Navigating Divorce? Prepare For These 4 Financial Challenges
Leisl L. Langevin, CFP®, CDFA®
Senior Vice President & Financial Advisor
Divorce is not only taxing emotionally and physically, but it can take a toll on both parties financially as well. You and your spouse will need to make decisions that not only affect you right now but also in the future. When it comes to the financial impact, here are some of the biggest challenges you may experience during a divorce.
Four Financial Challenges That Are Common During Divorce
Challenge #1: Dividing Your Property
You accumulate a significant number of assets during a marriage. The question is, how should everything be divided between both parties? Usually, the division of property is determined in a court of law or from an agreement between the spouses.
However, there are several states that are considered community property states, where marital assets and the debts that are incurred by either spouse during the marriage are split 50-50. Community property states currently include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.1 (In all non-community property states, assets are divided “fairly” at the discretion of the judge.)
Challenge #2: Tax Implications
There are tax issues that can arise from a divorce, so it’s a good idea to speak to an experienced financial professional when going through a divorce. Some tax-related concerns to look out for include:
- Who will get the tax exemption for dependents?
- Who will claim Head of Household status?
- Which attorney fees are tax-deductible?
- Will "maintenance" payments be tax-deductible?
- Is child support deductible?
Challenge #3: Deciding Who Will Pay Which Debts
It’s important to understand how much you owe and to whom you owe it. Obtain or make a report that includes all debts owed, how much and whose name the debt is in. Make yourself aware of any debt accrued after separation has taken place, as you could be responsible for debt your partner took on during the divorce process. Along with your team of professionals, you will need to determine who is responsible for what debt and how much.
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Challenge #4: Retirement Planning
If you or your spouse have retirement savings accounts, like an IRA or 401(k), the accounts may be divided between the two of you. If done properly, neither party will be required to pay the usual penalty tax. This can be a complicated process, and it is recommended that you work with a financial advisor to complete the transfer.
If you are losing some of your retirement savings, you’ll also want to work with your advisor to determine how you can work to make up for the loss in funds between now and retirement.
Four Tips to Help You Prepare Financially for Divorce
If you are just beginning divorce proceedings or are in the middle of a divorce, there are a few things you can do to help adjust yourself and your family to new financial circumstances.
Tip #1: Monitor your Expenses Closely
While you should do this regularly anyway, it’s more important than ever to keep track of how much you’re spending. If you’re used to being in a two-income household, suddenly cutting that in half can be difficult. Make sure you are budgeting appropriately so that you can best provide for not only yourself but your children (if applicable).
Tip #2: Check with your Human Resources Department at Work
Find out how your employee benefits and insurance will be affected while going through a divorce. If you have insurance policies or retirement accounts through work, be sure to update your beneficiary information immediately.
Tip #3: Establish Your Own Checking Account
While you’ll want to work with your attorney before withdrawing from or closing any existing joint accounts, you can still begin establishing your own checking and savings accounts in the meantime.
Tip #4: Apply for a Credit Card in Your Own Name
You will have less income coming in after the divorce, so it could be more difficult to open a new credit card. Plus, you’ll want to close any joint credit cards down immediately to avoid being liable for debt accrued by your spouse. Open your own credit card, and begin using that one (responsibly) instead.
Experiencing a divorce isn’t easy, but making sure you’re financially ready to start your new chapter can make things a little less stressful. Speak with a trusted financial professional to figure out how to best get your finances in order so that you can start fresh and look forward to a strong financial future.
As a Certified Divorce Financial Analyst (CDFA®), I take real pride in helping my clients through the financial challenges of divorce. Seeing the stress that can be relieved when they get a solid financial plan in place for their future is one of the most satisfying parts of my job.
If you’d like to learn more about how I and the rest of the team at Weiss, Hale & Zahansky Strategic Wealth Advisors can help you achieve your goals you envision for yourself through our Plan Well, Invest Well, Live Well strategic process, reach out to request a complimentary consultation at whzwealth.com, or call us at (860) 928-2341.
Presented by Senior Vice President, Financial Advisor Leisl L. Langevin CFP®, CDFA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084, 860.928.2341. http://www.whzwealth.com These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.
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