FINANCIAL CONSIDERATIONS IN DIVORCE
The divorce process can be challenging, especially when considering all the areas that may be impacted.
Gather all of your financial account statements, preferably for the past year.
- Bank accounts
- Investment and retirement accounts
- Credit card and loan statements
- Pay stubs and explanation of benefits from your employer
Get copies of your most recent two years’ tax returns and all schedules
Visit and inventory any safe deposit boxes. Make a list of the contents
Do not make any large purchases/withdrawals outside of normal living expenses.
Do not make any changes to your accounts or insurance policies.
Obtain copies of your full credit reports from all 3 bureaus.
Lock your credit
Create a budget based on living expenses
Figure out the Who, When, Why, What, and How for each:
Debts: (credit cards, loans, leases, etc.)
Who does the debt belong to? Individual or Joint
- Joint debt is taken out during the marriage and used for marital purposes such as a mortgage or automobile. The spouses will often split joint debt in a divorce.
- Individual debt is owned by one party, which may be from before the marriage or obtained during the marriage. Depending on the use, this can be split between spouses or be the responsibility of just one.
When was the debt incurred?
Why was it incurred? To purchase a home, start a business, child’s education, etc.
What type of debt, and what are the repayment terms and interest factors?
How is this debt being paid currently?
Financial Accounts: (bank accounts, investments, retirement, education, etc.)
Who owns the account (joint, individual, custodian)
When was the account established
What type of account is it. (brokerage, crypto, IRA, 401k, 529, etc.)
How was the account funded and how is it being managed?
Figure out the Who, When, Why, What, and How for each:
Debts: (credit cards, loans, leases, etc.)
Who does the debt belong to? Individual or Joint
- Joint debt is taken out during the marriage and used for marital purposes such as a mortgage or automobile. The spouses will often split joint debt in a divorce.
- Individual debt is owned by one party, which may be from before the marriage or obtained during the marriage. Depending on the use, this can be split between spouses or be the responsibility of just one.
When was the debt incurred?
Why was it incurred? To purchase a home, start a business, child’s education, etc.
What type of debt, and what are the repayment terms and interest factors?
How is this debt being paid currently?
Financial Accounts: (bank accounts, investments, retirement, education, etc.)
Who owns the account (joint, individual, custodian)
When was the account established
What type of account is it. (brokerage, crypto, IRA, 401k, 529, etc.)
How was the account funded and how is it being managed?
Health Insurance
Determine what options there are for coverage post-divorce. Most non-employee spouses will have to obtain their own coverage after a divorce. Children are typically allowed to stay on the original employee benefits plan.
If you are the non-employee spouse, you may be eligible for temporary coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). This coverage is usually more expensive but can provide coverage for up to 36 months on the plan you had while married. Alternatively, insurance may be an option at the employer of the newly uninsured spouse, or you can find coverage through the Affordable Care Act.
Home, Auto, and Umbrella Insurance
Consider that once the divorce is finalized, each party will have to obtain individual policies for auto, home, (or renters) and umbrella coverages. Do not make any changes to your policies until your divorce is final or your attorney approves of such a change.
Wills, Trusts, Medical Directives and Beneficiary Designations
Once the divorce is final, you will want to make changes to these documents in accordance with your divorce. Most states will nullify a former spouse as the life insurance beneficiary unless the divorce decree specifically states they are to remain the beneficiary or you update the beneficiary for listing them as a beneficiary after the divorce is final.
As a renter:
If you and your spouse were renters, then you will need to consider the lease obligation and who will stay in the rental and be responsible for paying the rent.
As a homeowner:
This requires a little more consideration. The options can have greater impacts to your overall financial well being. Options to consider are:
- Sell the home and split the earnings
- One spouse keeps the home and buys out the other party either through their assets retained or by refinancing the property in their name to cash out enough to buy out the other spouse. This will also be contingent on who is currently on the mortgage and deed to the home.
- Maintain the home as joint owners and split the costs until sometime in the future. This can get complicated by tying up the non residents spouses credit, taxes owed, and future market values.
- Don’t forget to consider: Legal costs or selling and closing costs.
Alimony
If one spouse make significantly more than the other the “monied” spouse may be required to provide support to the other spouse for a period of time to help them maintain the economic lifestyle after the divorce. The amount is based on the ability to pay and the needs of the other spouse and the length of marriage. There are no exact measures to alimony. Each state has their own rules and practices.
Child support
Child support payments are made by the non-custodial parent to help the custodial parent pay for the costs of supporting their children. Child support is intended to help cover the costs of food, housing, clothing, medical bills, education, transportation, childcare and extracurricular activities. Typically, these payments will last until a child turns 18 or graduates from high school — but in some states, they may last until a child turns 21 or older if certain conditions apply.
Even in cases where parents have shared custody of their children, one parent may still be required to pay child support. The courts may consider custody arrangements, parental income, total number of dependents and the expected costs.
Depending on the timing of your divorce. You may not be able to file married filing joint. Understanding the differences between married filing joint, married filing separate, head of household, and single should be a important part of the timing of your divorce. If you are divorced by Dec 31 in any given year, you cannot file as married. You will have to file single or head of household if you qualify.
Claiming children as dependents is another important decision. Both parents cannot claim the children in the same year. Often parents will alternate years, split which children they will claim, or negotiate this benefit as part of the divorce settlement.
Lastly, if you are divorced after Dec 31 2018, alimony is no longer taxable or a tax deduction at the federal level. Some states still allow for this as a deduction and consider it taxable income.