If you feel financially unprepared for the breakup of your marriage, you’re not alone. Only about one-third of divorcées have a comprehensive plan in place according to a 2017 Fidelity Investments survey. That’s one reason it’s critical to get the guidance you need to better understand and take control of your financial future.
To start, consider seeking guidance on some of the planning issues discussed below.
Splitting marital assets
Assets acquired during the marriage are split according to your state’s law. Generally speaking, most states follow equitable distribution rules that will consider all marital assets, and a court will determine their distribution between you and your former spouse. There are nine states that have community property laws, which means each spouse owns 50 percent of the assets acquired during their marriage (with certain exceptions).
When it comes to debts, in community property states the same approach holds. Debts acquired during the marriage are generally attributable to both spouses. In noncommunity property states, however, debts usually stay with the spouse who incurred the debt, unless the other spouse cosigned or otherwise guaranteed it.
The contributions you or your former spouse make to employer-sponsored retirement plans and IRAs during the marriage are generally considered marital property, with some exceptions. Contributions made outside of the marriage, for example, can be considered separate property. Pay particular attention to any qualified plans you may have, such as pensions or 401(k)s, as these should be divided according to a qualified domestic relations order (QDRO).
A QDRO allows for a tax- and penalty-free transfer to a nonowner ex-spouse. Neither the original owner nor the divorcing nonowner should be taxed or penalized if the nonowner rolls the assets directly into a qualified plan or an IRA. Keep in mind, if the nonowner spouse receiving the distribution uses the funds in any other fashion, a tax will be imposed on that distribution—but only to that spouse.
Dividing an IRA is different, though. ERISA does not cover IRAs, and the division of an IRA does not require a QDRO. For federal tax purposes, if the division follows a court-issued divorce decree and is made as a trustee-to-trustee transfer as opposed to an outright distribution, an IRA owner can avoid tax and penalties. Once the asset is transferred, each spouse becomes solely responsible for tax and penalties of any future distributions.
If you or your ex-spouse are interested in keeping the family home, you need to factor ongoing mortgage payments, property taxes, and maintenance expenses into your current cash flow and long-term financial plan to see whether it’s feasible. If not, there are other alternatives you may want to consider, including refinancing or downsizing.
The accumulated cash value of a life insurance policy is subject to division—much like any other marital asset. If it’s necessary to divide the cash value, transferring a policy’s ownership can be included as part of your divorce decree. If you are transferring a policy, be sure to update beneficiary designations before doing so.
Under the Tax Cuts and Jobs Act of 2017, alimony payments are no longer deductible by the payer, and, consequently, the payee can’t include the money as taxable income. This change applies to divorce settlements made after December 31, 2018. It can also apply to existing agreements that are modified after that date, but only if the modification explicitly states that the new rule applies.
You may be able to collect Social Security income on your ex-spouse’s working record (even if your ex-spouse remarries) as long as you have not remarried, your marriage lasted more than 10 years, and you have been divorced for more than two years.
To qualify, you and your former spouse must be 62 or older. If you were born before December 31, 1953, you can file a restricted application allowing you to receive up to 50 percent of your ex-spouse’s full retirement age benefit amount, and your own benefit can grow with delayed retirement credits. Your ex-spouse will not be aware of or involved in your claim.
If you’re caring for a child younger than 16 and you’re not remarried, children’s Social Security benefits may be available to you, regardless of your age.
Based on their sensitive nature, child support issues, including financial support and physical care, are usually resolved in court. The divorce decree should specify the amounts, if any, of child support paid from one spouse to the other, as well as who will be entitled to claim the children as dependents for tax purposes.
Following your divorce, it’s important to update your estate plan to accommodate any adjustments. If you named your former spouse as your trusted person or beneficiary in documents or on accounts, these designations should be changed as soon as possible. And, if you retain custody—even partial custody—of a minor, your estate planning documents should address the issue of guardianship for your child and the child’s estate.
If you have any questions about the information shared in this article, don’t feel that you need to solve them on your own. A financial advisor can talk you through the available options and help guide you to appropriate decisions regarding estate planning, emergency savings, health care plans, and any other topics.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Joelle Spear is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or email@example.com
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