≡ Menu

Divorce – A Wealth Killer

I excitedly opened MoneySense magazine this month and came by an enlightening article about divorce.  As the wedding vows state, marriage is forever.  This is true in an ideal world, but sadly in the real world (North America), divorce happens in over 50% marriages.

As stated in the title, divorce is a wealth killer.  Here in Canada, divorce typically results in splitting the assets 50/50, but there are some special circumstances.  There is also the no-fault rule which states that it doesn’t matter what the “reason” is for divorce, the assets will be split accordingly.

Generally speaking, assets will be split down the middle, but items like houses and child support payments can be the sticking points.  For example, if a spouse stays at home to run the household, while the other spouse is the main breadwinner, the stay at home spouse may be entitled to support payments.

Are there assets that can be held separate during a divorce?  Unfortunately not many unless there was a pre-nup signed (see below).  Here are a couple of assets that can be held separate:

  1. Corporate assets can be held separate from divorce proceedings if only one spouse is the shareholder.  However, again, if the court determines that the non shareholder spouse has “contributed” to the business, then he/she will be entitled compensation.  Thanks to The Money Grubbing Lawyer for this tid bit of information.
  2. Inheritance can be held separate if the money is not used for family purposes.  Once the money is intertwined with the family finances, like buying a family cottage, that’s when it can get tangly.  More on this below.

If divorce is the inevitable path:

  • Seek a lawyer and get advice – This is a key step because a lawyer will give you initial advice on how to proceed according to the laws of your province.
  • Arbitration instead of court – Discuss with your spouse the advantages of going through arbitration instead of going to court.  The cost difference is dramatic.  According to the Moneysense article, arbitration can cost around $15,000 where going to court can cost up to 10 times more.
  • Keep inheritances separate – Inheritance received by a spouse is among the few assets that can be separated in the case of the divorce.  That is depending on if the inheritance money was used for the for family or not.  Lesson here?  If you receive an inheritance, keep it in a separate investment/savings account.
  • Sign a Pre-Nup – It’s a bit late for this one, but a good lesson for the possible next marriage.  If one partner has significantly more assets than the other, it is often advised to sign a pre-nuptual agreement before getting married.  That way, if the marriage goes to splitsville, the asset split will be pre determined.

As the title states, divorce is a wealth killer.  It will cut your net worth by about half which can be financially devastating if you are closing in on retirement.  Moral of the story?  Be careful about who you marry and sign a pre-nup if one spouse is entering a marriage with signifcantly more assets than the other.

Note:  I’m not a lawyer so please take the contents of this article as a starting point for your research.

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 29 comments… add one }
  • Andy @ Retire at 40 October 6, 2008, 9:06 am

    Wow, it does make you think.

    Then again, pre-nups have been pretty popular in the general population for a few years now. It’s not just celebrities doing it anymore.

  • Stephen October 6, 2008, 9:51 am

    Ya it does make you think … it makes you think that people think about divorce too much that now they’re planning for it to happen. Marriage and love are choices … unfortunately you can’t control the choices the other person makes … but you can control your choices 100%.

  • MoneyGrubbingLawyer October 6, 2008, 9:55 am

    Yup, divorce is the quickest way to cut your net worth in half. It raises an interesting question, though- when we calculate net worth, should we really be including the full value of joint assets held with a spouse?

    I generally do, and my end result is what amounts to a “family” net worth, rather than my individual net worth. I guess that makes it much easier for us married folks to have nice numbers on paper when compared with single people- the power of dual incomes can be significant.

  • guinness416 October 6, 2008, 10:26 am

    Yup, divorce is the quickest way to cut your net worth in half.

    I’m all for separate accounts, but do any married people inclined to that sort of geekery really calculate individual net worths?

    If I were ever to get divorced he deserves more than half for putting up with me so long. I’ll leave this comment for his lawyers to find.

  • Al October 6, 2008, 10:32 am

    I have to disagree with one premise, that the split is 50/50. In reality, each of the wife, husband, and lawyers take a third.

  • David V October 6, 2008, 10:32 am

    I’ve raised the issue of pre-nups with girlfriends and haven’t found one who thinks they’d ever sign one. I guess the moral is to bring it up relatively early and decide how important it is to you.

    MGL, as I’m not a family lawyer, can I ask you something quickly? If I have stock account X with $100 000 in it, is it any less ‘secure’ from a divorce then if I started up a holding company as the only shareholder and kept the money in there? I guess the added wrinkle would be that I would have a pre-nup, so in theory I could put that account in the pre-nup.

  • FT FrugalTrader October 6, 2008, 10:32 am

    MGL, as I mentioned in the article, marriage “should” be considered a permanent arrangement, so combining net worths makes sense.

