Planning and Financial Concerns of Divorcing Couples
• The financial change caused by divorce can be devastating to families with children and to older couples where one spouse has the career duties, and the other has the homemaking duties
• If you are seeking a divorce, you should be familiar with the major topics: marital property versus separate property, alimony, investments, debt, retirement plans, property settlement, taxation, budgeting, legal fees, child custody and child support. Also consider risk management, and if you're older, Social Security
• In divorce law, assets are divided in accordance with state law
• For divorce law, property may be classified as either separate property or marital property
• If you have children and are geting a divorce, your divorce terms must determine the extent of child support, and possibly the necessity for enforcement of child support payments
• Most judges base child custody on a number of factors, with primary importance on the best interests of the children
• Most states have child support guidelines for determining the amount of child support
• Child support orders can be modified when there's a change in circumstances; most states provide methods for collecting unpaid support
• Alimony is based on one party's need and the other's ability to pay
• Property division covers the marital residence, debt, and retirement plans and Qualified Domestic Relations Orders (QDROs)
• If you're legally separated or divorced, become familiar with tax rules regarding filing status, dependent children, alimony, and property disposition
• During the divorce process, both spouses must disclose their monthly income and expenses. Claims for support (based on need and an evaluation of the other party's ability to pay) often originate from this financial disclosure
• Given the new situation after the divorce, both spouses should seek the guidance of experienced financial advisors
• Divorce attorneys typically charge hourly rates and require you to submit retainers (lump sums) up front
• If you are getting divorced, you may also want to hire an accountant
• Most legal and accounting fees and court costs for divorce are considered personal expenses and aren't income tax deductible
• Risk management should be considered when a divorce seems likely
• Social Security may be an issue if you're an older individual seeking a divorce after a long-term marriage
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Planning and Financial Concerns of Divorcing Couples
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Winter 2005
Marc L. Scudillo MS, MBA, CPA, CFP
Managing Partner, Amper Financial Services
Why is it important for you to
understand the basics of
divorce law?
While divorce is certainly a time of
emotional turmoil, it's a time of financial
upheaval as well. The financial change
brought about by divorce can be particularly
devastating to families with children and to
older couples who have assigned the career
duties to one spouse and the homemaking
duties to the other.
When seeking a divorce, you should become
familiar with the major topics: marital
property versus separate property, alimony,
investments, debt, retirement plans, property
settlement, taxation, budgeting, legal fees,
and, if you have children, child custody and
child support. You should also consider risk
management, and, if you're older, Social
Security.
By becoming knowledgeable about these
areas, you can provide your attorney (if any)
with a complete and accurate outline of your
wishes regarding the divorce settlement, and
you will be able to make an informed
decision before signing your divorce
agreement.
How is property
classified for divorce
purposes?
Assets are divided in
accordance with state law,
so it makes a difference
whether you live in a
community property state
or an equitable division
state. Within these two
categories of states,
property may be classified as either separate
property or marital property, but again, these
definitions will vary depending on your state.
Therefore, it's important for you to know
how your state classifies property. For
example, one state may mandate that
separate property consist of gifts,
inheritances, and property owned prior to the
marriage, and that such items will not be
divided between the spouses in the event of a
divorce. Another state may proclaim that all
property owned by the couple is marital
property, subject to division at divorce--it
doesn't matter who inherited what.
What should you know about child
custody, child support, and alimony?
When parents separate and divorce, one of
the most emotionally charged issues involves
the decision regarding who will live with the
children. Determining the extent of child
support, and possibly the necessity for
enforcement of child support payments, is
also cause for stress.
Child custody is based on a number of
factors. Most judges place primary
importance on the best interests of the
children. Custody may be classified as
physical or legal, and can be awarded to one
or both parents.
Most states have child support guidelines for
determining the amount of child support to be
paid. Child support orders can be modified
when there's a substantial change in
circumstances, and most states provide a
number of methods for collecting unpaid
support.
