Divorce can be a painful process.
Not only is it messy in terms of emotions and logistics, it can also be incredibly complicated when it comes to your financial situation.
While it can be tempting to rush through the process of dividing your finances, it’s crucial to protect your assets during this difficult time.
So hire a trusted attorney, stay informed, and work to understand the laws that could impact your bottom line.
DIVIDING THE ASSETS
As a general rule, assets and property acquired during the course of a marriage are divided when the spouses divorce.
While there may be exceptions for individual inheritances, gifts to an individual spouse, and assets or property acquired before marriage, the big difference depends on which state you live in.
That’s because state laws usually fall into one of two categories:
- Common Law Property States: The judge may consider a wide range of circumstances, including each spouse’s earning ability, length of the marriage, and how much each contributed to building household assets.
- Community Property States: Assets and property acquired during the marriage are divided more or less equally.
Most states follow the common law principle, with the exceptions being Alaska (where it’s optional), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Don’t try to hide assets from the court — either by neglecting to mention them or transferring them after the proceedings have begun. Such shady maneuvers can trigger penalties and additional court actions.
DEALING WITH DEBT
Though it would be great if debt went away when you divorced, it unfortunately gets divided among spouses. As with assets, the specifics depend on the state in which you reside.
- In a common law property state, each person gets responsibility for the debts he or she incurred in individual accounts. Debt in joint accounts — or debt attached to jointly-owned property — is generally divided in the same way as the marital assets.
- In a community property state, debt is typically split down the middle — with no regard to whether the debt was in a joint or individual account.
Whatever you do, don’t maintain your joint accounts after the divorce, as your spouse could run up expenses and saddle you with the debt.
As soon as the divorce is finalized, freeze all joint accounts and ask your creditors to reclassify them as individual accounts.
(Though most creditors will do this at your request, they’re not legally required to do so.) Then, to protect your credit rating going forward, make sure to keep up with monthly payments.
If you and your spouse own a home that has appreciated in value, you might want to sell it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 in realized capital gains for married taxpayers, but that amount is cut in half for single filers. For additional information about these rules, be sure to consult a tax advisor.
When it comes to your retirement funds, money in either spouse’s 401(k) or pension plan can be legally divided during a divorce.
To claim a share of your spouse’s 401(k) or pension plan benefit, you’ll need to obtain a court order called a Qualified Domestic Relations Order (QDRO). Once you have that, you must send it to your spouse’s plan sponsor before distributions are completed.
If you do receive a share of your spouse’s retirement assets, you might want to immediately roll over your share into an individual retirement account (IRA) to keep the tax benefits. You should discuss this with your attorney or financial advisor as soon as you anticipate a divorce.
While it might seem like a non-urgent issue, you should amend your estate plan as soon as you begin the divorce process.
Be sure to review your will — and if you don’t have one, draw one up.
Now’s also a good time to consult an estate attorney, so you can be confident your assets will be properly distributed upon your death.
Included in that, you should review your beneficiary designations for pensions, 401(k)s, and life insurance policies. Federal law requires a spouse to be the sole beneficiary of pension or 401(k) benefits — unless that right is waived in writing by the spouse.
If you find yourself faced with divorce, you undoubtedly have many different concerns and worries — it’s hard to know where to focus. But one thing you can’t neglect is your financial future.
Stay vigilant, and protect your interests, and hopefully you’ll be able to move forward with your life soon.
If you would like to discuss this, or any other topic affecting your financial life, then please don’t hesitate to get in touch.
Laryssa Freeman, CFP® is a member of the Fee-Only Network. She offers two options for new clients depending upon their needs:
1) Project-Based Financial Planning Service on a flat fee basis. The implementation of the plan is done by the client. The scope of work for the Project-Based Financial Planning Service may include the following topics based on the client’s needs: Retirement Planning, Estate Planning, Development of Financial Goals, Investment Analysis, Risk Management, College Planning and Tax Planning Strategies.
2) Comprehensive Financial Planning which includes all of the services above plus investment management and financial plan implementation by Meritage Wealth Management.