It’s safe to say that everyone wants to have one of the successful retirement stories they’ve heard about – retirement is great, you have money to do what you want and your lifestyle is how you had planned. But there are a lot of threats to ensuring this happens, and many are circumstances that people avoid talking about.
Take divorce for example. Unfortunately, divorce is how 50 percent of marriages end. While you don’t want to plan for the negative, when it comes to protecting your assets, it is something to think about.
At Global View, we have had clients come to us because they’re considering divorce or have already started their divorce proceedings. They want to make sure they protect their assets, but the proper planning wasn’t in place.
For some couples, the divorce process is amicable. But other times, it gets messy. This seems to be especially true the more money you have. While dividing assets and negotiating child/spousal support may have been ideas that have crossed these clients’ minds, nothing was done to protect their assets if in fact it happened. A divorce can have a serious impact on your finances, your taxes and your estate plan.
It doesn’t have to be this way. Educate yourself, assess your financial assets and liabilities, and seek out assistance from a qualified and trusted financial advisor who has experience helping people going through divorce.
One of the first things to do when facing a divorce is make an exhaustive list of your marital assets, and note how they are titled as well as any that may be protected from divorce (such as anything that is mentioned in a prenuptial agreement). Your list should include the value of each asset, which means that you might have to get appraisals or estimates on things like homes, cars, boats, antiques, artwork or collectibles. Other assets include life insurance policies, stocks, bonds, bank accounts, investment accounts, retirement plans, college savings accounts and so on.
Remember that all assets are not equal regarding tax implications. For example, if one spouse takes retirement assets valued at $100,000 and the other takes a money-market account also worth $100,000, this is not an equal division of assets, because the spouse taking the retirement assets will eventually be on the hook for paying taxes on the distributions.
Next, make a list of joint debts or financial liabilities: Mortgage, credit card debt, outstanding loans, etc. Assets aren’t the only things divvied up in a divorce – liabilities may also need to be divided.
Finally, note family income, and cancel any joint credit cards, close joint bank accounts and open new accounts in your name only to prevent your spouse from running up additional debt in your name. It is also wise to monitor your credit score and credit reports closely during this time to make sure your spouse hasn’t opened any new joint accounts, or accounts in your name.
Establish a New Budget
Whether you were a resource spouse or non-resource spouse in the marriage, separating households is going to require some careful thought and planning. Depending on how alimony and child support judgments are made, your income may not change much, but you may have doubled your living expenses, from housing and utilities to groceries and household items.
If you previously used a monthly or annual budget, you will need to rework it to reflect your new monthly or annual income and expenses, and make adjustments in spending accordingly.
Update Your Will, Estate Plan and Beneficiaries
Once a divorce is finalized and the financial dust begins to settle, consider whether you want to remove your spouse from any life insurance policies or investment accounts and designate them to someone else in the event of your death.
If you had a will with your spouse, you will want to meet with an attorney to revoke your old will and craft a new will for yourself. When working with a full-service financial advisory firm that offers family-office style services, that attorney may already be on your team. Working with a firm that provides experts in all aspects of your financial planning can help ensure nothing is forgotten.
It’s extremely important to make any changes to your will and beneficiaries as soon as possible. If you don’t, regardless of your marital status, if something should happen to you, your most current plans may be enforced and any assets you had designated to your spouse will be dispersed to that person. Some – but not all – states have laws that prevent this by automatically revoking any gifts designated to your former spouse if you get divorced after writing a will. It is not, however, recommended to rely on such state laws. Update your will to ensure your current wishes are followed. For what you can expect in the Carolinas, download this complimentary breakdown: 7 Reasons to Spend Your Retirement in the Carolinas.
Consider the Tax Changes and Implications
During your marriage, you were most likely filing joint tax returns, and as a divorcee, you will probably start filing single tax returns in the future, which means you may be paying a higher tax rate. In addition, only one parent, usually the parent with custody of the children, will benefit from the child tax credits by filing as head of household status.
Any alimony payments ordered or modified after Dec. 31, 2018 are not permitted to be tax deductible by the payer, or considered taxable income by the recipient, as per the Tax Cuts and Jobs Act. Likewise, the spouse paying child support cannot deduct child support payments from tax obligations, and the recipient of child support is not required to report child support payments as taxable income.
It is recommended that both parties maintain any pre-divorce tax returns (or copies) for at least five years.
Create a New Financial Plan
Divorce doesn’t have to ruin you (or your spouse) financially, no matter what your previous or current financial situation may be. Make an appointment with a financial advisor to review your assets and liabilities, prepare for changes to your income tax filing status and help you plan for a secure financial future.
Your best protections against financial collapse in the event of a divorce are knowledge and support. It is possible to still become one of the successful retirement stories you had planned for. Educate yourself and evaluate your assets and income, liabilities and expenses, and overall financial situation as a single person. And talk with a financial advisor. Where you stand financially can be one less thing to worry about when going through a divorce.