Divorce involves many loose ends, both emotional and financial. If you’re considering or going through a divorce, you need to determine how assets and liabilities will be divided between you and your former spouse.
Generally, a person facing divorce has two approaches financially – reactive or proactive.
In the reactive mode, an individual acts in response to immediate financial concerns and tries to maintain the status quo. In the proactive mode, an individual works toward the post-divorce future, considering all options with the long-term in mind and the reality that the status quo will change.
A focus on practical solutions to key financial considerations can put you on track to successfully transition to your new life. Below are 13 proactive tips we thought we would share.
1. Take a financial accounting of your fixed expenses and anticipated income streams. If you have a shortfall, you either need to increase income or reduce expenses. If you cannot improve your employment, you need to consider if you would be able to receive maintenance from your spouse. On the expense side, all expenses are not equal and some can go in order to reduce your shortfall. This is also the time to consider downsizing as an option. If you have fixed expenses, like a mortgage, you cannot afford post-divorce, you need to look for other housing arrangements. Too many people wait until the divorce nearly ends before thinking of the future, and the house tends to be the most likely issue left on the back burner.
2. Having budgeted for what you can afford, look if you can plan for retirement. One danger of divorce is that by focusing on present needs the individual forgets about the need to support oneself for the long haul. Do you have retirement assets? Does your spouse? Should you ask for more retirement funds to protect your long-term health? If you are asking to receive maintenance, consider using some of it, even all of it, as savings in an IRA.
3. Think about Social Security, particularly if you are closer to retirement. If you were married for at least ten years and your former spouse made more money, you can claim that spouse’s Social Security benefit. However, if you remarry, you lose the right to that claim.
4. You should consult a financial planner to look at your investment portfolio and income streams to see how you can maximize your resources come retirement. If you wait too long to start saving or shifting assets, you may cost yourself the ability to a reasonable lifestyle at retirement.
5. You should determine how to divide your primary residence. Do you want to stay in your current home? If you have a desire to stay in your current home, you may need to allow your spouse to keep a larger share of another asset to create an equitable distribution. Have you considered how much it will cost you each month to maintain your current home? Consider whether your current home may require significant investments in maintenance and upkeep that could make it expensive to retain. Take the time to determine how previously planned improvements or repairs will be paid for and keep a record of items paid for by jointly owned assets. What about selling your current home? If the house is included in one spouse’s portion of the settlement, calculate 50% of the equity portion to be paid to the spouse who does not retain ownership of the house.
6. You should also determine how to divide your retirement plans. Retirement savings are typically split on an equal basis, although not in all cases. Funds saved before marriage might be considered separate property. Equal distribution is particularly important for those divorcing at age 50 or older, where retirement plan savings may represent a significant percentage of a couple’s combined wealth. A Qualified Domestic Relations Order (QDRO) would be drafted and entered by the Court to arrange the transfer of part of the assets in a workplace plan or IRA to an ex-spouse’s retirement account. The transfer can be made directly from one account to another to help avoid a 20% withholding tax on the transaction. The person receiving retirement assets in this manner has a one-time opportunity to withdraw any amount of this money without a 10% early withdrawal penalty.
7. Understand your Social Security benefits. Spousal benefits. Once you reach retirement age, you can claim spousal Social Security benefits based on your ex-spouse’s earnings, provided that you were married for at least 10 years. This is allowed as long as the benefit you are entitled to is larger than the benefit you would receive on your own work record. You also must have been divorced for at least two years and remain unmarried. The spousal benefit will equal one-half of the benefit of the ex-spouse if both have reached full retirement age (full retirement age ranges from 65 to 67, depending on date of birth.) If you start receiving benefits prior to full retirement age, your benefits will be reduced. Review all options to maximize your Social Security benefits.
8. You should determine if there are any post-divorce tax implications. Divorced couples will no longer be able to claim the tax status of “married, filing jointly,” effective in the year in which the divorce is final. You’ll need to choose whether to file as a single person or, if you qualify, as a “head of household.” Each spouse can have tax benefits, depending on your situation. You must determine how to handle mortgage and property tax deductions in the year of the divorce. Will it be split, or will one spouse claim the deduction? Certain assets, when liquidated, may also be subject to tax. As decisions are made about how to equitably divide assets, be sure to consider their after-tax value.
9. You should draft a divorce financial document checklist. Gather key financial documents you’ll need to evaluate any kind of divorce settlement, including (a) the most current statements of all accounts (bank, checking, savings, credit cards, investment, retirement plans, etc.); (b) all documents relating to loans; (c) recent credit card statements; (d) pay stubs or W-2 income statements as well as tax returns for the past three years; (e) titles to property (homes, cars, boats, etc.); and (f) all insurance policies (including life, health, property, etc.)
10. You should account for all assets that were owned in the name of one spouse prior to marriage or inherited by one spouse and kept in a single name. These can potentially be excluded from “marital assets” that must be divided.
11. You should update beneficiary designations on insurance policies, IRAs, annuities and retirement plans as appropriate. You should also review and update wills and other estate planning documents.
12. You should make sure all bills are updated to reflect your name only and are paid on time to help ensure you maintain a high credit score throughout the divorce process. Be certain taxes are paid and tax returns are filed on time as well.
13. You should consider using a divorce mediator to help minimize legal costs associated with a divorce.
Should you need the assistance of an experienced divorce attorney, or have questions about your situation, know that we are here to help and ready to discuss those questions with you.