How to Prevent Divorce from Ruining Your Financial Life
BY JENNIFER LEIGHTON
There are many aspects to a divorce. There’s the legal aspect – and it is huge. The divorce laws in California are voluminous, complex, and often murky. There’s the financial aspect – and that is overwhelming as well. Many of us who’ve gone through divorce are all too familiar with the uncertainty of what our finances will look like post-divorce. And, of course, there’s the emotional aspect – which permeates every other part of the process.
A good family law attorney will be able to guide you through the legal side of your case. And an experienced therapist or counselor can help you to deal with the emotional pieces. In a similar way, financial professionals are available to assist you with the financial effects of divorce. Divorce doesn’t have to mean financial devastation! Here are some tips to keep in mind as you work on the financial aspect of your divorce.
Be Realistic About Income and Expenses. It is a rare couple who will not feel the financial effects of a divorce. In almost all cases, there is at least some sort of necessary lifestyle adjustment. It’s the natural result of separating one household into two. And the days of depending on support payments to carry you through the rest of your life – especially if you are on the younger side – are all but gone.
If you divorce in California, your attorney will have you fill out a form known as an “Income and Expense Declaration.” This form shows everything you earn and everything you spend. While you don’t want to underestimate the dollar amount you will need to meet your living expenses post-divorce, you also don’t want to be unreasonable. This form is also valuable to help you create a new budget as you move forward.
Be Mindful of Taxes. The recent Tax Reform Act created some significant changes regarding spousal support payments. For couples whose divorce is finalized after January 1, 2019, spousal support payments will no longer be tax deductible for the payor nor included in the taxable income of the payee. While the short and long-term consequences of this provision have yet to be determined, it is highly likely the amount of spousal support payments will decrease.
Don’t forget your filing status will also change after a divorce. You may file as “Married Filing Jointly” so long as you were still legally married as of December 31st of the year for which you are filing. It is important to keep your future filing status in mind while you are negotiating the terms of your divorce. If you have the ability to file as “Head of Household,” you will see a greater tax benefit than simply filing as “Single.”
Don’t Forget Insurance. It is crucial that the spouse who receives support payments have a life insurance policy on the spouse who pays them. In addition, the payee spouse should be the owner of the policy, the beneficiary, and the one who pays the premiums. Don’t rely on your spouse’s life insurance through his or her employment! In many cases, those policies will not provide enough coverage and you will never have 100% control over your name being taken off as the beneficiary.
If you’ve relied on your spouse for health insurance, make sure to account for increased costs once you are on your own in your new budget. It is also a good idea to at least investigate the possibility of buying long term care insurance. Women, especially, have a likelihood of needing care toward the end of our lives.
Protect Your Retirement Assets. We often think of our retirement accounts as “yours” and “mine,” especially since accounts such as IRAs and 401(k)s are held in an individual’s name. However, retirement assets accrued during the marriage are considered community property. Without getting too complex, the general rule is that gains or returns on separate property investments are likely also community property. And these assets may be one of the largest of your marital estate.
All too often, one spouse will fight to keep the house and “make up the difference” by walking away from their interest in the retirement accounts. Unless you have a very large marital estate – or would be able to meet all of the expenses of the home without your former spouse’s help – this is usually a bad idea and can have severe consequences on your financial future. Think carefully before you forgo retirement assets and utilize a financial planner to analyze the true cost of making such a decision.
While there is no “ideal divorce,” your ideal goal should be to have your family law attorney, your CPA, and a financial advisor experienced with divorce cases work together to guide you through this time. Employing the right team of professionals can help to smooth out your transition period and prevent your divorce from being any more of a financial stress than it needs to be.