    Here is some more info on separating assets from Money Grubbing Lawyer:

    http://moneygrubbinglawyer.com/2008/09/29/dr-romance-prescribes-a-prenup/

  • Dividend Growth Investor October 6, 2008, 11:57 am

    I have had similar experiences like David on talks about pre-nups. Few people discuss it or are willing to do it. It’s a touchy subject.. If they don’t want to sign is that because you hurt their feelings by telling them that you have an expectation that you’ll eventually get divorced down the road..
    Or is this a game that your gf’s are playing so that they get the maximum benefit?

    Oh my head hurts :-)

  • mjw2005 October 6, 2008, 12:42 pm

    Pre-nups…in the real world….I can not imagine anyone agreeing to them….and if I was single and was asked to sign one before I was married I would be insulted….maybe this is illogical….but we live in a real world with real emotions….If I was considering marriage I would be damn sure it was the person I would want to spend the rest of my life with….or at least take a chance at…and if I loose my shirt in the process so be it….All I can say is what type of people consider write and sign these things….

    just my 2 cents

  • Hank October 6, 2008, 1:02 pm

    I saw a neat response of the division of assets in divorce on a similar thread.
    Husband 50%, Wife 50%, Lawyer 40%
    Divorce is a wealth killer unless you’re a “Family Law’ Lawyer. ;-)

  • EastCoast October 6, 2008, 1:14 pm

    I think the subject of Pre-nups are easier with the younger generations. For myself in my mid 20s and having seen my parents go through a nasty long and expensive divorce I see a pre-nup as a way to minimize the cost of a divorce and speed up the process if it comes to that. For the girlfriends I have talked to that come from divorced house holds as well they can see the benefit to it.

  • Marianne O. October 6, 2008, 1:42 pm

    I think there are some situations in which a pre-nup can be very useful. My husband and I have a pre-nup. Its sole function is to exclude him from having a financial interest in my parents’ cottage, the ownership of which they transferred to me and my brother about 15 years ago.

    Since my parents live full-time at the cottage for at least 8 months of the year, it’s really more their home than “home.” So they want reassurance that they’re not going to lose the cottage. Fortunately my husband was willing to sign, and that gives them a lot of peace of mind.

    As for our other possessions, we’re pre-nup free. Right now we’ve got far more debt than equity, so there’s not much to protect.

  • FT FrugalTrader October 6, 2008, 2:26 pm

    The whole “emotion” behind pre-nups is an interesting issue. If one spouse brings significantly more assets than the other spouse, I can’t imagine NOT signing one before marriage. A prime example is Paul McCartney and Heather Mills. I’ll bet Mr. McCartney wished he has his time back!

  • Brian October 6, 2008, 3:23 pm

    The real solution is not get to the decision of divorce. The whole nation should see “Fireproof” in theaters now. There is not one marriage that is not savable. It takes two people coming together and working threw it. Marriage is not easy and requires work by two people. If you are not willing to make it work do not say the vows that you will love each other threw all situations till death you part. In the today’s culture couples give up too easy and it gets a little tough, then they do not work it out and it just escalates to each of them hating each other.

  • Roxanne October 6, 2008, 7:00 pm

    Another interesting point is to look at the province you get married in. In Qc for example – there are two types of possible outcomes in divorce: 50/50 or you keep what you had going in – everything aquired after is 50/50. It depends what you decided on with the notary. Here is the legal mumbo jumbo:
    http://www.cdnq.org/en/legalInformations/depliants/MatrimonialRegimes.html
    So be aware of the choices your province holds.

  • Accelerated Mortgage Program October 6, 2008, 9:10 pm

    it makes sense… i still cant believe how costly it can be. i would imagine the more assets you are dealing with, the more complex the situation, and that will lead to increased costs to straighten things out.
    -jack

  • The Sentinel October 6, 2008, 10:36 pm

    mjw2005,

    So essentially you’re saying that you’re willing to flip a coin (50% chance of divorce) on the chance of going broke. I’m sorry, but this is the real world and in the real world, logic trumps emotion every time.

  • Thicken My Wallet October 6, 2008, 10:47 pm

    Pre-nups can be, and are, challenged if the circumstances in which the pre-nup were signed have changed materially so do not think that a pre-nup is iron-clad.

  • The Financial Blogger October 6, 2008, 11:46 pm

    If divorce is the inevitable path:
    – Quit your job
    – Start your own company as self employed
    – Declare 12k a year while making 100K
    – Ask for a pension to drive your sport car ;-)

    If you have children, divorce is not an option, it’s suicide ;-) hahaha!

