowledge and expertise.
Working with the right professionals can make a significant difference in ensuring a fair and smooth process.
On top of this, it can be a very emotional time – which is rarely an optimal condition for good decision making.
Having an independent expert and third party in your corner during this period can be invaluable.
Particularly with more complex affairs, you should look to engage with:
- A Financial Planner: An experienced Financial Planner can help you with the financial aspects, covering most of the points mentioned above. They can provide valuable insights and help you to make well informed decisions.
- A Legal Advisor: An international divorce lawyer can guide you through the legal complexities and ensure your rights are protected, particularly if there are multiple geographical and legal jurisdictions involved.
- Tax Advisor: A tax advisor can help you understand and mitigate any tax implications related to asset division.
By engaging with such professionals, you will receive expert guidance on managing your finances and understanding the long-term impact of your decisions, you will have peace of mind during a stressful time, you will be able to plan for your financial dependents, and you will achieve better financial outcomes to secure your future.
Conclusion:
Divorce is never easy, but with careful planning and the right support, you can navigate the financial complexities and make sure that your future remains both stable and bright.
Seek out the right support and guidance (including professional help), then start by getting a handle on your financial position and future trajectory through cash flow modelling. Then, focus on dealing effectively with significant assets like pensions and the family home, and addressing any business ownership issues.
By keeping these points in mind, you can make informed decisions that protect your financial wellbeing during what is undoubtedly a challenging time.
If you’d like to discuss anything in this article in further detail, please do not hesitate to get in touch – no matter where you are in the divorce process, it’s never too late to plan.
By Technical Team @ Abacus
Please keep in mind that, whilst we aim to update these articles periodically, the content could be subject to future rule changes. Always make sure to speak to a qualified professional to ensure you have the most up to date information and are taking regulated advice around your specific circumstances.