There are steps you should consider to minimize the financial impact of divorce, whether you’re currently in the process of filing, recovering from one, or watching it unfold for a friend or family member.
The single most effective divorce tool is a carefully outlined prenuptial agreement. Although entering a marriage with an exit strategy may seem calculating, many couples can benefit from having one. “A prenup is generally good insurance,” says Arlene Dubin, a matrimonial attorney. She recommends not only spelling out what would happen to key assets like real estate and investment portfolios, but also outlining how to deal with debts incurred before and during the marriage.
The first financial shock to face is the cost of the divorce itself. You’re already splitting assets; when you add a messy divorce with high legal fees, it becomes a considerable financial and emotional drain. It’s vital to have someone on your side who has a handle on an exit strategy that can minimize the financial impact of divorce.
Start with a complete inventory to help you understand what you’re entitled to receive or retain. Assets should include retirement plans, savings and checking accounts, properties and pensions, business interests, and inheritances. In addition, list any financial obligations or debts that you and your spouse may have incurred. You should document each item by gathering tax returns, paycheck stubs, wills, trust instruments, bank and credit card statements, insurance policies, property deeds, and brokerage account documents. Financial housekeeping is essential during a divorce, arming you with the knowledge needed to make the right financial decisions.
Splitting the assets of your marriage will fall to the lawyers and the legal process. There are, however, tactical steps you can take to minimize the financial impact of divorce. “I tend to recommend splitting what you have across all assets as opposed to a scenario where you take the house and I take the cash,” Dubin says.
If neither of you has an emotional attachment to the family home, selling it could be preferable, says Bill Hunter, director, IRA Product Management at Bank of America Merrill Lynch. The proceeds can be split, used to pay down debt, or cover the cost of the divorce itself. A sale of other shared, non-liquid assets may also be advisable.
Another important asset is health insurance. If you’re covered by your spouse’s plan, under federal law you can continue that coverage for up to three years by enrolling in Cobra, although you’ll be responsible for making the payments.
Splitting IRAs and 401(k)s can prove problematic. If either of you has a retirement account, it’s vital that you sign a court-ordered qualified domestic relations order (QDRO), which spells out exactly what percentage of the account each of you will receive. This document allows you to roll over your agreed-upon share into another IRA without incurring early-withdrawal taxes, as long as you do so within 60 days of receipt of the QDRO. Try to avoid tapping your retirement accounts to pay for the divorce. Instead, consider taking a loan at today’s favorable interest rates.
You need to update the beneficiaries in your will, as well as the person to whom you’re granting a power of attorney should anything happen to you. “Review all your estate planning documents to make sure they reflect your current wishes,” says Michael Liersch, director, Behavioral Finance at Bank of America Merrill Lynch. Be sure to follow up on any debt you may have incurred during the marriage. Although the responsibility to pay may fall to your ex-spouse, your name may still be tied to the account. This can have repercussions on your credit should he or she default on payment.
Social Security can also come into play. If you were married to your spouse for over ten years, you can claim spousal benefits even if your former partner remarries. But if you remarry, you can’t claim the benefits unless your new marriage ends in death or divorce.
Once the divorce is finalized, the next chapter begins. Your financial advisor can help review your financial outlook and create a budget based on your new circumstances. Start with what you spent over the past year and try to forecast your new situation as to what would be a realistic budget. Your goal in the end is to have a new financial strategy — one based on a new life chapter.*
*This article does not constitute legal, accounting or other professional advice. Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its financial advisor provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.
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