Nobody goes into his or her wedding day planning to get a divorce. Unfortunately, the hard truth is that half of the marriages in the United States end up that way.
If you see yourself headed towards divorce, recognize that in addition to the emotional distress of officially ending your marriage, you'll also have to handle a significant financial strain. Divorce has far-reaching effects on both you and your spouse's finances, so educate yourself about the specifics before you begin so you can come out in the best possible position.
Protecting your financial interests
Even if you are having a relatively amicable divorce, be ready to stand up for your financial needs. You have the right to your share of jointly held assets, and it is your responsibility to be aware of these assets and insist on getting what's due to you. Some couples opt to use a Certified Divorce Financial Analyst rather than a lawyer to assess the financial situation objectively and to help divvy up assets and debts in a fair way.
If you choose to hire a lawyer to represent you, which makes sense when you do not anticipate an amicable agreement, keep the cost of your legal fees in mind. They could quickly eat away at the savings and assets you are fighting over. Gather financial documents in advance to make your lawyer's job less time-consuming. In addition, communicate directly with your spouse when possible so you do not have to pay your lawyer to handle the communication.
Splitting assets evenly
In general, your goal is to divide jointly held assets so each of you end up with half of them. However, that may not mean turning everything into cash and dividing that amount in half. Instead, you'll often want to each take the full portion of some of the assets, while ensuring that the value of what you each get remains equal. For example, if you own a house together, one of you may want to keep the house but give up other assets, like a car and an investment account.
When you are splitting up investments, keep capital gains taxes in mind. Liquidating investments can trigger capital gains tax, so instead, you may want to sign over your share of particular investments to your spouse, while your spouse signs over other investments to you. This allows you to avoid paying penalties on investments you would otherwise want to continue holding.
Once you have decided how to split assets, you still have the work of signing the assets over to each other and breaking the ties on joint accounts. Go through all accounts systematically to ensure you do not discover months down the road that your spouse still has access to a bank account that was assigned to you. Likewise, follow-up to ensure that debts your spouse is keeping have had your name removed, so you are not liable for them.
In addition to signing over the accounts you are currently using, don't forget to change the beneficiary on accounts you are maintaining for the future. List a new beneficiary on your life insurance policy and retirement accounts and don't forget to update your will as well.
Keeping sight of the long-term impact
The financial effects of divorce will ripple forward long past the signing of the divorce decree. For example, you'll see the effect on your credit score for years. This is especially true if the majority of the borrowing you did as a couple was in your spouse's name. This may leave you without any credit history of your own. If you had joint accounts, it is better to keep them open in just one of your names instead of closing them entirely because the longevity of accounts impacts your credit score.
If your divorce settlement included alimony or child support payments, these would affect your finances for only a period set out in the agreement. If you are receiving alimony or child support you'll eventually stop getting, don't forget to plan ahead for how you'll manage your finances when your income drops.
Regardless of whether child support or alimony is involved, you'll likely feel some financial strain shortly after the divorce because you are transitioning from one household into two. That means paying for two places to live, two sets of utility bills, and missing out on discounts for buying things like insurance and food together. Therefore, take the time to make yourself a budget that takes your income and expenses into account, and downsize your lifestyle as necessary to make your budget balance.
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