Divorces are difficult. Throughout the dissolution of a marriage, an individual may float between moments of disappointment and pride, anxiety and relief. Even the most civil of exes must be prepared to act in their best interest, especially when it comes to finances.
To better understand the financial stakes in divorce, The Active Times spoke with two divorce finance experts: Carol Lee Roberts, President of the Institute for Divorce Financial Advisors, and Dori Shwirtz, founder of DivorceHarmony.com. Here's what they want you to know about your money and your divorce.
First off, divorce is costly
According to the Institute for Divorce Financial Advisors (IDFA), the current average cost of divorce is $15,500. Should the split, as many do, require litigation, the average cost jumps to $19,600. Divorces are not just costly but also time-consuming. On average, divorces take 10.7 months to resolve without litigation and 17.6 months if litigated.
Litigation isn't the only option
Attorney fees typically run $250 per hour. Shwirtz suggests holding off on employing attorneys and considering other more cost-efficient alternatives. Rash decisions may have costly consequences, so thoroughly research each possible route before deciding which is right for you. Mediation, for example, offers couples a way to maintain control of their separation and set the terms themselves rather than being at the mercy of the court.
Know your financial situation before you file
Before filing for divorce, both Roberts and Shwirtz stress that you must thoroughly understand your financial situation. Know your insurance, your debts and your assets. In many marriages, good or bad, one party typically handles the finances for the couple. Everyone, "even if you're marriage is wonderful," Roberts said, should clearly understand their monthly expenses.
Gather important documents
Most of the necessary financial information you need can be found in previous tax returns. Set aside any bank or company statements and remember to include payments on auto-pay. Keep all information organized and easily accessible.
Pay off joint debt or refinance
Regardless of how your divorce settlement shakes out, you will still be responsible for paying off any joint debt. Even if your divorce decree states that your ex will pay off the debt, Roberts said, "that doesn't change anything about your debt to a third party." So should your ex-spouse begin missing payments, your credit score may be affected and, soon enough, credit card companies or other third-party lenders may begin coming after you for payment. You are never discharged of your responsibility to repay. So, Roberts suggests couples pay off joint debts or refinance any remaining debt in one spouse's name as much as possible.
Close joint accounts
Shwirtz recommends couples close joint accounts as early in the separation process as possible. This allows individuals a shot at getting a full picture of their financial life outside of the marriage. The Women's Institute for Financial Education also suggests divorcing couples quickly open new accounts in their individual names, then decide on a reasonable way of splitting the money in joint accounts.
Craft a 'post-divorce budget'
Even before the divorce has reached the "after" phase, Shwirtz recommends you create a new budget. "Your expenses may double, but your salary may not," Shwirtz said. Budget for your new place. Take into account divorce expenses, costly holidays or any upcoming changes to your insurance plans caused by the divorce. Set the budget now so when you receive the official divorce decree, you have a forward-thinking plan.
Having an emotional and financial support system is key
"Make sure, if you are in the process of divorce, that you have a support team," Roberts said. This includes not just family, friends and therapists or counselors, but also financial advisors. Enlist all the help you need in order to healthily exit your marriage. Financial, familial or therapeutic support - lean on whatever is right for you.
Begin saving up an emergency fund
Life post-divorce, like in marriage, can throw the occasional curveball. As you budget for your new post-divorce life, consider setting aside an emergency fund. There are many simple ways to start saving. So, be prepared for any unfortunate financial mishaps by setting aside whatever you can spare.
Look over all assets
Take an account of all your assets, as these may have to be split as part of your divorce settlement. Season tickets to your favorite team or frequent flyer miles count too, Shwirtz said. Not to mention vehicles, household furniture, any art or antiques, timeshares and tax refunds, insurance policies, retirement plans and businesses.
When dividing assets, remember not all assets are valued the same. For example, two assets with the same face value, say a $250,000 house and a $250,000 retirement plan, are not equal. The house requires maintenance. "You have to pay property taxes, in all likelihood there is a mortgage associated with it," Roberts said. The retirement plan, however, requires no additional funds. Rather, it grows and matures in a tax advantage way. So, she suggests, figuratively run the settlement out a few years in advance, and test the long-term impact.
