Important Financial Considerations Regarding Divorce

The Financial Implications of Divorce:

Whether you are considering divorce or are currently experiencing it, there is often a considerable amount of stress, uncertainty, and fear, throughout the process. These and other emotions are certainly understandable and to be expected. With that said, understanding how divorce might affect you financially can help you to make the best possible decisions amidst a difficult situation and hopefully help to ease your mind throughout the process. 

While these basic considerations can help to guide your thought process, the help of a financial advisor, an attorney, and other divorce experts can help to make the entire process less stressful. If you enjoy your relationship with your advisor throughout the divorce process, the relationship could continue and hopefully guide you as you begin a more independent financial journey and readdress your goals for the future.

Assets:

During a divorce, all of the marital assets will be considered, regardless of value. This might include cash, CD’s, stocks, 401ks, real estate, bonds, retirement and other investment accounts, cars, jewelry, insurance policies, and much more.

Even assets that are presently illiquid or not expected until well into the future could be considered in the divorce process, such as a future tax refund, patents, or a family business. These items will be itemized and quoted at a fair market value whether you will go through mediation or a divorce court. Based on the value and division of these assets, other factors may be influenced such as alimony, debts, and other financial obligations.

Different assets have different tax treatment and therefore, the division and future use of these assets can often prove to be a highly complicated discussion. This is often made more complicated when the discussion begins on the treatment and ownership of the family home. Even if both partners mutually decide to sell the home, there are a variety of expenses and commitments necessary to the selling process that must be considered.

Debts:

When it comes to the debt discussion, in many cases the mortgage can often be more simple than other debts. In a typical scenario, although no divorce is the same, the person who keeps the home will usually be expected to pay the remaining balance of the mortgage as well as any other debts and expenses related to the property. With that said, with both names on your mortgage loan, technically both spouses remain equally obligated to pay the debt. This is because creditors do not honor divorce decrees and joint accounts tend to remain on your credit report.  

Credit cards can also prove tricky when the named card-owner has a spouse with charging privileges on the card. In this case, it must be determined how the expense of the debt will be divvied up, if at all. Auto loans can also pose a real problem, particularly when both names are listed on the loan. Once it is determined who will retain ownership of the vehicle, and therefore pay for any associated debt and expenses, the best approach might be to request to refinance without your spouse.  

Steps such as this are important because any joint loans could continue to affect your personal credit for years to come. For instance, if your ex-spouse files for bankruptcy it could affect you immensely, unless you choose to file for bankruptcy as well. Why? Well, when your ex’s liability for the debt is cleared, the creditor reserves the right to pursue the remaining debtor—you—for the full amount of the debt. Similarly, the bankruptcy filing itself could show up on your credit report.

Be sure to bear in mind these important considerations and safeguard your information throughout the process. Divorces divulge large amounts of intimate financial information and are breeding grounds for identity theft.  

Taxes:

Taxes can prove to be another tricky area when determining the financial implications of a divorce.

This is particularly true when there are dependents involved, whether children or adult-dependents. In that case, the custodial parent is more likely to benefit from having tax exemptions and being able to file as head of household on their tax return. Typically, the parent with whom the child spends more time is the one who should claim the dependent. If the parents have 50/50 custody of the child, the parent with the higher AGI (adjusted gross income) should claim the dependent. It is important to note that only one taxpayer can claim a dependent and they must have their social security number to do so.

For parents with multiple children, it is common to see the children “divided” at tax time with one parent claiming some of the children and the other parent claiming the remaining children. If you are unable to reach an agreement with your soon-to-be ex-spouse, then the IRS will intervene and apply their tiebreaker rules to determine how the children will be claimed and by whom.

Child Support and Alimony:

Child support and spousal maintenance, also known as alimony, are not the same thing. The tax treatment of alimony payments has recently changed so here are the rules as they currently stand.  

If your divorce was executed on or before December 31, 2018:  

If you are entitled to alimony, you will need to pay the tax on what you receive. Similarly, if you are the spouse paying support to your ex, your income will be reduced, and you may be able to deduct these payments from your federal income tax.  

If your divorce was executed after December 31, 2018: 

Alimony payments are not deductible by the payer nor are they taxable to the recipient.  

When it comes to child support, regardless of when your divorce was executed, child support is not taxable for either party, the spouse paying the support or the spouse receiving the support.  

Credit:

Pre-divorce, you should obtain a credit report to appeal any blemishes you believe to be incorrect. Additionally, you should try to establish your own credit before divorcing if possible as it can be much more difficult to do so after the fact.

During the midst of a stressful divorce, it is easy to overlook your credit. However, this is a consideration you do not want to ignore. Creditors do not honor divorce decrees so your partners inability to pay their obligations of your previously joint debts could impact your personal credit and you could even be held liable for their financial obligations.

The health of your credit will be particularly important as you independently prepare to potentially buy a new home, vehicle, or other needed assets.

Insurance:

Another important divorce consideration is how your insurance coverage might change and the costs associated with it.

Many people access more affordable or better-quality insurance through their spouse. In fact, according to a 2019 CNBC article, only 29% of couples have separate health insurance. This means that the remaining 71% of couples surveyed are on a joint plan with their partner, and therefore, would need to reassess their insurance coverage in the case of a divorce.

The Cost:

Aside from the many costs associated with divorce, the actual process comes with a cost as well.

The national average cost of divorce, as calculated in a survey by Bankrate, was found to be approximately $15,000 per person and includes the cost of court fees, attorney’s fees, and external experts such as appraisers, tax advisers, financial professionals, child custody evaluators, and more.

Of course, uncontested divorces are far cheaper but are also far less common. For this reason, many somewhat amicable and agreeable couples choose to try mediation as it can lessen the costs associated with divorce, provides greater flexibility and involvement, and is completely voluntary. With that said, mediation is not the best approach for all couples.  

With this information in mind, it is clear that the cost of divorce is very much determined on a case-by-case basis. Regardless of the cost, divorce is a complex and emotional process. For this reason, the help of a team of financial and legal professionals can help you to overcome the struggles associated with the process, make the most of your financial situation, and come out ready to start fresh both emotionally and financially.  

Written by Kaitlyn Keeler

Kaitlyn is an enthusiastic client service intern that assists our advisors with your accounts. She is an attentive business student with a concentration in finance.