Financial Considerations for Your Divorce

April 30, 2020

Financial Considerations for Your Divorce

Marital addition and disposition can both be expensive transactions, that sounded entirely too much like a business transaction, huh?

When we choose to enter into a marriage, a legally binding union, we also assume our partners assets and liabilities as our own, unless a prenuptial agreement states otherwise.  So, when you get married, there may now be payments for new debt service (loan payments, credit card payments, other bills) that were not previously part of your financial picture. 

Likewise, when a marriage ends in divorce, there is certainly a business transaction component as well.  Who gets what?  Do you get to keep your retirement accounts, do I get to keep mine?  Who gets the house?  Who gets the debt? While dividing up the "stuff" is a big piece of uncoupling, individuals should also be prepared for another potentially large expenditure...attorney and other professional fees.  In my experience, I've seen individuals spend on average $10,000 to $20,000 on attorney fees alone.  So, if you are planning to use an attorney, be sure that you are also prepared to take on the financial responsibility of doing so.  

If you and your spouse are moving into a divorce, it will also be helpful to consider the following:

Insurance:

-Who is going to cover health insurance for any minor or eligible children and for what period of time?

-How will medical expenses after insurance be split?  How will you pay medical bills and/or reimburse the ex-spouse on a go-forward basis (how often, in what form, what tracking/documentation will be required)?

-Who will pay for the existing life insurance policies that are in place? 

-If there is a cash surrender value to existing permanent life insurance policies, have those values been considered in the division of marital property?

-Will you or your ex-spouse be required to carry life insurance for the benefit of the other to compensate for any child support or alimony obligations in the event of your untimely passing?

-Who will insure your physical property up until the finalization of the divorce, how will said costs be split, how will coverage be transferred to the appropriate party after finalization of the divorce?

 Shared responsibilities for raising children:

-How will costs of non-medical expenses be shared?  Can each parent individually incur an obligation for which they will both be mutually responsible or do both parents have to agree (such as signing up for summer soccer)?

-Will either or both parents have an agreed upon obligation to help with first cars, college, weddings, etc? If so, how will those obligations be accounted for?


Tax Liability:

-Who will claim which child(ren) in which year?  

-What resolution procedures will be considered in the event that one ex-spouse does not claim the appropriate child(rent) in the appropriate tax year?

-Have you met with your Certified Public Accountant (CPA) or tax advisor to understand the tax implications down the road of the assets/liabilities that you have assumed in the divorce?  (For example, if you get the the pre-tax IRA money and your ex-spouse gets the Roth money, you will pay future income tax on those dollars vs. your ex-spouse will pay none, thus those dollars are not equal in net value to you each down the road.  Another example, if you take the rental properties and your ex-spouse takes the cash in the bank account, you will incur capital gains taxes some day if you decide to liquidate the rental properties and your ex-spouse will incur no tax liability on the cash.)

 

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. Waddell & Reed does not offer tax or legal advice.  (04/20)