DIVORCE

Before a Divorce  

GATHER ALL NECESSARY DOCUMENTS:
This includes bank records, credit cards statements, tax statements, insurance documents, employee benefit plans, loan information, estate planning documents retirement plans, and any other documents tied to your finances.

• Although the common belief is to remove an ex-spouses as beneficiary on any account as soon as possible, it is best to consult with your divorce attorney before making these changes.

• Make copies of these documents and give them to your attorney. 

TRACK YOUR BUDGET:
If you are certain that divorce in inevitable, it is important to start tracking all household income and spending. This will help your attorney determine an equitable way of splitting up assets and liabilities.

• The more information that you have the better! Records from previous years could help smooth out any inconsistencies found in just 1-year’s worth of spending.

• Doing a budget and providing records could help the court determe if child or spousal support is necessary.

• It is ok to include non-recurring expenses, such as home maintenance and vacations.

• Think about future spending, especially if you have children. Expenses such as day-care, after-school activities, car insurance, private school, or college tuition are examples to consider.

• Tracking your budget can also help you determine future expenses after your divorce is finalized. Some expenses may fall off while others will be added.

• Ultimately, it is important for you to have a plan so that you can remain financially stable throughout this tough time.​

IMPORTANT DON’TS:
Don’t make any large purchases – these types of purchases could end up causing complications throughout the divorce process.
Don’t move out of your home! It is best to consult with your attorney before deciding which spouse moves out.

IMPORTANT DO'S:
Start putting money aside. Many divorces cost more than expected, which is why being proactive may alleviate some financial pressure.
Set up a P.O box – this will help you prevent missing important documents if you decide to move out.
Hire an attorney. If there is any chance that you feel that the divorce will end up being contested and having to go to court, it is important to get an attorney involved ASAP.

• Their guidance could help you get your fair share and navigate the legal complexities divorce usually entails.

• Speak with several attorneys before selecting one. Look for someone that you feel comfortable with, but also has experience in cases similar to yours.

During & Post-Divorce  

CASH FLOW NEEDS:

• Depending on your situation, you may receive or pay ongoing spousal support throughout the divorce process. If this is the case, liquidity is going to be key.

• Prioritize tapping into the accounts that incur the least amount of penalties such as savings, money markets, and CDs.

• Consult with your CPA and/or financial planner before liquidating retirement accounts to better understand tax consequences and IRS penalties.

• Other considerations such as relocation cost as well as any other cost attributed to you setting up your new life should be accounted for. 

QUITCLAIM DEED:

• A legal instrument used to transfer an ownership interest in real estate property from one spouse to another. It is most commonly used when one spouse wants sole ownership of the marital home.

• Allows for transfer to occur regardless of existing liens on the property

• An alternative solution to selling the property and incurring unnecessary fees from realtors and title companies 

INSURANCE:

• Depending on how the assets are divvied up, you may need to purchase a new home and auto insurance policies on those assets.

• Apply for medical insurance for you and your dependents in the event you were previously covered under your ex-spouse’s plan.

• COBRA allows you to continue coverage for up to 36 months, but it is wise to start shopping your options ASAP so that coverage continues thereafter.

• Re-evaluate life and disability insurance coverage. 

UNEVEN COMPENSATION:

• When one of the parties in a divorce owns stock options or a business, there’s a good possibility that their annual salary fluctuates year-to-year.

• Comprise a formula to handle the inconsistencies in income and find a neutral person to audit the appropriate documents to determine that your financial rights are being honored.

• The settlement should determine who owes taxes and how they owe them irrespective of who receives compensation.

TAX CONSEQUENCES:

Liquidating Assets

• Capital gains from the sale of stock may be taxable.

• Be aware of early withdrawal penalties from IRAs, 401(k)s, 403(b)s, and other retirement plans.

• Depreciation recapture and capital gains taxes from the sale of rental real estate. 

Alimony tax considerations

• The TCJA (Tax Cuts and Jobs Act of 2017) changed the rule on alimony payments and they take effect for divorces that are settled after December 31, 2018. Alimony payments are no longer tax-deductible to the payee and no longer counted as income to the spouse receiving the payments.

• For agreements made December 31, 2018, and before, the old tax law still applies, but they must still meet the same previous guidelines.

• If the agreement was settled before December 31, 2018, and there is a modification it must specifically state that it is adopting the TCJA treatment for the new law to apply.

Child Support tax considerations

• Child support payments are not deductible by the parent who is making payments and they are not considered as income for the parent that is receiving child support payments.

• Depending on the court order, either parent can take a dependency exemption on each child.

• If the parents can’t come to an agreement the court will create a schedule in which each parent can use the child dependency tax deduction.

• Exceptions can include if one parent will not experience a tax benefit for claiming the exemption or if one parent has a history of missing child support payments.

• Parents that fail to pay child support face garnishment of their tax refunds.

BEWARE OF EMPLOYEE BENEFITS:
It is important to know and understand the benefits that you and your spouse are entitled to. Your Human Resources department can sometimes aid in this process.

Most common situations to consider:

• Deciding which health insurance plan the children are covered under.

• Division of any pension plan and retirement plan assets via a Qualified Domestic Relations Order.

• Whether or not to exercise any stock options.

• How to split up Health Savings Accounts (HSAs) and Flexible Savings Accounts (FSAs)

• Updating beneficiaries on work-provided life insurance coverage and retirement accounts.

QUALIFIED DOMESTIC RELATIONS ORDER (QDRO):

A QDRO is a drafted document that recognizes the right of a third party (such as an ex-spouse or child) to receive benefits from a qualified retirement plan. The person who holds the plan is called the participant and the ex-spouse or child that is the beneficiary is usually called the alternate payee.

• These are used in the divorce process to split up assets located in retirement plans, which include 401(k) plans, 403(b) plans, pensions, and other qualified plans.

• This can be used for child support, alimony, or marital property rights to a spouse, former spouse, child, or any other dependent of the plan participant.

• They are drafted and then provided to a judge or a state agency that has the authority to issue judgments.

• The QDRO which gets approved via the court must then also get approved via the retirement plan.

• To draft a QDRO often a financial advisor who specializes in the area of divorce can help. Often employer retirement plans will also maintain templates that can be used to put together the appropriate documents.

• There are typically two different ways these funds are distributed:

  • Shared payment approach – splits the benefit payments between the participant and alternate payee.

    • This approach is used when the participant is already retired and receiving a stream of payments from an annuity or pension.

  • Separate interest approach – Divides the participant’s retirement benefits in half.

    • The alternate payee can either take a distribution out as a lump sum or they can hold it in the account and have the right to receive the portion of the retirement benefit later.

    • A distribution from a QDRO will not be taxable if it is rolled over into the alternate payee’s IRA or other qualified accounts.

    • If it is not rolled over and taken as a distribution it will be subject to ordinary income tax, but it will not be subject to the 10% early withdrawal penalty.