The end of a marriage is also the beginning of a new financial life. Reconsidering your financial arrangements, whether or not your income will be reduced, should be a priority as you adjust to your new circumstances. Some of the major issues that may require your attention are discussed below. Divorce can be a complicated and challenging process in which details are easily overlooked. Protecting your financial health during this time is crucial, and no one should enter this process without a trusted divorce attorney on his or her side. Equally important is knowing the laws that shape divorce proceedings and the impact they can have on your assets.
Adjusting retirement plans: Your financial future may look very different without your spouse. You may be able to improve your retirement outlook by taking advantage of additional current contributions to your 401(k) or other retirement savings account. Money in either spouse's 401(k) or pension plan may legally be divided during a divorce. To claim a share of a spouse's 401(k) or pension plan benefit, you need to obtain a court order called a Qualified Domestic Relations Order (QDRO). To avoid tax liabilities on any 401(k) assets you may receive, arrange to have them rolled over directly into an IRA. You should discuss this with your attorney who is familiar with divorce proceedings as soon as you anticipate a divorce.
Social Security: If you were married for 10 years or more, it may be advantageous to collect on your ex-spouse's social security benefit once you are at least 62 years old and meet the law's conditions. It is a good idea to call the Social Security Administration to inquire about any benefits you can expect to receive.
Your new marital status may mean a shift in your investment goals and, therefore, in your investment strategy. Your present assets may be more or less risky than you want in the future. You should also examine your new living costs to make sure your arrangements are realistic for your income and needs, and to decide how much and how often to invest for the future.
Dividing the Assets
As a rule, assets and property acquired during a marriage are divided when spouses divorce. While there may be exceptions for individual inheritances, gifts to an individual spouse, and assets or property acquired before marriage, the big difference among states is what formula might be followed for the division. The state laws on this generally fall into one of two categories.
Common law property states are those where the judge may consider a wide range of circumstances before ordering a division. Among the factors are each spouse's earning ability, the length of the marriage, and how much each spouse contributed to building household assets. Most states follow the common law principle.
Community property states are those in which assets and property acquired during the marriage are divided more or less equally.
Don't try to hide assets from the court, either by neglecting to mention them or transferring them after the proceedings have begun. This can trigger penalties and additional court actions.
After a divorce or separation, a general review of all your financial documents is advisable. Be sure to examine the following:
Life insurance. The change in your marital status most likely will require a reevaluation of your life insurance
Credit records. It is important to separate your credit history from your spouse's history so that future reports will be based only on your own credit use. That will involve notifying credit bureaus of your divorce and removing your spouse's name from any joint credit accounts.
Dealing with Debt
Divorce does not eliminate debt; it divides it between the two spouses. But as with assets, practices differ.
In a common law property state, each divorcing partner generally gets responsibility for the debts he or she incurred in individual accounts. Debt in joint accounts -- or debt attached to jointly-owned property -- is generally divided in the same way as the marital assets.
In a community property state, debt -- like your assets -- is typically split down the middle, without regard to whether the debt had belonged to a joint account or to an individual account held by either spouse.
One important trap to avoid is maintaining joint accounts after the divorce. Your spouse could continue running up expenses and leave you with the debt. As soon as the divorce is finalized, freeze all joint accounts and have your creditors reclassify them as individual accounts. Most creditors will do this at your request, though they are not legally required to do so. To protect your credit rating, make sure to keep up with monthly payments.
If you and your spouse own a home that has appreciated in value, you may want to sell it before the divorce is finalized. Federal tax rules offer a healthy exclusion in realized capital gains for married taxpayers.
This amount is cut in half for single filers. Be sure to consult a tax advisor for additional information about these rules.
If you find yourself faced with divorce, it is essential to protect your financial future. Enlisting the help of an attorney who is familiar with your state’s estate laws is crucial. If your spouse is your heir, you need to revise your will to name another beneficiary(ies). Also, marital status is often a key factor in planning an estate
Also make sure to review beneficiary designations for pensions, 401(k)s, and life insurance policies. Federal law requires a spouse to be the sole beneficiary of pension or 401(k) benefits unless that right is waived in writing by the spouse.
Get Professional Assistance
A divorce or separation may give rise to numerous tax issues, and a settlement agreement that reduces taxes may benefit both sides. Professional legal and tax advice is essential as your agreement is being negotiated.
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