Divorce can be a complicated and challenging process in which details can be easily overlooked. It is important to know the laws that determine the outcome of divorce proceedings and how this may impact your assets and financial well-being.
Division of Assets
Typically, everything you and your spouse acquired from the day you were married is subject to division. Exceptions include individual inheritances, gifts to an individual spouse, and assets acquired before marriage. When assets are divided, the court considers each spouse’s earning potential, the length of the marriage, and each spouse’s contribution to building household assets.
The exceptions to this rule are the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Under the laws of these states, almost all assets are divided equally.
Coping with Debt
Do not assume that a divorce will erase any debt. If you reside in a community property state, debt will be divided with your former partner, in the same manner that your assets are. You will be responsible for half of all debt in jointly held accounts and, in some cases, half of a former spouse’s debt as well.
If you do not reside in a community property state, you remain responsible for your individual debt (but not the debt of your spouse’s) and any debt held in joint accounts. Many couples include debt payment as part of the divorce settlement. You may want to consider taking on the responsibility for a portion of the debt, and using your portion of the divorce settlement to reduce it.
If you and your spouse own a home that has appreciated in value, it may be advisable to liquidate it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 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.
Your Retirement Accounts
Money in your 401(k) or pension plan may be legally divided during a divorce. The divisible figure begins to accumulate on the day you are married and ends on the day you are divorced.
To claim a share of a spouse’s 401(k) or pension plan benefit, you must obtain a Qualified Domestic Relations Order (QDRO) from the court and provide it to your spouse’s plan sponsor before distributions are completed. You and your spouse may also elect to not divide retirement plan assets. If you and your spouse make this decision, it may be wise to make this agreement in writing and include it as part of the divorce settlement, which would prevent the courts from declaring the money divisible.
You may want to review your will, or have one created if you currently do not have a will. It may be advisable to review your estate plan at the same time you commence a divorce proceeding and make any necessary amendments. You should also review beneficiary designations for 401(k) plans, pensions, IRAs and life insurance policies. Federal law requires a spouse to be the sole beneficiary of pension or 401(k) benefits unless the spouse waives their right in writing.
If you find yourself faced with divorce, it is critical to protect your financial future. Divorce and finances can be very complicated. Enlisting the help of an attorney and carefully monitoring the process can ensure that your interests are considered and that you will not need to revisit the proceeding at a later date.
This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Olivia A. Mussett, CFP®, a local member of FPA.
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