'Put on your parent hat'
When two parents divorce, Shwirtz said, "you're really working towards a common goal." That goal being the best-case scenario for your child. "It's very, very important that both parents make sure they are keeping the children at the forefront," Roberts said. This means refraining from turning children's extracurriculars and uniforms into bargaining chips. Play clean. Make your child proud.
Consider who will claim children as dependents
Prior to the divorce, co-parents must settle who will claim the child as a dependent, and thus potentially qualify for additional tax benefits. It is common for the custodial parent, the one who spends more than half a year with the child, to claim them as a dependent. However, Roberts said, "it's not unusual for divorced couples to alternate." Meaning one parent claims the child as a dependent one year and the other the next. Previously, she explained, when single-worker households were the norm, the primary breadwinner would claim the child since they had more taxable income. Now, given the rise of two-worker households, parents who evenly share responsibility for raising a child can more flexibly move the dependent status back and forth.
Protect spousal and child support
During a divorce proceeding, one party may be ordered to pay the other money in the form of spousal or child support. For the receiving party, it is wise to protect the income stream with insurance. "Say one spouse is supposed to be paying $1,200 a month in child support," Roberts said. "You want to make sure god forbid something happens to that spouse you have something to replace that income each month." Roberts recommends protecting the support income stream with life and disability insurance.
You may qualify to stay on your ex's insurance for up to 36 months
COBRA, the Consolidated Omnibus Budget Reconciliation Act, allows for divorcing parties to stay on their ex-spouse's employee-provided insurance for up to 36 months after a divorce. Typically under COBRA, just 18 months of additional insurance coverage is provided to beneficiaries who were insured by the plan prior to the qualified event. However, a handful of events - death, divorce or qualification for Medicare - trigger an additional 18-month extension. In order to take advantage of this COBRA provision, you must notify your employer within 60 days of the divorce.
If you sell a marital home, you may exclude capital gains even if you moved out
After selling a home, the IRS allows couples filing jointly to exclude capital gains of up to $500,000 from their taxable income. Individuals may exclude just $250,000. Typically, the exclusions are granted if the person or couple resides in the home for two of the five years prior to sale. However, when a home titled in both divorced parties names is sold, each individual may exclude $250,000, even if just one party meets the residency requirement. "The tax laws allow you to use your ex-spouse's use period," Roberts said. "They don't force you to remain in the same house with someone you just divorced, which is probably a wonderful idea."
Divorce over 50, a rising trend, has serious financial ramifications
Divorce rates roughly doubled for people age 50 and over from 1990 to 2015. Dubbed "gray divorce," marital separation in older age may have potentially detrimental effects on an individual's health: physical, mental and financial. According to the IDFA, following a gray divorce, women experience a 45% drop in standard of living while men experience a 15% drop. A 2017 study found U.S. women 63 and up who had previously been through a gray divorce have a poverty rate 27% more than any other group at that age. "Dividing your retirement assets at age 30 is not fun for anybody either," Roberts said. "But there is a longer period to recoup."
Once the divorce is finalized, update all documents
"Divorce is disruptive," Roberts said, "so there's a tendency to be like 'oh god, that is finally done.' But until all the paperwork is done, it's not really done." This means correcting all beneficiaries on all plans and wills, regardless of whether you intend to keep or kick an ex off a beneficiary list. Some states have Automatic Revocation Statutes that automatically void a spouse's beneficiary status at the time of divorce.
Update your W-4 form and prepare for a tax shake up
After updating beneficiaries, update your W-4 tax form too. This designates you as a single, non-married person, thereby affecting your federal income tax withholdings. Some divorcees may file as a "head of household," meaning they are unmarried and pay more than half the costs of keeping up a home for themselves and a qualifying child or dependent. Even if a divorce agreement gives one parent the right to claim the child as a dependent, the other may still file as a "head of household" if the child lived in their home for more than half the year. Should the divorce not be finalized by the end of the year, divorcing couples may file either a joint return or separate married filings.
The end of a marriage means the start of a new life chapter. Use this clean slate as an opportunity to grow financially, whatever that looks like for you. Start off by implementing these financial resolutions.
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