However, if you go into the divorce process with a good understanding of how it will impact the various facets of your finances, and enlist a team of professionals to guide you, you’ll be able to handle it in the best way possible. From splitting assets to understanding the tax implications of divorce, read on for expert advice on how to prepare for the most common issues relating to divorce and money.
Controlling the Cost of Divorce
There’s no way around it: Divorce can be an expensive legal process. “The longer you spend with attorneys figuring out asset division and custody, the more you end up paying and the longer your dissolution drags out,” said Rachel S. Ruby, a California-based attorney, former divorce mediator, and the author of the book “Divorce To Bliss,” in an email interview with The Balance. As someone who has been through a divorce herself, Ruby advised trying to seek amicable solutions for dividing assets and custody, if applicable, even before hiring lawyers. In her divorce, Ruby and her ex-spouse agreed to split everything, and it helped defray some of the costs (other than some issues that were spelled out in an attached stipulations list). “Most divorces are or become contentious so this is not possible, but if the parties work together, they can save a lot of money,” she said.
Seek Financial Guidance
Divorce is a huge financial event. Seeking advice from financial professionals can be a smart investment in the long run, especially if your finances as a couple are complex, according to Samantha Garcia, CDFA and wealth advisor with California-based Halbert Hargrove. Whether or not you hire a divorce attorney, working with a CPA, a financial advisor, and/or a CDFA can help you understand both the short- and long-term impact of how assets get divided. For example, said Garcia, a house worth $750,000 and an individual retirement account (IRA) worth $750,000 may look equal on paper today, but you have to look toward the future to see what the tax implications are and how the values may change after divorce.
Splitting Assets
Depending on where you live, there may be different rules around “who gets what” when it comes to marital assets. If you live in one of the nine community property states—AZ, CA, ID, LA, NV, NM, TX, WA, and WI)—the rule is that all assets acquired during the marriage by either spouse are considered joint marital assets. As such, they will be divided 50/50 between the spouses. In all other states, how assets are divided varies case by case. For some, the soon-to-be exes (and their lawyers) may be able to strike up a deal and split assets pretty evenly. In other cases, such as if there are debts to be paid off, it might make more sense to sell the marital property and divide the proceeds after the bills are taken care of.
Dividing Property
If you and your spouse own a home together, it can be sold and proceeds split, or one spouse can buy out the other. But it may not always be as simple as an even split (especially if you’re not in a community property state), said Garcia. Some questions that may come up, according to Garcia, include:
Did one spouse have a family contribution to help with the down payment? If one spouse wants to keep the house, will they be able to refinance on their own without their spouse? How will any capital gains taxes be dealt with if the house is sold?
When Anna Maassel, an investment advisor representative and retirement planner at Voyageur Advisory Group in Maumee, OH divorced, there was a large amount of equity, and she and her ex had to pay $55,000 in capital gains taxes. “That’s not an insignificant amount. I had to take that money out of the proceeds and put it in a separate account right away so that I could pay my taxes when they were due,” Maassel said in a phone interview with The Balance.
Splitting Joint Accounts
If you share checking and savings accounts with a spouse, it is recommended to either cancel those accounts and establish accounts in each individual’s name, or at least freeze them until the divorce process is final. If the account remains open, either spouse will be able to access the funds, and that can become a problem if one of the parties wants to be vindictive and drain the account. To close a joint account, you and/or your spouse may need to physically go into a branch, though some banks may let you close your account via email, by phone, or in writing. Ruby advised speaking with an attorney or financial advisor to understand the best timing for this process, however. For example, if you’re selling a home that is in both spouses’ names, there may need to be one joint account in which to deposit proceeds until the sale. “Our escrow officer was able to deposit net proceeds of the sale equally (what we had agreed upon) into our individual accounts, and once everything was done, we both signed off and closed the remaining joint account,” said Ruby.
Dividing Debt
When it comes to who will pay off outstanding debts, lenders and creditors expect payment from the person whose name is on the loan or account, said Maassel. The same is true for credit cards or other debts that were incurred during your marriage. In most cases, the person whose name is on the account will be responsible, while joint debt will be split equally and impact both spouse’s credit scores. Until everything is settled and officially divided, though, be sure to continue paying at least the minimum amount due on all bills to protect both of your credit files. Once shared debt is paid off, it’s advisable to call each creditor and follow their procedures for closing any joint credit card accounts.
Handling Health Insurance
Typically during divorce proceedings, the spouse that is on the other’s health insurance cannot be kicked off, said Maassel. But once the actual divorce has been granted, the spouse without coverage will have to pay for COBRA, go through the healthcare marketplace, or apply for Medicaid benefits.
Tackling Tax Issues
When in the midst of divorce, speaking with a tax accountant is a smart idea, especially if you have complex assets, said Maassel. “For example, it was better for me to file as head of household than single. Those are the types of nuances that tax pros understand,” she said. Other tax to-knows from the IRS include:
After your divorce is final, speak to your employer about changing your withholding. You’ll have to fill out Form W-4 to make updates. Alimony is tax deductible for the payer spouse, while the paid spouse must include it as part of their income. Child support payments are not taxed or counted as income, however. Which party gets to claim a child as a dependent on their tax return will be determined in the divorce decree. In some cases, the primary custodial parent will always claim; other times, the parents will take turns claiming every other year.
Rethinking Retirement
When going through a divorce, changes to your retirement plan are likely. “If your retirement goal is 65 and you’re getting divorced at 55, will you still be able to meet your goal?” said Garcia. This is an important question that likely requires the help of a professional. Beyond that, you’ll also want to understand what happens to retirement funds after divorce. Retirement accounts, including 401(k), IRAs, and pensions are considered marital assets. In other words, as part of your divorce settlement, retirement accounts will be divided just like other assets. It could be 50/50, or it could be done in another way.
Ongoing Obligations and Expenses
Financials will look very different for each individual after a divorce, so it’s important to take a holistic look at other expenses, said Garcia. The first place to start is by listing and then keeping tabs on what’s coming in and what’s going out. In other words, each party should work out a brand new budget for themselves. From there, you’ll need to sort out how existing bills will be dealt with, and examine new expenses that may emerge. If you share children, custody arrangements will likely impact just about everything else money-wise, said Garcia. Some questions she recommends you and your spouse work through together include:
Will you be sharing custody 50/50? Will one spouse be paying child support? How are the kids’ expenses currently paid for, i.e. everything from school clothes, activities, child care, and health insurance? Even if kids are really young, who’s going to pay for college?
When children are involved, a CDFA or financial advisor can help you think through some of the key questions that need answering.
