Divorce planning
A sound financial foundation built over the course of years can be ruined in short order upon the breakup of a marriage. When divorce is inevitable, it is in the interests of both spouses to engage in some financial planning.

Financial issues relating to divorce:

  1. Property settlements - Marriage creates certain rights in the property of each spouse. Upon divorce, marital property is divided according to equitable distribution statutes adopted by many states. What happens with the marital home usually is one of the biggest issues in a divorce. A prenuptial or postnuptial agreement may supersede equitable distribution statutes.
    • Section 1041 - The federal tax code stipulates any gain from the sale or transfer of property to a former spouse as a result of a divorce is tax free. No gain or loss is recognized.
    • The family home - Careful consideration should be given as to whether a divorcing spouse can afford to maintain the family home. If neither spouse can afford to maintain the home, it may need to be sold and the proceeds divided. Joint ownership for a period of time (such as until a child attends college) is a common option, with expenses shared and proceeds split when it is eventually sold.
  2. Alimony and child support - Regular payments from one former spouse to the other frequently are elements of a divorce settlement. How the payments are structured determine whether they qualify as alimony or child support.
    • Alimony - is deductible by the payer for income tax purposes. For the recipient, alimony is taxable income. There are strict requirements for payments to qualify as alimony, as opposed to child support:
      • Payments must be made in cash.
      • Payments must be received under a divorce or separation agreement and not paid on a voluntary basis.
      • The payer and recipient must be living separately at the time of the payments.
      • There must be no agreement to identify the payments as other than alimony for tax purposes.
      • There must no agreement to continue payments after the recipient's death.
      • The payments must not be treated as child support. Any payments that would be reduced or eliminated under conditions related to a child (such as death or reaching a specified age) would be treated as child support.
    • Child support - Payments made to provide support to a child are neither tax deductible to the payer nor taxable income to the recipient. Payments reduced or ended upon an event happening to a child will be considered child support and not qualify for treatment as alimony.
  3. Retirement assets - After the home, retirement plan assets and rights frequently are the marital property with the greatest value. Federal law allows ex-spouses to receive a share of retirement benefits earned during the marriage.
    • Qualified Domestic Relations Order - Court-ordered document that tells retirement plan administrator how to divide benefits between divorcing spouses.
  4. Social Security - A divorced person may qualify for higher Social Security benefits under their ex-spouse's earnings history if the marriage lasted at least 10 years and he or she has not remarried.
    If these conditions are met, the divorced person is entitled to the higher of the benefit based on his or her own earnings record or an amount equal up to 50% of the former spouse's Social Security benefit. This does not affect the benefit collected by the other former spouse.
    If a marriage is close to the 10-year mark, it may be worthwhile to delay the divorce until the 10-year requirement is met. This is particularly true if one spouse earns significantly less than the other.
  5. Health insurance - Ensuring health insurance coverage is an important consideration for a divorcing spouse.
    • COBRA rights - Under the federal COBRA law, a covered worker's former spouse and children are eligible to continue group health insurance at their own expense for up to 36 months in companies with 20 or more workers.
    • Life and disability insurance - These types of coverage also should be reviewed upon divorce to ensure adequate protection. Life and disability insurance may be required to ensure alimony or child support payments continue upon the death, illness or injury of the payer.
      Life insurance with cash value becomes part of the property settlement process. Owner of life insurance policy may decide to change beneficiaries if settlement does not require continued protection of a former spouse or children.
  6. Budgeting -Upon separation or divorce, both spouses are likely to face significant reductions in income and/or increased expenses for items like separate housing and childcare. These financial consequences will require the divorcing spouses to review expenses and income and consider downgrading the lifestyles to which they had been accustomed.
    Prepare a realistic post-divorce spending plan or budget based on individual sources of income, including alimony and child support.
    Consider ways to increase income, such a second job or a side business.

Other steps to take
Certain steps should be taken immediately, ideally in consultation with an attorney, once divorce becomes inevitable.
  • Section 1041 - The federal tax code stipulates any gain from the sale or transfer of property to a former spouse as a result of a divorce is tax free. No gain or loss is recognized.
  • The family home - Careful consideration should be given as to whether a divorcing spouse can afford to maintain the family home. If neither spouse can afford to maintain the home, it may need to be sold and the proceeds divided. Joint ownership for a period of time (such as until a child attends college) is a common option, with expenses shared and proceeds split when it is eventually sold.


Disability

Related Articles
  1. Personal Finance

    The Fundamentals Of Spousal Support Taxation

    The spousal support that is paid out after a divorce can have varying tax implications. We'll look at what you need to know to settle on the best tax solution.
  2. Taxes

    Divorced? 7 Tax Traps to Avoid

    Filing your taxes is complicated enough, but it can become even more challenging after a divorce.
  3. Personal Finance

    Getting Divorced: Mistakes Men Make, Mistakes Women Make

    When they get divorced, men and women make different types of mistakes. A strategic primer.
  4. Personal Finance

    What It Costs To Get Divorced

    Here's a breakdown of how much it will cost to get divorced in the U.S. today.
  5. Personal Finance

    Social Security and Divorce Are Unlikely Bedfellows

    If you get divorced after at least 10 years, you might get some extra Social Security benefits.
  6. Personal Finance

    How Life Insurance Works in a Divorce

    Learn the implications of life insurance in a divorce situation, and identify the steps you should take to ensure your policies are sorted out post-divorce.
  7. Insurance

    Can Divorce Insurance Keep You From The Poorhouse?

    Divorce rates are estimated to be between 40-50%, and you could lose as much as 77% of your net worth.
  8. Personal Finance

    Where Will You Live After a Grey Divorce?

    Couples who divorce later in life can use a home equity conversion mortgage to cover housing costs.
  9. Insights

    How Divorce Can Adversely Affect The Economy

    Divorce not only affects the people involved, it also affects the nation's economy.
  10. Retirement

    How to Protect Your Retirement After a Divorce

    Divorce is never fun, but knowing the rules and anticipating the impact of retirement plan division and pension payouts can make things easier.
Frequently Asked Questions
  1. How do you calculate r-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the Correlation formula to correlate ...
  2. What is the Difference Between International Monetary Fund and the World Bank?

    Learn about the International Monetary Fund and the World Bank and how they are differentiated by their respective functions ...
  3. Where Did the Bull and Bear Market Get Their Names?

    The terms bull and bear are used to describe general actions and attitudes, or sentiment, either of an individual (bear and ...
  4. What's the difference between Google's GOOG and GOOGL stock tickers?

    Learn the difference between Google's GOOG and GOOGL ticker symbols. Splitting shares into classes prevents management from ...
Trading Center