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.

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

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:

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.