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Life events

Getting Divorced

Where do you start?

A divorce can be a difficult time. Yet, with some preparation, you can plan how assets and debts will be divided and take charge of your financial well-being.

Take the quiz

Today in the U.S., what percent of marriages end in divorce?

Correct

That′s correct 39% of marriages end in divorce.

Too much

Fortunately, only 39% of marriages end in divorce.

Source: Time, 2018

Untying the knot

Do some financial homework first:

  • Make a list of your combined assets and debts, like bank accounts, investments, retirement plans, real estate, personal property, collectibles and loans.
  • Try to determine what each item is worth now and what it cost when you bought it.
  • Note the names on all accounts and how the title is held.
  • Decide which assets and debts are available to be divided.
  • If you have a prenuptial agreement, that’s a good place to start.

 

Prenups

Each prenuptial agreement is unique. Generally, prenups:

  • Identify assets that you brought into the marriage and are entitled to take with you
  • May outline whether alimony will be paid to either of you
  • May outline how property will be settled
  • May outline child support arrangements

Without a prenup, or for issues not covered by the agreement, you'll work with your legal and tax advisors to reach a settlement, including alimony, division of property, and child support. 

 

Understanding alimony

Alimony, or spousal support, is a stream of payments from one spouse to the other. Your state may have laws that affect your alimony and how it's structured. Alimony can be:

  • Set up to last for a specific period of time or for life
  • Used to provide support so a spouse can maintain his or her current standard of living
  • Used to bridge a financial gap until a former spouse can re-enter the workforce.

You won't pay income tax on alimony you receive and if you pay alimony, you won't be able to take a tax deduction.

 

Settling property

Your property settlement is the division of marital or community property assets. State laws may vary, but these assets:

  • Are usually those that you acquired while you were married, like your home, investment accounts or retirement plans
  • Usually don't include assets that you brought into the marriage, those acquired by gift or inheritance, those held in irrevocable trusts for your benefit, or assets that were identified as nonmarital or separate property in your prenup

Work closely with your attorney to determine the assets that fall into each category. 

Some assets become more complex in a divorce. For instance:

  • Retirement plans can be divided only according to the terms of each plan.
  • Stock options, restricted stock and other forms of deferred compensation should be considered in the total value of your combined assets.

But, if the nonemployee spouse will not be eligible to receive them; other assets may need to be shifted to balance the employee owned benefits.

 

Supporting children

The amount and length of time for child support payments will be specific to your divorce agreement, as finalized by the court. Often, it will last until the child reaches age 18, and may or may not require that college funding be available as well. Child support is not taxable income if you receive it, nor is it deductible if you pay it. 

Your fresh-start budget

 

Potential income (cash inflow)

• Alimony you're receiving

• Child support you're receiving

• Income from investment assets – both your own assets and those received in
the property settlement

• Trust distributions

• Salary

• Distributions from family investments

• Gifts you will receive    

Potential expenses (cash outflow)

• Alimony you're paying

• Child support you're paying

• Education costs

• Insurance—health, disability, property and liability

• Moving and additional housing costs

• Legal fees for the divorce and updating various legal documents

• Accounting fees for tax planning and return preparation    

Things to consider

Think about which assets you’ll need to negotiate as part of the property settlement.

  • Real estate
    • What will it cost to maintain the property?
    • Will you be able to cover those expenses yourself after the divorce?
  • Loans
    • Do some of the assets have loans against them?
    • Can you afford the monthly payments?
  • Tax implications
    • Will any of the assets result in income tax from their use or sale at a later date?
    • Will any result in capital gains tax?    

 

Surplus or shortfall?

Once you look at your budget, you'll know if you can expect to have additional funds to invest (a cash flow surplus) or if you'll have a shortfall and need to reduce spending or withdraw from investments periodically. In either case, this is an opportunity to speak with us about asset allocation to help meet your new needs.

Next steps

Check with your employer's human resources department to determine if you need to update any of your benefits. Divorce is considered a "life event" so you can make changes during the year instead of waiting until the annual enrollment period. Here are some other considerations:

 

Insurance

• Make sure you won't have a gap in health insurance coverage.

• If you were on your former spouse's plan, check to see if you can continue on it (COBRA coverage).

• If not, find another health insurance solution before the coverage ends.

• Determine whether you should purchase or maintain life insurance policies and carry disability insurance.

Estate plan documents

• Update your will and other estate planning documents.

• The structure of your plan as a single person may be very different.

• Update your property and health care powers of attorney, especially if they give your former spouse authority to make decisions on your behalf.

Beneficiary designations

• If you have life insurance or retirement plans, you may need to update the beneficiary designations if they currently name your former spouse.

• Work with your attorney to coordinate these with your estate plan.

Income taxes

• Tax return filings can be complicated for the year of divorce.

• If you are still married on December 31, you'll need to determine whether you'll file a joint return with your spouse or if you will file as "married filing separately." Discuss this with your tax and legal advisors. 

• If your divorce is or will be final by December 31, work with your tax advisor to prepare a projection of the current year's tax liability. This should reflect your new filing status (single or head of household) and new sources of income and deductions. If employed, update withholding elections.

Mortgages and other loans

• Make sure you understand the terms of any debt you're assuming before the divorce settlement is complete.

• Ensure that loans are properly titled and assets securing the loans are properly reflected. Notify lenders in advance.

Banking and credit cards

• Notify your bank and credit card issuers of the divorce.

• Confirm that your former spouse no longer has signing authority or the ability to use your credit cards.

• If you haven't had credit cards in your own name in the past, consider obtaining one to begin establishing a credit history for yourself.

• Request copies of your credit report and credit score to make sure they're accurate.

Passwords and privacy

For security reasons, change all of the passwords and personal identification numbers (PINs) for bank, investment, retirement, medical and other accounts.

These are just some of the financial factors that you should consider. Talk with us as well as your legal and tax advisors as early as possible. This will help you make better decisions and improve your long-term financial security as you go through a divorce.

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