What Divorce Means for Your Finances

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When you’re contemplating a serious life change like divorce, splitting hairs over armchairs and investment accounts may be the last thing on your mind. Yet it’s important to think about your financial future, especially if you have children. Misstep in the proceedings can have far-reaching financial implications.

If you do not have a prenuptial agreement, arm yourself with knowledge of the family’s financial situation and any applicable laws in the state where you’re filing for divorce. In nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), assets gained during marriage is “community property” and equally owned by both spouses. Every other state follows “equitable distribution” which means that a judge will attempt to distribute assets as fairly as possible during divorce proceedings.

Not all divorces end in court, however. Ideally, you and your soon-to-be former spouse can work out a settlement that minimizes third-party intervention (as well as costly attorney fees). Don’t underestimate the cost of a drawn-out divorce. A plan to extricate from each other amicably can save you time, money and anxiety in the long run.

If you are not normally in charge of the budget, now would be a good time to familiarize yourself. Whether or not your detachment is amicable, take steps to protect yourself financially. Close any joint credit card accounts so your ex-spouse can’t incur new debt you may be responsible for paying. Take stock of all assets, even if you don’t think they have value. It’s easy to overlook non-cash belongings such as frequent flier miles, tools, collectibles, or cash value life insurance plans. This exercise will help you determine what you want in the settlement, as well as an equitable way to divvy up debt.

You should also evaluate how your situation will look following the divorce. You may need to make lifestyle adjustments if your family is going from a two-income household down to a single. If you expect to receive child or spousal support, plan how you will use those funds. Keep in mind that alimony must be reported as income on taxes, but child support does not.

Disentangling your life from your spouse often means duplicating some structures that were already in place for the both of you. You may need to build an emergency fund for rainy days, get insured, and make your own plans for retirement. If you were banking on a spouse’s 401(k) to support you both in old age, you may not need to walk away empty-handed. In the divorce proceedings, a judge might issue a qualified domestic relations order to distribute some portion of a spouse’s retirement account to the other person. If your marriage is rounding out a decade, it may be worth staying on a little longer for one benefit: social security. A divorced spouse could potentially receive social security benefits based on their former spouse’s record if they never remarry and would have received a smaller or no check otherwise.

Since splitting assets doesn’t usually create wealth, divorce often means setback for one or both spouses. Professional advice can help mitigate the damage, and get you back to financial normalcy faster. Consider recruiting a financial planner to help with asset appraisal, dividing assets and liabilities fairly, and general advice about the best way to proceed. Aside from professional perspective, a certified divorce financial analyst will also give you objective advice, in contrast to well-intentioned but potentially misinformed counsel from loved ones. This is especially important if you aren’t comfortable with financial matters. An advisor can champion you in your separation, making sure that you get a fair cut of community property.

The next person you should reach out to for help is an accountant. It’s important to consider how divorce can impact your tax situation. An accountant would be able to point out strategies for minimizing tax impact. For example, the IRS allows an exclusion of $250,000 in capital gains for each spouse on the sale of a house they have both lived in for two out of the last five years under certain conditions. To avoid conflict of interest, consider hiring an accountant separate from the one you may share with your spouse.

 Your work doesn’t stop after a judge stamps your divorce agreement. As soon as possible, change the beneficiaries on any insurance policies, investments, retirement plans, and savings accounts. If you die, beneficiary designations take precedent even over your will. That means updating your last testament may not be enough to keep your ex-spouse from inheriting assets after you pass. While you’re at it, be sure to update any deeds and titles that have changed hands to insure ownership has fully transferred. You may be tempted to make these alterations before your separation is final. If you have already filed, however, it may be illegal to change beneficiaries before everything is settled.

While splitting up is never fun, it doesn’t have to be financially ruinous. Taking the time to understand the financial impact can keep you thriving after divorce.