Alimony is also an important topic. Alimony
is based on one party's need and the other's
ability to pay. Deciding whether a spouse
should receive alimony (and, if so, how
much) is based on certain criteria, which can
vary from state to state.
What should you know about property
division?
Property division is a complex area,
encompassing such subtopics as the marital
residence, debt, and retirement plans and
Qualified Domestic Relations Orders
(QDROs.)
It also involves a number of other areas as
well, including: classification and valuation
of property, hidden assets, family businesses,
and structuring property settlements. The
Property Settlement at the conclusion of the
divorce will dictate how the assets and
liabilities will be divided.
What should you know about taxation?
If you're legally separated or divorced, it's
important to become familiar with the
applicable tax rules regarding filing status,
dependent children, alimony, and property
disposition. Indeed, understanding the tax
implications of your initial preferences
regarding child custody and property
settlement may alter or influence your final
decisions.
What should you know about budgeting and finances?
During the divorce process, both spouses
must determine and disclose their monthly
income and expense needs. Claims for
support (based on need and an evaluation of
the other party's ability to pay) often
originate from this financial disclosure.
It's not uncommon in a marriage for one
spouse to assume primary responsibility for
the family budget. For some couples, bills
are paid when due, but neither party tries to
stick to a budget. When two households are
created incident to a divorce, cash becomes
tighter and it becomes necessary to develop
a budget. A number of tools can be used for
this purpose.
We have also found it important to assist one
or both spouses in creating a new financial
planning framework to make important
financial decisions easier after the divorce.
Again, it is not uncommon that one spouse
to assume primary responsibility for the
investment decisions for the family. Given
the new situation after the divorce, it is
advisable for both spouses to seek the
guidance of experienced professional
financial advisors.
What do you need to know about legal fees & professional services?
When seeking a divorce, you'll want to
always consider hiring an attorney.
Depending on the complexity, you may want
to also consider whether an accountant
should be hired. If you wish to hire an
attorney, you should note that divorce
attorneys typically charge hourly rates and
require you to submit retainers (lump sums)
up front. These fees can be less expensive
or more expensive, depending on the
complexity of the case, the reputation and
experience of the divorce attorney, and the
geographic location.
If you're a financially dependent spouse
(such as a homemaker), it's possible for a
court to award sufficient legal/accounting
fees and costs to enable you to retain
competent counsel. Upon your submission
of an appropriate motion to the court, a
judge could order your spouse to subsidize
your legal fees for the divorce.
You should also consider the deductibility of
divorce expenses. In general, most
legal/accounting fees and court costs for
obtaining a divorce are considered personal
expenses and aren't deductible for income
tax purposes. However, you may deduct as a
miscellaneous deduction on IRS Schedule A,
subject to the 2 percent floor, any money
paid for advice related to the tax
consequences of your divorce or securing
income. Specifically, deductible items
include fees for advice on securing and
collecting alimony and the tax consequences
of property and payments received. On your
legal bill, your attorney should make a
reasonable allocation of the legal expenses
between tax-related (deductible) and nontax-
related (nondeductible) advice.
Do you need to know about risk management and Social Security?
Risk management should certainly be
considered when a divorce seems likely. The
selection of beneficiaries for your life
insurance policy will probably be revised,
and, in some cases, your health insurance
coverage may terminate. Often, for example,
one spouse participates in a group health
insurance plan at work that provides
coverage for both spouses. When a divorce
occurs, coverage for the non-employee
spouse may end. You need to know what
your health insurance options are and how
life, disability, and property insurance should
factor into your divorce agreement.
Social Security may be an issue if you're an
older individual seeking a divorce after a
long-term marriage. Be aware that, if you've
been married to your spouse for at least 10
years, you may (in certain cases) be able to
qualify as a dependent for Social Security
purposes. Thus, you might be entitled to
benefits, even if you never worked.
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