The Finances of Divorce
No one gets married expecting to get divorced. Unfortunately, with the national divorce rate at around 40 percent1, many marriages will end. Going through a divorce is never easy, not emotionally or financially. Whether your split is amicable or contentious, there are certain steps you can take to protect yourself and begin planning for your personal financial future.
In many marriages, one spouse tends to handle most of the couple’s finances, often acting both as banker and bill payer. If you are not the spouse in this role, it would be wise to educate yourself about where your marital money is – bank accounts, stocks and bonds, real estate, insurance policies, retirement plans, etc. – that way you can be sure you get your fair share in the divorce. Even if you have been the family’s banker, it can be helpful to gather all financial information in one place for easy reference.
Collect Financial Information
Take an accurate inventory of your joint assets in bank and brokerage accounts, property holdings, insurance policies, collectibles, qualified retirement accounts, and the like: this will be important as you separate. Make a list of what you think might constitute personal or separate property versus marital property. Property and assets owned by you and your husband individually before you were married are not considered marital property unless you legally changed the ownership rights during the course of the marriage.
Additionally, if applicable, you should collect all information about money you may owe – especially personal loans, credit cards and educational loan debt. You should also review your tax returns for the last two years. Make copies of everything and keep them someplace secure, whether in your own safe deposit box or the possession of a trusted friend or family member. If you do not already know, find out who your advisors are and what role they play in your financial life.
If you intend to petition for spousal support, collect copies of home loan, tax, car, utility, insurance and maintenance bills, and track other daily living expenses. Make sure you also have copies of your will, trusts and any other legal documents created during the course of the marriage. If you have a pre- or post-nuptial agreement, you will need a copy of that as well. It is also wise to make sure you have a record of all your account passwords, as well as your spouse’s social security number. If your name is not on your utility bills, add it. This could help you more easily open a new account after you divorce.
Typically, spouses become the default beneficiary on financial accounts. Once you decide to divorce, be sure to update your beneficiary designations. This not only should be done in your will, but also for pensions and retirement plans, life insurance policies, annuity contracts, investments and veteran benefits if applicable.
The Best Defense: A Good Offense
If you know or suspect your divorce is going to be unfriendly, you need to protect yourself. Contact credit-reporting agencies, such as Equifax, and make them aware of your situation. Open a savings and checking account in your name alone. If you took your husband’s name but will now be reverting back to your maiden name, you can open the accounts in your married name and change them after the divorce decree is issued and your name change is finalized. Fund your new accounts with as much money as you think you’ll need to sustain you through the divorce. These two actions may help protect your credit score if your spouse tries to abuse joint accounts or write bad checks during your split.
What about Retirement?
When it comes to dividing retirement assets, different rules apply depending on your state of residence and the length of your marriage. Some assets may be treated as community property and divided equally: others may favor the higher wage earner. Determining the actual value of assets becomes quite important, and it may be worthwhile to hire a professional appraiser to estimate the future value of current assets before you agree to anything. Additionally, a qualified financial professional, along with legal and tax advisors, could help you determine which assets you are entitled to, what percentage you can expect to receive, and which forms need to be filed to ensure all is transferred correctly and there are no undue tax consequences.
Assuming you are eligible to receive a portion of your spouse’s pension or other qualified plan, it is important to find out if there are survivor rights. If so, you could still collect benefits throughout your own retirement even if your spouse passes away.
Do not overlook future Social Security benefits. If you were married for at least 10 years and never remarried, you can qualify for 50 percent of your ex-spouse’s benefits when you both reach 62, even if he has remarried or hasn’t retired. You can receive 100 percent if he has passed away. If you qualify based on your own history, you’ll receive the larger of the payments. Note that you will have to be divorced at least two years before filing a claim2. For more information, visit www.ssa.gov.
Divorce obviously affects the two spouses who are choosing to separate. But, the impact it has on the couple’s children must also be considered. In addition to the emotional tumult children may experience, their financial futures will be impacted as well.
If you have dependent children, make sure the cost of higher education (and who will pay for what) is clearly delineated in your divorce settlement. A 50/50 split is not always fair, especially if you earn less or put your career on hold to be a full-time caregiver to your children. With the help of attorneys and financial professionals who can project anticipated college costs, you should be able to reach an equitable resolution so the children’s educational goals remain intact long after their parents’ marriage is dissolved.
Your agreement should also determine which parent would be responsible for carrying the healthcare benefits of the children and how the cost for any medical needs not covered will be divided. If you have depended on your husband’s medical insurance, you likely will no longer be covered once your divorce is final and will have to obtain health insurance benefits on your own.
When evaluating spousal and child support, be sure the contract language is very specific in case future circumstances change or the contract is legally challenged. Also, it is financially wise to adjust the payments to account for inflation, especially if they will be made over many years. Keep in mind that in some cases, spousal support may not be awarded.
A New Chapter, a New Financial Strategy
Your financial strategy and retirement plan will undoubtedly be affected by your change in marital status. After you have made sure your credit is safe, your beneficiaries are changed, and you are getting your rightful share of retirement assets, you need to craft a fresh plan for your new beginning. Ask for help. A reliable financial professional can guide your development of a new approach to your financial future. Together, you can assess your income-to-obligation scenario and implement a realistic strategy to help support your goals.
Useful Resources & Links:
1) CDC Fast Stats 2004, Divorce
2) “Social Security Is Important to Women,” October 2008. www.socialsecurity.gov.
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© AXA Equitable. Made available by Carter Rowles: http://www.carterrowles.myaxa-advisors.com. Carter G. Rowles, Financial Professional; CA Insurance Lic. #OE16048; 9606 North MoPac Suite 950; Austin, Texas 78759; Tel: 512-794-2327. Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from and independent tax advisor.