The financial impact of divorce
Divorce has many multifaceted impacts that extend beyond the break-up of the relationship.
One of the most significant of these impacts is the financial repercussion it has on both parties.
That makes divorce all the more complicated.
“That’s because a couple’s finances go well beyond the amount of money two people have in the bank,” says Educators Certified Financial Planner professional Lisa Raponi. “From the family home, vehicles, and any investments you may have, to tax implications and potential child/spousal support—your combined financial picture is made up of an intricate web of many layers.”
The longer you’ve been married, the greater and deeper that web will stretch across every aspect of your life.
“Hence why it’s important to seek independent legal counsel,” continues Lisa. “Especially since the end of a marriage tends to result in emotions running high on both sides. Beyond working through the legalities and complexities of divorce, having your own lawyers can help provide each of you with a sounding board to voice any major concerns, as well as a peaceful buffer for developing a plan that collectively and collaboratively works in the best interest of both you.”
Believe it or not, there are also educator-specific impacts of divorce to consider.
Lisa goes on to explain, “Two of the most common questions education members have about the financial effects of divorce relate to the division of assets and how their teacher’s pension will be affected.”
How are matrimonial assets divided?
You and your spouse can reach a private agreement on how assets are divided, or you can ask the court to decide the question of property division, in which case division of property is decided under the Ontario Family Law Act (FLA) (note: the FLA applies to married couples only, not common law partners). The FLA states that when married couples separate or divorce and come to court for property division, each party is entitled to an equalization of net family property. In other words, the value of all assets and debt acquired by the spouses during the marriage will be divided equally.
Here is a simple example:
Bill and Mary are a married couple getting divorced.
Since getting married, Bill has increased his net worth by $100,000.
Note that Bills’s worth could have been zero at the time of marriage and increased to $100,000 by the time they separated, or worth $1,000,000 and increased to $1,100,000 by the time of separation—it’s the growth that’s important.
Mary increased her net worth since they got married by $80,000.
The difference between them is $20,000.
The equalization payment is half, or $10,000, so Bill would be responsible for paying Mary $10,000.
Keep in mind that some items are excluded from the calculation to equalize the property, such as life insurance proceeds, gifts a party received from a third person during the marriage (not from the other spouse), or an inheritance you can trace.
Then there’s the matter of the matrimonial home (the house that a married couple lived in at the time of separation) to consider.
In Ontario, while the matrimonial home is included in the calculation of net family property, its value (at the date of marriage) is not deducted, even if it was owned before the marriage. This means the entire value of the matrimonial home (or half if jointly owned) is factored into the equalization payment calculation when the couple separates.
How will divorce affect your pension?
The Ontario Teachers’ Pension Plan (OTPP) states that your pension must be included in the valuation of your family assets.
The valuation of your pension is determined as follows:
- The OTPP will calculate the value (of your pension) that accumulated while you were married
- OTPP then reports that value, known as the Family Law Value (FLV), to you (pension holder)
- Once you’ve received your FLV statement, you then have to decide if you’re going to use your pension to settle your equalization obligation
“The division of property calculation is like a balance sheet,” explains Lisa. “At the end of the process, that balance sheet has to be equal—hence the term ‘equalization payment’. While pension valuations will always show up on an equalization statement, the divorcing education member can use an entirely different asset, such as a percentage of their share of the matrimonial home, to settle their equalization obligation. On the other hand, if you choose to use your pension to equalize your property, your soon-to-be former spouse is entitled to a maximum of 50% of the value of your pension accrued during the time you were married, regardless of how long that was. This will be seen on your future Statement of Pension Benefits as an FLV reduction.”
She notes that for those who are already retired and navigating a divorce, the process is similar. “Since you’ve already received your first pension payment, your former spouse may become entitled to the division of your pension, if you choose to settle your equalization obligation with your pension.” You can find more information on OTPP’s website.
What other major financial impacts might divorcing individuals face?
“If children are in the picture, there’s also alimony and childcare costs to consider,” notes Lisa. “Plus, you’ll have to update your estate plan including will and beneficiaries and rework your budget to accommodate for everyday expenses as a single person. But remember, although you might be newly single, you are not alone. You can always reach out to me and my colleagues for advice on how to navigate whatever specific financial challenge you’re going through.”
