The Law of Division: Planning after Divorce — Taxes & Planning

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Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Financial Advisor

Taxes

Your tax filing status will be your status as of the end of the year. This may cause your taxes to increase or lead to an additional liability. If you are a W2 employee and have been withholding for most of the year based on being married, you may end up under-withholding if you now have to file as single. Married people get more tax breaks, so you could unexpectedly end up forking more over to the government. It is possible that you have been making estimated payments for that year; if so, who gets the benefit?

Also, if mortgage interest and property taxes were paid for that year, who gets to use the deductions? It is important to discuss these things up front as they can trigger audits if they are deducted on both tax returns. This is especially true with listing dependents — if both spouses list the same child as a dependent, you can get in trouble with the IRS.

Retirement assets do not have the same value as after-tax assets — this should be kept in mind when splitting up assets. Uncle Sam owns a share of IRA and retirement accounts.

Work with your accountant/CPA to make sure these items are handled correctly.

Financial Plan and Investment Allocation

After your divorce, can your plan work separately?

If one spouse does not work and lives on alimony, you have likely cut your income considerably while increasing expenses to support a spouse — paying for one household may change to paying for two households. Income in retirement may also decrease with respect to pensions and social security income.

If your income is significantly less than your spouse, you are going to need to re-evaluate your budget and goals. Who is responsible for the children’s education? What goals do you now have as a single person?

Having a budget for each spouse and knowing what each person needs to survive alone should be calculated. There is no point in keeping a home or property you cannot afford to support alone.

Risk Analysis

You may have done a risk analysis with your spouse and come up with an investment allocation together. At this point your risk tolerance has possibly changed significantly or may be different from your collective results. You may need to go through this process again, which could lead to a change in your overall asset allocation.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@ek-ff.com 

The Law of Division: Planning after Divorce — Insurance

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Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Financial Advisor

Insurance Policies

Often, property and casualty policies may be issued in the name of one spouse. This is usually the case with homeowners insurance. If you receive property from a divorce, you should make sure the policy has your name on it in the event of a claim. It would also be prudent to relist personal property after the split as you may be paying a higher premium when you now only need half the coverage. For example, if you move from a four-bedroom house with $60,000 content coverage to a two-bedroom, you may only need $30,000 worth of coverage. You could also be paying extra for valuables such as jewelry and art belonging to your former spouse so it is important to re-evaluate your policy.

Your car insurance may also increase, due to marriage discounts insurance companies provide. You will also have to remove any stacked coverage if you no longer have two or more cars in the household. If your address changes or the garaging for the car changes, this will also affect your premiums. If your car moves from a secure garage to an outdoor parking spot, this could also cause your premium to increase, depending on the carrier.

You may have various life insurance policies, maybe some with your employer. Check the beneficiaries to make sure they are in line with your desires. If you want minor children as beneficiaries, you may need to set up trusts. You should also revisit your estate planning with your attorney to make sure your trusts do not list your former spouse as trustee (unless that is your desire).

It may also make sense to get term insurance coverage on the spouse who pays child support until the children are old enough to support themselves. The spouse who receives the child support should be the beneficiary of this policy.

If health insurance is provided by the employer of one of the spouses, how will the other spouse get coverage after the divorce? Are the dependents covered under that policy?

This can be a financial hardship if the other spouse has to find individual coverage on his or her own.

Credit Reports

If your spouse has been dealing with the finances and most of the bills and credit are in his or her name, you will need to establish your own credit. You want to make sure your name is not on anything belonging to your former spouse just in case a payment is missed and your credit is affected negatively.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@ek-ff.com 

The Law of Division: Planning after Divorce — Accounts

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Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Financial Advisor

Divorce is an emotional time for everyone involved, but neglecting diligent follow-up can impact your finances. There are several areas that can easily be overlooked when you are constantly having disagreements, child custody battles, and alimony issues. Whichever spouse has been in charge of the finances, it is important for both spouses to become familiar with their planning.

Real Estate

The largest asset is usually the house. If the house needs to be sold, keep in mind there may be a large capital gain on the property that needs to be accounted for. Each individual is allowed to take a $250,000 home sale tax exclusion. The joint $500,000 (for married couples) home sale tax exclusion on the gain on the sale of the house may still apply even though you are going through a divorce.

Who is on the mortgage? Does one spouse need to come off the liability? This seems easier said than done, but most banks will require a new loan in the name of the party who gets the home. If the person granted the home in the divorce cannot qualify for a new loan, this can be a problem. Banks allow loan assumptions for several reasons, but the process is similar to obtaining new financing. Avoid removing your name from the title before the liability is released.

If you are not granted the house or other real property, but your name is still on these assets, you are still subject to liability if something happens. For example, if a natural disaster causes damage to your property, or a leak causes damage to the property of a neighbor, you can potentially get sued just as a result of being listed on the title. An umbrella insurance policy is fairly low cost and can help in these circumstances.

You are also still liable for any maintenance fees or assessments which are not paid along with property taxes if your name remains on the title. If your former spouse fails to pay these fees on time, this can negatively affect your credit.

Bank and Brokerage Accounts

“Removing” a joint owner on an account is easier said than done. After divorce you will need to open individual or trust accounts and close existing joint accounts. This requires ordering new checks and relinking direct deposits and EFT payments. If you have retirement accounts, the court may issue a QDRO which will allow splitting these assets and putting half in the other spouse’s name. It is important to check the beneficiaries on IRA accounts after divorce to make sure the beneficiary is not the former spouse (unless that is what you want). The beneficiaries on your company 401K can easily be overlooked since statements may be sent annually.

You should make sure any individual account has a transfer on death listed. This is the person the account will go to if you pass away and the account will avoid probate. If you have any joint credit cards, you may want to have them cancelled. If the joint account is linked to any other individual accounts you may have, you will probably want to unlink it.

Setting up a trust for minor children should also be discussed with your estate attorney.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@ek-ff.com