Prepare for negotiations in divorce

Maintaining financial security is one of the toughest challenges you will likely encounter when facing separation and divorce. Because most states require that estates be split equitably, not equally, the unfortunate reality is that many divorcing parties – particularly women – end up losing economically. If there are dependent children, the quality of life for the children also could be severely compromised.

It is important that prior to your separation and divorce proceedings, both spouses get together with attorneys and financial consultants to negotiate the best possible agreement.

There are many issues to consider:

• Resolve how children’s college tuition will be paid. Both parents’ contributions to college expenses will need to be addressed in the divorce agreement. Be cautious about using retirement assets as a source of education, as these assets could take a very long time to replace. College expenses can be paid through a patchwork arrangement of low-interest loans, financial aid and part-time student jobs. Unfortunately, most women will have fewer financial resources in retirement than their children will have in college.

• Reevaluate your retirement plan. You may be unaware of the phased increase in normal Social Security retirement age from age 65 to 67. In other words, don’t expect eligibility for full benefits before they’ll actually be available. Hopefully, your Social Security will be supplementary income and not a major source of retirement wealth.

To significantly complement your retirement savings, you may need to rely on an investment portfolio. While some investments involve assumption of greater risk, they may be more likely to produce higher returns, particularly if you are years away from retirement.

• Negotiate the best health insurance coverage for you and your children. If one parent has access to health insurance at a reasonable cost, most states have laws permitting or requiring the court to order that parents keep the children on the plan. Children are typically covered until they reach 18 years of age. If health insurance becomes an expense, it should be factored into the child support award.

Take note that under the Consolidated Omnibus Budget Reconciliation Act of 1986, if a spouse’s employer has 20 or more employees, the employer must allow the other spouse to have a policy with its health insurer for three years after the divorce.

• Calculate the long-term costs of keeping the house. Keeping the house may make sense if you are hoping to maintain custody of your children and preserve some continuity in their lives. It also is a very valuable asset. But a home is an illiquid asset that can be very expensive to maintain in the long term. A mortgage, taxes, utilities, maintenance and general day-to-day upkeep add up. Down the road, will you still be able to maintain the house once the marriage is dissolved? Make sure you run the numbers ahead of time and determine your ability to acquire a new residence before you stake your claim and fight to keep your home.

Keep in mind that any reduction in your standard of living during this transition period may be used as grounds for providing less support in the future. Tuition, extracurricular costs, child care, health care, recreation, transportation, housing and food should all be accounted for as part of your expense package. Therefore, when negotiating the terms of a separation agreement, think carefully about the priorities you set and the decisions you make, as these choices will most likely serve as the basis for your final divorce decree.

Consult your personal tax and legal advisers for appropriate guidance in your particular situation.

Barbara Rae Hall is a financial planning specialist and financial consultant with Smith Barney. Smith Barney is a division of Citigroup Global Markets Inc., member SIPC.

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