Finding Your Financial Footing After Divorce

 

Divorce marks a complicated time of life. In one day, you can feel relief, sadness and anger. It’s emotionally complex. Unfortunately, it’s also financially complex. Divorce requires a thorough recalibrating of your finances.

 

In this article, we’ll cover some of the best practices and things to know from a financial and tax planning perspective. This is not legal, tax or financial advice; rather it’s a way to organize all there is to discuss with your Wealth Advisor, tax advisor and lawyer. Additionally, this article will not touch upon strategies for any of the contested aspects of the divorce process. For those, please consult with your legal counsel on your specific situation. 

The Basics

With a divorce, you typically go from one household, where all assets are legally shared to two households, with legally separate assets. Untangling who gets what can be emotionally fraught—but there are several basics everyone should do.

 

Catalog Your Assets. Until each of you have a thorough inventory of everything you jointly owned, you can’t possibly divide them up fairly. Resist the urge to hide assets. This will not endear you to the judge of your case and may end up backfiring. This process may require appraisals of homes and valuable collectibles, as well as a clear-eyed perspective on each partner’s current and future likely earnings.

 

Update Your Beneficiaries. Lawyers see it all the time. Someone who was divorced for years forgot to update their beneficiary designations on a major asset, like their brokerage account. Upon their passing, their ex-spouse receives the asset, even if the deceased has remarried. On any financial asset, we recommend you review your beneficiary designation every few years; during the divorce process, you should review and update them all. 

 

Joint Accounts. You likely had joint bank and investment accounts with your ex. Eventually, your joint accounts will be closed. As part of the divorce process, you’ll need to create your own, separate accounts. Be transparent as you open new accounts and transfer money in. Work with your lawyer and Wealth Advisor throughout the process, so that it’s done properly.

 

Update Your Financial Plan. With a new marital status comes a new financial life. With one less person involved in your vision, it pays to sit down with your Wealth Advisor and map out your new strategy—and your new budget. Even if your personal financial goals are unchanged, your assets and income will have shifted. How do you account for that? How do you pursue the lifestyle you want? Your Wealth Advisor can help you get started.

Dividing Assets

While dividing assets may seem simple, it’s often not. Let’s review some situations where you may encounter some snags.

 

The House You’d Shared. If you and your ex-spouse own the property outright, but one of you wants to remain in the home, the person who stays will likely need to buy out the other spouse. Depending on the other assets you have, this could become problematic.

 

If you and your spouse have a mortgage on the home, and you need to keep a mortgage on the home to continue owning it, but the home is in both your names, one of you would need to buy out the other and refinance the home. If mortgage rates are higher than when you took out your previous mortgage, this could increase your monthly expenses, as well as require you to use a portion of your other assets for the buyout.

 

Additionally, especially if your ex was the person who had the larger income, you may have trouble qualifying for a mortgage on your own. While alimony payments may be considered as income, many mortgage underwriters prefer to see a history of alimony payments for at least 6 months, if not longer, before they factor it into your ability to take on the loan. Work with your Wealth Advisor on your options. 

 

Lastly, if neither of you want to stay in the home, you’ll likely want to sell it and split the proceeds. Before you put it on the market, get an accurate assessment of what you expect the sale price to be—and create some ground rules with your ex, should you fail to achieve an acceptable price.

 

Vacation Homes. In some cases, it’s clear who wants or gets the vacation property. In other cases, it’s not. Regardless, if you’re not selling it and splitting the proceeds, likely one party will need to buy out the other.  And the value may be less obvious than it seems: if the home was rented out much of the season, it may generate income. Work with your lawyer, accountant and Wealth Advisor if this situation applies to you.

 

Major Collectibles. Anything from automobiles to watches to the contents of wine cellars can have significant financial value. How is this assessed and how is it factored into the division of assets? If something needs to be sold, how do you do so at a price that each party deems fair? Work with an expert on the specific collectible, as well as your lawyer and Wealth Advisor.

 

Brokerage Accounts. When you divide up brokerage accounts, there are tax considerations. What would the capital gains taxes be on various equities? Are they short-term gains or long-term gains? And how does that affect their value when dividing up assets? If one of you makes significantly more money, the high earner may end up paying more in taxes on the same asset than the low earner would pay. That difference could be substantial and may affect how each of you plan on splitting your total assets. Your investment advisor, Wealth Advisor and tax professional can help you assess your portfolio.

 

Retirement Plans. While retirement plans are held in one person’s name, typically any funds accumulated during the marriage are considered joint property.

 

To divide an account, you obtain a Qualified Domestic Relations Order (QDRO) from the court that outlines your share of the assets. You would then use that order to rollover your portion of the retirement account into your own dedicated account. Because retirement accounts grow tax-free, you should not experience any taxation during the dividing of these assets, provided you roll them over properly.

 

If your spouse has a pension that’s considered joint property, you also may use a QDRO to ultimately receive a portion of the monthly retirement benefits.

Additional Tax Considerations

Cash. Any payment from one party to the other that’s made from savings, checking, or other cash-equivalent accounts that is part of dividing assets as part of the divorce proceedings can be transferred without triggering a gift tax.

 

Child Support and Alimony. For divorces prior to 2019, alimony payments are taxable income for the recipient, and the payer can deduct them from their income. Since 2019, alimony payments are not considered taxable income for the recipient and cannot be deducted from income by the payer. Child support payments are not taxable income and cannot be deducted from income by the payer.

 

How You File. You’ll now need to file as a single taxpayer. If you have dependents, you’ll also want to coordinate who claims head of household status, as well as who files for various possible credits related to your children. Typically, this is the filer who has primary custody. However, in joint custody situations the status may be unclear. There are even cases where the custodial parent alternates by tax year, as per a court order. Work with your lawyer and tax preparer on how you’ll handle your situation. 

 

Update Your Status with Employer. You’re required by law to update your marital status via a W-4 within 10 days of your divorce. As you build your budget and consider your new income as a single filer, you may also want to adjust your voluntary withholdings to properly reflect your new situation.

Social Security

While this may be a long way off, depending on your stage of life, you may be eligible to file for spousal Social Security benefits from your ex, provided you were married at least 10 years, divorced at least 2 years, and not married when you file. Doing so may be particularly relevant if you were married a long time and had significantly lower earnings than your spouse—whether because you chose to stay home with the children, your job paid less, or a combination of the two. In such a scenario, filing for spousal benefits may net you a larger monthly benefit amount than if you filed on your own income.

Your Wealth Advisor Can Help

Major life moments—good and bad—are when your Wealth Advisor should serve as one of your most trusted advisors. With their years of experience, they can offer solid advice tailored to your needs. During a divorce, in particular, you want someone who can provide level-headed financial insights while also showing compassion for the transition you’re going through. If you’re ready to work with a Wealth Advisor ready to serve you, please just reach out.