By Bill Schretter, CFP® | February 5th, 2020
When you were getting married, you did not plan on getting divorced. You wanted the relationship to last, but now you are worried that it won’t. Before you begin the divorce process, you could seek marital counseling, both as individuals and as a couple.
Often, employer assistance programs (EAPs) offer free counseling sessions, or you may be able to access counseling through your religious affiliation. Unless the issue is abuse, addiction or other dangerous behavior, counseling can go a long way in saving a marriage. It is important to know the root source of the issues and verify that your differences are truly irreconcilable.
If you ultimately decide to seek a divorce, the following financial planning tips can help you achieve a reasonable financial settlement to establish a strong foundation for your new life:
- First, talk to a CFP® professional about your finances. It is important to run a simulation so that you fully understand your financial situation before you begin the divorce process. Review your credit report to assess your current financial situation and identify future concerns. If possible, try to also access your spouse’s credit report and IRS tax transcript to be aware of their financial situation, too. In preparing for the transition, consider that as a spouse with low or no income, your credit score will adversely change from when you were married.
- Speak to an attorney to understand the divorce process and potential associated costs. Your state will require a period of separation before a divorce can be finalized. Separation becomes especially complicated if minor children or large debts are involved. The divorce process is easier and less expensive if it is amicable—a mutual decision by both parties.
- Negotiating a financial settlement will begin with the common law property rights, which split everything 50/50. Unless you can prove that the property was yours before the marriage or is from an inheritance, you must mutually agree on settlement terms. You always have the personal right to fund a separate account using savings from a Joint Tenants With Right of Survivorship (JTWROS) account. It is recommended to maintain a few thousand dollars, or three to six months of savings, because you may need funds to rent an apartment or travel after your separation. This savings will need to be disclosed to the court and will be considered part of the financial settlement. Further, most attorneys require a deposit for their services before they begin to file the divorce paperwork with the local probate court. It is important to keep statements to prove balances and equitable share.
- Under the threat of perjury, the courts require a complete financial and credit disclosure during the divorce process, so you will need to produce an accurate financial statement that lists all marital assets and liabilities. Once the divorce process begins, no funds may be separated or repositioned without the other party’s consent. A failure to report honestly can impact your ability to secure child custody and visitation rights. You also would become financially responsible for all court costs associated with redrafting documents and for making the other party financially whole.
- Make sure that both of you continue to pay the bills. As a married couple, you both share in the responsibility of paying off marital debts. Do not make the credit issues worse by avoiding bill payments during the divorce process. Do not assume that you can separate your finances by getting all the assets while your spouse gets all the debt, even if he or she is the “cause” of the divorce. Additionally, make sure income taxes have been properly paid. You are always liable for joint filings, unless you secure innocent spouse release—a provision that can be included in the divorce settlement. To help avoid disputes or IRS involvement, make sure the divorce settlement includes clear provisions for who gets any tax credits associated with the marriage or children.
- Throughout the divorce process and after, do not defame your spouse on social media or share bitter comments with family, friends and especially minor children. Such rancor can cause problems in later court hearings and custody agreements. Keep the communications civil.
- Your pension and IRA accounts will be split evenly—regardless of who contributed money to the account—unless you settle on other terms. Do not buy your right to keep the full IRA or pension account from your partner. Too often, individuals pay $50,000 in cash to buy a $50,000 IRA balance, failing to consider the impact of taxes and market volatility on value. One partner might also offer cash from other sources to buy out his or her partner’s rights to home ownership. However, this leaves the purchaser with very little emergency funds or personal flexibility. A home is expensive to maintain and may take a long time to sell. If minor children are involved, it may be preferable to keep the same home, and stay in the same school system, by mutually maintaining ownership in the home until a specific date before selling and splitting any profits. Alternatively, it is recommended that both partners opt to sell the home now and relocate to less expensive accommodations.
- The divorce settlement papers, or dissolution of marriage, will detail how assets are to be split and must be given to all financial firms where you hold accounts. A QDRO (Qualified Domestic Relations Order) will also need to be provided to all firms where you have ERISA accounts. Both documents need to explain how the assets are to be split.
- Debt is not truly divided between the parties. The creditor offered the loan to both of you, so, when you get divorced, they have the right to request payment in full. Therefore, through the divorce settlement process, you are offering new payment terms to the creditor. They may accept the new payment terms, but they usually reserve the right to collect from the other spouse in case of default. So, in the process of the divorce, you must list all debts of the marriage and fairly separate them between partners. Include in the divorce settlement a requirement to secure new loans to pay off the marital debt.
- If it is an amicable divorce, I recommend including the responsibility of both parties to provide life insurance and require an IRA and 401(k) irrevocable beneficiary designation to benefit the children in case of premature death. Additionally, in calculating child support, seek to include a provision to annually fund a 529 Education Savings Plan. If, as a married couple, you planned on helping to pay for college, you need to include provisions to maintain that mutual commitment to your children.
- In calculating alimony, it is important to realize that the initial agreement is very difficult to change. You can seek to include conditional provisions that limit the amount or duration of alimony payments to certain requirements, such as maintaining employment or sobriety.
Following these strategies will help you evaluate your current plan and prepare for a settlement to establish a strong financial foundation for life after your divorce. Find a CFP® professional today to learn more.