Financial planning before, during and after divorce.
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There are many financial planning considerations before, during, and after a divorce. An important part of the process from a financial perspective is dividing up the assets. Usually, couples separate worth 50-50 (though not always) of their assets. But that doesn’t mean real estate is split down the middle, and some estates are much more favorable from a tax perspective than others.
Once a divorce is finalized, an important (but often overlooked) part of the process is updating property documents and beneficiary designations. Here are some important considerations when planning financially for divorce.
money and divorce
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This article focuses only on some general financial planning aspects of divorce and is not intended to be personal legal, tax, accounting or financial advice.
When Divorcing, Gathering Is Important Yours Team of professionals. During a divorce, your attorney is the star quarterback. You may also want to consider involving a financial advisor, tax advisor and estate planning attorney.
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Asset division is one of the key financial components of a divorce. But even getting a complete list of properties can be challenging.
Jared Spinelli, a divorce attorney and partner at Rubin & Rudman in Boston, MA, explains, “It’s more common than many people realize that during a divorce we discover that one (or both! ) the parties had a secret bank account, or had secret credit cards, that the other spouse did not know about. The preliminary, mandatory financial discovery rules require us to have three full years of bank statements at the start of the divorce proceedings. need to be exchanged and it is tremendously helpful for knowledgeable lawyers (or forensic experts) to review for unexpected financial surprises.”
Finding large cash withdrawals on bank statements or someone hiding money inside payment apps like Venmo is also routine, he said.
property division in divorce
During the property division process, a financial advisor can advise you and your attorney on which assets would be most favorable to maintain after the divorce. The tax implications of different assets vary greatly. During a negotiation, the attorney with the highest estimated asset may give priority. after tax worth.
How much tax matters on individual assets during asset division
money in retirement accounts Will be fully taxable as regular income (unless in a Roth account when the money is withdrawn tax-free over the term).
opposite of this, invest in a brokerage account Taxable only on cost basis. Essentially, the cost basis is the original purchase price of the stock, bond, mutual fund or ETF. What’s more, investments in a brokerage account are taxed at a friendly long term capital gains tax rates when sold It is also possible to select specific tax lots within a holding!
cash The property has no tax implications.
So all else equal, after a divorce, the cash and investments in a brokerage account will have more after-tax value than in (non-Roth) retirement accounts.
tax considerations when division of matrimonial home Also important in divorce. Assuming you’ve both lived in the home for at least two of the last five years, you’re eligible to exclude up to $500,000 of the gain from your taxable income (assuming you file taxes jointly for the year of the sale). We do). If you’re in the 20% tax bracket for capital gains, that’s a savings of $100,000! The exclusion is half the amount for eligible single filers.
asset division strategies and ideas
A lot goes into creating the right property division strategy for your joint wealth during a divorce. Your personal circumstances and goals should drive the process. Several general key points are considered here.
What do you want your life to look like after divorce? Dividing your assets and property during a divorce may seem like it’s only about dollars and cents, but it doesn’t have to be. In determining what you want to keep, consider how these assets fit into the way you envision your post-divorce life. Do you imagine being happy in your in-laws house? Who Gets Pets? Which investments suit your risk profile and goals? How much liquidity (such as cash) do you need for your new start? work with yourself Trusted Financial Advisor On projections to better understand the income you’ll need to maintain your current lifestyle.
Liquidity and cash flow are needed. An important factor to consider is the liquidity of the assets being divested. Real estate isn’t liquid until sold, so you’ll need to make sure you can cover the expenses with other assets. Withdrawals from retirement accounts are generally subject to penalties if taken before age 59 1/2, except for any transfer as part of a division. Future benefits like Social Security or a pension won’t help you pay your bills right after a divorce.
Retirement Accounts: IRA vs. 401(k)s. To split a workplace retirement plan, such as a 401(k), 403(b), or pension plan, requires a court-issued document called a Qualified Domestic Relations Order (QDRO). A QDRO must be prepared by a lawyer, it is not a standard form, and can add time and expense to the process. In contrast, transferring or splitting up an IRA is a standard procedure at major financial institutions. Sometimes, it is beneficial to have the 401(k) account owner keep that asset and equalize the division with the money in the IRA. This isn’t the only consideration when dividing retirement accounts, but something to be aware of.
Mortgage. When ownership of real estate changes hands during a divorce, the former owner may not remain on the mortgage. To keep property after a divorce, you must pay off the mortgage or refinance into a new loan in your name. This requires completely new underwriting based on your credit and post-divorce assets and income. So it is really important to make sure that you will qualify on your own. And keep in mind, refinancing to a higher rate will increase the monthly payment.
Stock Option / Equity Compensation. There are many factors to consider when dividing stock options in a divorce. The first is what portion of the equity compensation is a marital asset (more on that later).
Jared Spinelli explains, “The preliminary review is to determine what interests are already vested and/or what ‘might’ be subject to a vesting schedule and other achievable benchmarks. Perhaps the most equitable results first.” Treats vested stock as marital property subject to division as income for purposes of support and for any future vested interests (though it doesn’t have to be done that way). Complex compensation structures It is so incredibly important to find a knowledgeable, experienced domestic relations attorney familiar with the law so that they can work with everyone involved to determine the most appropriate treatment of stock compensation or equity ownership.”
He cautions, “If the case cannot be settled, the challenge becomes how to most clearly interpret complex damages so that a judge can understand and rule correctly.”
Even if all parties agree on shares to be included in the marital property, valuation can be a challenge if the company is private. Furthermore, most stock plan documents prohibit the transfer of equity compensation which creates a barrier to an accelerated split. It is especially important to neutralize the tax effect for the equity holder. The exercise/sale (or vesting, in the case of restricted stock units) is taxable to him individually.
it’s all about matrimonial Property
Divorce attorneys must agree on which assets are part of the marital property pool. States have different laws regarding what constitutes marital property. the biggest difference is Community property states (like California) and separate property states (like Massachusetts). Other important relevant factors include when the property was acquired and whether you have a prenuptial or postnuptial agreement, How the title of the property (which contains the name of the spouse) may be irrelevant.
What happens to inheritance during divorce?
Is present or future inheritance subject to division during divorce? Perhaps. Often, inheritances received before marriage are separate property of that person.
Spinelli says, “If there is no pre-nuptial agreement, then after a divorce, a party’s ability to receive an inheritance from someone in the future is at least a consideration that warrants a discussion during the divorce process. Initially, it focused on whether and to what extent the potential (or inevitability) for inheritance is more than just an expectation or guarantee. Nevertheless, lawyers and/or judges can be creative in choosing whether property How would it be most equitable to consider the potential legatee in the overall apportionment of the dispute.”
Of course, there are many other aspects of inheritance and divorce to consider and discuss with your attorney, but this should be on your radar.
Top Financial Planning Tricks Afterwards Divorce
The divorce may be over, but there’s still some work to do to completely turn around and protect your finances. Here’s a checklist of post-divorce financial planning tricks.
- Update retirement plan beneficiary designations. Retirement accounts in your name will need to be updated to reflect your new beneficiary wishes. Typically, couples designate their spouse as the primary beneficiary. But after a divorce, ex-spouses rarely want the other to get that money. The only way to be sure is to change your beneficiary designations. Estate planning is an important part of this, especially if you have minor children, so consider setting up a trust.
- Changing – and tracking – life insurance beneficiary designations. Again, you’ll want to make sure that all of your life insurance policies reflect your wishes. And terms of the divorce settlement. With minor children, it is not uncommon for divorce agreements to require one/both parties to hold a certain amount of life insurance for a specified period of time. This could be 20 years or more unless you can surrender the policy or convert it…