  • Sarlock October 7, 2008, 4:20 am

    Given the financial devestation that can result from divorce and the significant odds that it will occur to any given couple, it is prudent to invest a huge amount of time in to maintaining and nurturing your marriage… more than you do your own investments even. A failed investment decision or two can hurt, but a divorce hurts far more. Sometimes people forget that a marriage requires time and effort just like other things do.
    I know far more married couples who are on their way to a well funded retirement than I know divorced individuals who are in that boat.

  • nobleea October 7, 2008, 12:54 pm

    My fiance (then girlfriend) and I read David Bach’s book Smart Couples Finish Rich. There is a chapter on wills and pre nups. After reading the whole book, we had a discussion on pre nups (the book explains them well and why you should have them). They’re mainly required when there is a large discrepancy in wealth being brought in to the marriage.

    We haven’t written one up yet.

    I agree that divorces have become too easy, or too acceptable. I don’t mean that in a bad way, but marriages are not cake walks and there will always be struggles. Aside from abuse, every marriage is save-able.

    I highly recommend the book Five Love Languages if you disagree.

  • mjw2005 October 7, 2008, 6:40 pm

    I guess what I meant to say is the fact that we need pre-nups in our society says a lot about who we all are…maybe in noblelea’s situation I could see it as reasonable as there are innocent parties involved, but even then if I was the husband or husband to be I would be a little hurt if I was asked to sign a pre-nup because to me it says…”I don’t trust you….I wan’t to marry you but I don’t trust you 100%”…..

    I know people don’t agree with me

  • Stephen October 8, 2008, 10:05 am

    The Sentinel:

    In the real world people use their emotions to lead them to divorce instead of using their logic to do what is right and save the marriage and honour their commitments. Emotions are more the reason why we have a 50% divorce rate than logic. Use your logic before and after you get married and then you won’t need the logic of a prenup for your divorce because it will never happen.

    Do you consider yourself to be a lyer? If not, then don’t get up and lie to your future partner and tell them you will be with them for the rest of your life.

  • Alice October 12, 2008, 12:27 am

    When my husband and I were about to separate, nearly a year ago, he told me what a “better deal” he could get with someone else, and “how much better off” he’d be without me, because I had been a stay at home mom for the past 2 years–we had two children, ages just 4 years and 6 months at the time of the separation. Ironically, the divorce is now nearly finalized, and his legal bills alone were more than $30,000, he got to keep the house–a dubious distinction, with the market being what it is–and I will be getting, aside from the settlement, which was significant to me, enough to allow me to purchase a home in my own name–25% of his pre-tax income for the next 14 years. And 15% for four years after that. He’ll basically be paying my mortgage, paying the taxes on the income, and I’ll be deducting the interest. For someone who was in an abusive relationship, I have actually greatly improved my emotional and financial outlook; I have basically no debt (just a small amount of student loans and legal fees from the divorce) and I’m now in a career-track government job, a homeowner, and building a life of financial independence. I miss being home with my girls, but from a numbers standpoint, I am in a much better place.

  • Kandace October 14, 2008, 8:51 pm

    Divorce is also a financial killer for second marriages. My husband and I were both previously married, but I had no kids. He has five. It’s a wealth killer because the financial implications continue long after the papers are signed. Half of his current income goes for alimony, child support, and insurance. His wife isn’t able to give any additional financial support to the kids so we are also taking on the costs of college, weddings, etc. I would love to be saving more for retirment, but am grateful that we can meet our obligations and keep our heads above water.

  • wannabe_millionnaire November 10, 2008, 3:12 pm

    If you read Elizabeth Warren’s “Two income trap,” divorce is listed as top three causes of personal bankruptcy. The other two are layoff and medical bills.

  • Ms Save Money May 5, 2009, 6:08 pm

    Gosh, divorce is such messy business. I knew someone who married 3 times and has 9 kids – he makes a lot of money but none of that goes to him…. so sad…

  • Eileen Mayor-Masse May 7, 2010, 12:44 pm

    Does anyone have advise on keeping the cottage jointly after divorce? Ex is quite lazy(mainenance – what is that), and although he claims to be amicable, he must be using a different dictionary than I. However I do not have the resources to buy him out, and would like to keep it. Does anyone have agreements that have worked?

  • Popsicle Pete August 5, 2010, 8:09 pm

    Being insulted by a prenup is as silly as needing to get married in the first place. Marriage, throughout the ages, and continuing to this day, is about society forcing two people to be together, and making it difficult for them to get separated. It was used in olden days to force women to be faithful to one man, and to punish men for sleeping with married women. Today it is used to make men be committed to one woman for the rest of their lives, that they likely don’t want to be committed to for the rest of their lives.

    If you could just get married for “love” that would be great. But getting married is signing a contract to split half your assets, if one person has more assets (or will be making more money throughout their careers) then it only makes sense to get a prenup.

Cancel reply

Leave a Comment