By Jessica Searcy Kmetty
Experiencing a divorce is rarely something couples expect to face. When I was first married at age 19, I had visions of what it would be like to celebrate my 50th anniversary. I pictured a large party with our friends and family, cakes and grandkids and maybe even great grandkids. I remember sighing a breath of relief at our 8th anniversary because we had made it through the infamous “seven-year itch” with three small children.
But alas, there are two people in every relationship, and despite all efforts, my marriage fell apart and we divorced after 18 years, splitting up assets and spending thousands of dollars in attorney’s fees in the process.
While divorce overall has been steadily decreasing, it’s still common in the U.S. In fact, among those 50 and older, the divorce rate has doubled since 1990, and tripled for those over 65.
Your financial situation can be one of the most important elements to understand as you navigate a divorce.
One often-overlooked aspect of divorce is the decrease in income all parties suffer. On average, men typically see a 25% decrease in income following a divorce, while women can experience a decrease of over 40%. It is no surprise that women often experience greater financial hardships following a divorce than men.
Additionally, those who go through a “grey divorce,” splitting up after age 50, are nearly 9 times as likely to have financial challenges at age 63 than their continuously married peers.
Divorce can be expensive. Not only do you need to afford your new lifestyle without your spouse, but you also need to pay for the divorce process itself. In fact, the average cost of a divorce is $15,000 for each person, which includes court fees, attorney fees, and taxes, among other expenses.
Furthermore, people typically need their income to increase by about 30% after a divorce in order to support their standard of living. For people divorcing after the age of 50, the change can be even more dramatic, with wealth often decreasing by 50%.
From splitting up bank accounts to identifying your net worth, how well you manage your money plays an important role in setting up your new life stage. Here are some ways to help you address money issues during a divorce.
Identify Ownership – You should start the divorce process by listing out which assets are considered marital property, and which are separate property. These details come back into play when you are addressing your money. You will need to clearly know what you own versus what you share, and from there, you can divide them up accordingly.
Create Your Own Net Worth Statement – By knowing what assets you own personally and jointly you will begin to create a picture of your financial worth. You will need to capture these details in a net worth statement that subtracts your liabilities from your assets. Keep in mind that this statement reflects where you are in your financial life today, not tomorrow. So, as you unwind your finances, focus on actions that move you forward with a stable foundation.
Separate Your Finances – Next you will need to go through the process of separating your money. Remember, assets that you had before your marriage remain yours after a divorce, which includes anything you may have purchased with an inheritance. Here are some key finances to address and separate from your spouse:
- Bank accounts
- Credit cards & loans
Social Security – Divorcees are often able to receive Social Security benefits from a former spouse under certain conditions. You must meet the following criteria:
- Have been married for at least 10 years
- Be currently unmarried
- Be at least 62 years old
- Have a former spouse who is able to claim Social Security or disability benefits
- Have personal Social Security benefits available to you that are less than what you would receive from your former spouse
These benefits apply even if your former spouse remarried. Additional conditions can affect these benefits, so consult with your professional advisor on your specific financial situation.
Retirement Accounts – These accounts often hold a significant portion of people’s assets, especially if they have been accruing for years. When divorcing, it’s critical to negotiate how you will split these accounts. Your choices largely depend on the state you live in, so make sure to work with your financial professional and legal counsel before making any moves. From defined-benefit plans to pensions, separating retirement savings in a fair manner can be complex. With thoughtful consideration however, it’s possible to soundly address them and minimize complexity.
As you move to divide retirement accounts, here are some details to keep in mind:
- Taxes – How will taxes affect your retirement accounts either now or in the future? Do you need to roll money into something like an IRA?
- Prenuptial Agreements – Do you have a prenup in place that defines how you must handle your retirement assets?
- Financial Stability – If your retirement account is being split or transferred, how will this change affect you financially? On the flip side, if you’re receiving these funds in a divorce settlement, how well do they support your retirement? And do you have gaps that need to be filled?
- Current Living Needs – Do you have enough money to cover daily living expenses? If not, will you need to access money from a retirement account to help you?
Taxes – Taxes will almost certainly play a role in your finances during the divorce process. From splitting investment accounts to managing alimony, paying attention to how taxes may affect you will help maximize your divorce settlement outcomes. Tax rules are constantly changing, and there is no guarantee that tax treatment will remain unchanged in the years ahead. A legal professional may be able to address your specific tax questions but here are some key areas to include in your strategizing:
- Filing joint tax returns is still required if you aren’t divorced by 12/31 since the IRS will still view you as married
- Due to a tax law change in 2019, alimony paid to an ex-spouse is no longer tax-deductible, and those who receive alimony will no longer pay taxes on it. Legal fees paid to an attorney due to alimony arrangements may also not be tax-deductible anymore. If any of these items were listed in a pre- and/or post-nuptial agreement, they may be nullified as a result of these tax changes.
- If you have children when you divorce, then child support is likely a part of your settlement. For the person paying support, it’s important to note that these payments are not tax deductible, nor is the received support income. Also, no one pays taxes on child support money. These standards apply to divorces after December 31, 2018.
- If you have children who live with you for the majority of the year, then you may be able to claim the Child Tax Credit, worth a $2,000 deduction per child. For other dependents over 16 years old, you can claim up to $500 per child. Parents who don’t have custody can only claim this credit if the other parent signs a waiver allowing them to do so.
- Property that transfers during a divorce isn’t taxable during the settlement. However, capital gains taxes may apply later if you sell the property. Since the tax basis shifts during the divorce settlement, you may need to pay tax on the value it accrued before and after the divorce.
- Your estate includes more than your retirement account. It also includes your home, car, art, and antiques. Essentially, everything you own factors into your estate. Protect your assets by going over your estate strategy with a fine-toothed comb with the aid of your financial professional and attorney.
Insurance – Your insurance policies also need to be reviewed during the divorce process. From removing your spouse from accounts to revising your policies, pay close attention to insurance during the divorce process. Also make sure to review and update your beneficiaries after your divorce is finalized. Connect with your insurance professional to make sure that all your policies have been updated.
Estate Planning – You’ll want to make sure to do a thorough review of your estate planning to make sure that you have the right people designated to make decisions on your behalf, and the right beneficiaries named for inheritances. Probate is an expensive process so you should avoid naming your estate as a beneficiary. Furthermore, designating minor children as beneficiaries is complicated, so your best option may be to setup a trust for the care and maintenance of your minor children.
Going through a divorce is rarely a simple or inexpensive process. You can help protect yourself and make the most of your opportunities by working closely with a financial advisor and other divorce professionals. It may help decrease complexity, remove uncertainty, and improve fairness to all parties involved.
Whether you are preparing for a separation or divorce, have recently gone through one, or are considering getting married and want to “expect the best but prepare for the worst”, we’re here to help.
ThinkAdvisor.com, February 11, 2020, http://Investopedia.com, March 30, 2020, AARP.com, February 14, 2020, TheStreet.com, April 3, 2020, SSA.gov, 2020, Money.com, April 15, 2020, USAToday.com, February 10, 2020, IRS.gov, January 3, 2020, Kiplinger.com, March 6, 2020, Investopedia.com, August 18, 2020, Kiplinger.com, May 19, 2020
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Published for the blog on February 4, 2021 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.