Don't let a divorce wreck your finances

When her divorce finally came through, forty year old Chetna Bhatt had no clear idea about investments and assets, as her ex-husband had managed all their finances earlier. In the course of the settlement, their house was handed over to her. While she was happy about retaining the house, Bhatt later figured the hidden costs that came with it. Moreover, having been a housewife, she also failed to account for expenses she would incur in terms of her children’s education and her own betterment. By the end of it all, she could only regret at having received a flawed divorce settlement deal, that could not be reversed.

Says Certified Financial Planner, Rishy Nathany "The biggest problem with divorce settlements is that, substandard assets are passed on to the wife. Property is a very debatable issue. It is always overvalued when it is given and undervalued when it is taken away."

Here's a handy checklist of how to go about your settlement in the most effective manner.

1. Determine your share
Have an idea of what comes to you as your share of the settlement. Nathany explained, "The main crunch lies in reaching the settlement, on how you assess the fair value of the property." Take stock of all shares, bonds, mutual funds, any other investments and property you possess together. Understand how it will be divided between you. You need to draft a plan of settlement, taking into account any inequalities in your incomes and responsibilities, in terms of who will be bringing up the children.

2. Estimate your budget
Figure out your short term and long term investment plans. This would largely depend on what you foresee and estimate as your expenses after your settlement. Remember you may have to rework your spending priorities and this means, charting out a budget plan.

Having children means a significant long-term investment decision. If you are taking custody of your children, figure out costs and expenses. If you are contributing jointly towards your children’s education, decide how this will be carried out in the future.

All your investment decisions will be based on this budget. Consult a financial planner on investment options and the risks and pitfalls associated with them. "Don’t take assessments by your husband and his planner, at face value. Spend some money and get them valued independently," cautions Nathany.

3. Figure out your best investment plan
You need to pick out asset classes that would get you the best out of your divorce settlement deal and will last through your future requirements.

If you are a homemaker, your portfolio should combine equities, bonds and maintaining some assets liquid. Says Nathany, "Ideally for a housewife, I would advise to invest about 30% in equity, about 20% in monthly income plans (MIPs) with an equity blend, which should add another 5% to the equity portfolio."

Balance the amount invested in equities with safer options like RBI bonds. "I would suggest investing 30% in RBI government bonds. This would give her tax benefits. It would be good to invest Rs 1 lakh in SIPs and equity investments. About 20% can be kept liquid, in short-term floating rate debt funds," Nathany advised.

However, if you are a working woman, your portfolio changes dramatically. Nathany emphasizes that investments in equity can easily go up to 60%. "If she is 40 and she can sustain herself, looking at a 20 year horizon, why should she not invest in equity?" he questions. Buying property and renting it out is also a viable option. "In case she wants to buy property, I would recommend 50% in equity, 30% in property and 20% in fixed income," he adds.

4. Focus on your retirement goals
Pay attention to your retirement accounts. If you have been jointly contributing towards your retirement, chalk out a plan to divide it equally between the two of you.

5. Review your insurance policies
Make sure you insure your health and your children’s as well. "A woman in such a situation should buy a term insurance, health insurance and disability insurance, for herself," explains Nathany.

6. Get an idea of the taxes
The alimony that you would receive as a part of your settlement can come in two ways - either as a monthly maintenance or as a lumpsum amount. You need to figure out which option is the most tax-friendly.

Says Investment Consultant Sandeep Shanbhag, "The Income Tax Act does not specifically refer to divorce settlements or alimonies. However, on the basis of various case laws, it appears that lumpsum alimony is not taxed in the hands of the receiver but alimony in the form of monthly maintenance is taxed."

From this, it appears that it would make sense to take a lumpsum alimony and invest the proceeds in an instrument that gives tax-free returns.

7. Understand what comes with a house
When you get a house as part of your settlement, it may seem like a good deal on the face of it. But, says Nathany, "In case of a house, the mistake is that the house generally stays in the husband's name. It is just handed over to stay. A woman is generally given assets, which she can only use but cannot control."

8. Attend to joint accounts and credit cards
Don’t forget to close your joint accounts and reach an agreement on them. Also, see to it that you have your latest credit card bills in place and make sure you have cleared all dues.

9. Keep all your necessary documents ready
The documents include any lease agreements, joint account statements, bank account statements, insurance policies, credit card payments, mutual fund statements and all financial documents pertaining to the transactions that you have carried out together. Also ensure that you have with you, all documents pertaining to alimony, any property related settlements and any agreements on children’s expenses, to a any trouble at a later date.

by Anupama Viswanathan