10 Financial Considerations When Filing for Divorce
If you are currently going through, or considering, a divorce this blog post is for you. Use it as a checklist to discuss with your divorce lawyer and/or financial planner.
- When dividing up your investments, keep in mind that not all investments are alike. Always value assets "after-tax".
For example, $100,000 in an IRA is not worth as much as $100,000 cash. The IRA has limits such as you may not take money from an IRA until age 59 1/2 without paying a 10% penalty, and you must begin taking money out by age 70 1/2. Also, when you do take money from the IRA it's going to be taxed at your ordinary income tax rate at that time. For someone in the 25% tax bracket that means your $100,000 is worth only $75,000!
If you get the house as part of the settlement and take over the mortgage you get the tax deduction, but you also get all the expenses. Make sure you can afford to cover not only the mortgage but also the upkeep and taxes on the property. If you decide to eventually sell it, you're the one stuck with all the costs associated with doing so. Getting the house is an asset, but it's an asset that has long-term financial implications.
Also, the assets (mutual funds and stock) held in a taxable account will have tax-consequences when you go to sell those assets. For that reason it's important to be aware of the cost basis for those assets. If the investment appreciated in value since you originally purchased it, you'll have to pay capital gains tax when you sell it.
- There are more Social Security benefit options if you've been married for 10+ years.
If you've been married for almost 10 years, it may behoove you to wait until after your 10 year wedding anniversary before you sign the divorce papers. That's because people who have been married at least 10 years are eligible for spousal benefits, which are based on their spouse's work history. Although you still get spousal benefits if your "ex" remarries, you aren't eligible for them if you eventually remarry. There are other restrictions, which can be found at the Social Security website. www.ssa.gov
- Now is a good time to review all your current insurance policies with an insurance professional.
With all the changes in your life, you want to make sure you're adequately insured for life's unexpected turns. This includes life, auto, home, disability, long-term care, and umbrella insurance.
Review the beneficiaries listed on the various policies to make sure they're up to date.
If you're expecting alimony or child support as part of your settlement, is there a life/disability insurance policy in place to cover those future payments should your "ex" die or become disabled and unable to work? Make sure you own the policy (and not your "ex") to ensure your "ex" can't remove you as the beneficiary down the road and name someone else.
If you're the one paying child support, you may want to consider getting insurance on your "ex", too. If they are no longer available to help in the care of the children it probably means that you'll have to hire someone to help you. Could you afford to do so?
- Don't forget to update your Estate Plan!
If you created an estate plan as a couple, it's important to go out and get a new plan as a single person. After all, do you really want your "ex" to be the trustee of your will or have durable power of attorney over health care decisions? Also, the structure of your Estate Plan may have worked when you were part of a couple, but there may be better options once you're single.
- Address your child's college education funding during the settlement.
If you plan on contributing to your child's college education, it's best to determine who/how it will be funded before the divorce is final. It would be ideal to have the money set aside in an account for the sole purpose of funding college. Since this won't be an option for most people, at least state clearly in the settlement who will be responsible for how much and for how long. You want to avoid having one person verbally agreeing to foot some/all of the college bill, but not following through.
- Get a credit card in your name only before you divorce, if you don't already have one.
If you aren't currently working it may be difficult to get a credit card once you divorce. Apply for a couple now, charge something, and immediately pay it off in full. This will be the beginning of your credit history.
While you're at it, set up a bank account in your own name, too.
- You will now have some new tax issues that you should be aware of.
Decide in the settlement who gets to claim the kids as dependents on their tax filings. If you have an even number of kids it's easy to divide them up. If you have an odd number you may want to claim the "odd" child in alternate years.
Remember that while child support paid/received has no tax consequences, alimony does. If you're paying alimony it's tax deductible, whereas the person who receives alimony must report it as income.
- Time for a medical checkup and teeth cleaning!
If you're currently covered under your spouse's work health plan, you won't be eligible after you're divorced. (You may have the option to pay for your insurance up to a year, thanks to COBRA.) Go get everything checked out while you're still covered.
Speaking of health insurance, decide in the settlement who will be responsible for the kids' medical, dental, orthodontic, and vision care, as well as any other special needs your children may have.
- Update the beneficiaries on your retirement accounts.
These days, a lot of our investments are tied up in retirement accounts (IRAs, 401ks, etc.). On these types of accounts it's normal to have your spouse listed as your beneficiary. In fact, if you don't want them listed then they usually have to sign something saying they're okay with that. However, once you're divorced they won't automatically be removed as your beneficiary--it's up to you to notify the plan sponsors/custodians who you want your new beneficiary to be.
- Rebalance your investment portfolio.
Now that you've divvied up all your assets and you have your own investment portfolio, it's important to rebalance it to be a well-diversified portfolio which reflects your risk tolerance as a single person. You also want to make sure that the asset location of your accounts make your portfolio as tax-efficient as possible. A qualified investment advisor (me!) can help you with this.