Divorce & Finances
By: Financial Hotline
Spring 2023 (Vol. 41, No. 1)
If you are considering divorce, it’s vital to plan for the dissolution of the financial partnership in your marriage. This means dividing the financial assets and liabilities you have accumulated during the years of marriage. Further, if children are involved, the future support given to the custodial parent must be planned for. The time you take to prepare and plan for eventualities will pay off later on.
Here is what you can do:
1. Make a list of all of your assets, joint or separate, including:
- The current balance in all bank accounts
- The value of any brokerage accounts
- The value of investments, including any IRAs
- Your residence(s)
- Your autos
- Your valuable antiques, jewelry, luxury items, collections, and furnishings
2. Make sure you have copies of the past two-or-three-years’ tax returns including any attachments. These will come in handy later.
3. Inventory your financial debts and obligations. You may need to pull your credit report to make sure you don’t miss anything. Your report will indicate what accounts are yours alone and which are joint. List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.
4. Make sure you know the exact amounts of salary and other income earned by both you and your spouse.
5. Find any papers or online accounts relating to insurance-life, health, auto, and homeowners, as well as pension and other retirement benefits. Take screenshots or make copies of crucial information in case future password changes make access more difficult.
6. Consider canceling any joint credit card or open equity line accounts. Remember, if you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for any new bills.
7. Consider closing any joint bank or financial accounts. If your spouse’s name is on the account, they can legally take all the funds.
8. If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. This will help you to establish credit after the divorce.
If you and your spouse agree on the terms, you may be able to settle your divorce with minimal help such as a divorce mediator or even do it yourself. If there are significant issues dealing with assets, child custody, or alimony be sure to get your own attorney. Here are a few reminders: Make sure the divorce decree or agreement covers all types of insurance coverage-life, health, and auto. Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans. Don’t forget to update your will. If the settlement gives you full ownership of real estate or other assets, make sure the deed and accounts are updated to properly reflect that on title. If the deed or account name doesn’t change, the court document won’t override it.
Don’t forget the tax consequences. Child support is not taxable to the recipient and not deductible by the payer. If children are involved, the settlement agreement should detail who gets to take the tax deduction. Currently, alimony is also not taxable or deductible. Property settlements are not taxable events when pursuant to divorce or separation. Transfers of assets between spouses in this event do not result in taxable income, deductions, gains, or losses. The cost basis of the property carries over to the recipient spouse. Be careful in a divorce, your spouse may give you an equal share of property based upon fair market value, but with the lower basis. This can result in a higher taxable gain upon a sale of the asset.
If retirement accounts are involved, generally, when these plans are split up there is no taxable event if pursuant to a qualified domestic relations order or other court order in the case of an IRA. This is true, however, only if the assets remain in a retirement account or IRA. Once funds are distributed they will be taxed to the recipient. At the time of division, the payer does not receive a deduction and the recipient does not have taxable income.