Money and divorce: Separating finances after a split

One of the many challenges of divorce is dividing assets with your former spouse. But, with proper planning, you can take charge of your financial future.

Tags: Assets, Insurance, Life events, Planning, Taxes
Published: April 05, 2018

Divorce involves many loose ends, both emotional and financial. While it can feel overwhelming, a focus on practical solutions to your financial separation can put you on track to successfully transition to your new life.

If you are considering or going through a divorce, you need to determine how assets and liabilities will be divided between you and your former spouse. Keep in mind that laws can vary by state.
 

If one spouse is the primary income earner

Spousal maintenance payments — Formerly known as alimony, spousal maintenance payments are arranged when one spouse is non-earning or makes substantially less money than the other.

Child support If there are minor children who will be cared for primarily by one spouse, the other spouse may need to contribute child support payments on a regular basis. If one spouse carries health insurance for the children, premiums and deductibles for doctor visits may need to be contributed as well.
 

How to divide your primary residence

Staying in your current home — If you have a desire to stay in your current home, you may need to allow your spouse to keep a larger share of another asset to create an equitable distribution.

Costs related to your current home — Keep in mind that your current home may require significant investments in maintenance and upkeep that could make it expensive to retain. Determine how previously planned improvements or repairs will be paid for and keep a record of items paid for by jointly owned assets.

Selling your current home — If the house is included in one spouse’s portion of the settlement, calculate projected realtor’s costs for eventually selling the house and subtract half from the equity portion paid to the spouse who does not retain ownership of the house.
 

How to divide your retirement plans

Equitable distribution of retirement assets — Retirement savings are typically split on an equal basis, although not in all cases. Funds saved before marriage might be considered separate property. An equal distribution is particularly important for those divorcing at age 50 or older, where retirement plan savings may represent a significant percentage of a couple’s combined wealth.

A qualified domestic relations order QDROs arrange the transfer of part of the assets in a workplace plan or IRA to an ex-spouse’s retirement account. The transfer can be made directly from one account to another to avoid a 20 percent withholding tax on the transaction. The person receiving retirement assets in this manner has a one-time opportunity to withdraw any amount of this money without a 10 percent early withdrawal penalty.
 

Social Security benefits

Spousal benefits — When retirement age is reached, you can claim spousal Social Security benefits based on the earnings an ex-spouse, provided that you were married for at least 10 years. This is allowed as long as the benefit you are entitled to is larger than the benefit you would receive on your own work record and that you have been divorced for at least two years and remain unmarried.

Calculating benefits — The spousal benefit will equal one-half of the benefit of the ex-spouse if both have reached full retirement age (full retirement age ranges from 65 to 67, depending on date of birth.) If you start receiving benefits prior to full retirement age, your benefits will be reduced. Review all options to maximize your Social Security benefits.
 

Tax considerations

Filing status — Divorced couples will no longer be able to claim the tax status of “married, filing jointly,” effective in the year in which the divorce is final, as recognized by the laws of your state. You’ll need to choose whether to file as a single person or, if you qualify, as a “head of household.” Each can have tax benefits, depending on your situation.

Mortgage and property taxes — A determination must be made on how to handle mortgage and property tax deductions in the year of the divorce — will it be split or will one spouse claim the deduction and compensate the other spouse for it? Certain assets, when liquidated, may also be subject to tax. As decisions are made about how to equitably divide assets, be sure to consider their after-tax value.

Maintenance payments — Currently and historically, the person making maintenance payments can deduct that amount on his or her tax return. The person receiving the payments will need to claim it as income. However, effective for divorces in 2019, the deductibility and taxation of maintenance payments will be eliminated.

Child support payments — These payments are not subject to income tax for the recipient or considered deductible by the person making the payment, but a child tax credit and exemption can be claimed on a tax return. Generally, the person who retains custody has the right to those claims, but the right can be transferred to the noncustodial parent.
 

A divorce financial checklist

Divorces can be overwhelming. Consider using a financial checklist to be sure you’ve covered your bases.

  •     Whether one spouse will remain in the current residence or if it will be sold as part of the divorce arrangement.
  •     How current loans (including mortgages, automobile and student loans and credit card debt) will be managed.
  •     The division of savings and investments, including savings and checking accounts, brokerage accounts, IRAs, annuities and workplace retirement plans.
  •     Distribution of other assets, such as household possessions, valuables and even frequent flier miles.
  •     Handling of insurance policies, including life insurance, health insurance, property and casualty insurance, and long-term care coverage.
  •     Review titling and beneficiary designations.
  •     Ongoing income to support a nonworking (or lower-earning) spouse.
  •     If there are minor children, ongoing financial support to meet their needs.
  •     Continued funding for key financial goals, such as education and retirement.
     

Available professional advice

A divorce mediator or attorney experienced in handling divorce matters is important, but you should also consider working with a financial professional to help assess your current and future financial situation — as well as to review the financial checklist for divorce.

 

Contact a wealth advisor to learn more about managing the assets of a divorce.