Friday, May 30, 2014
The end of a marriage can turn your finances upside down. Thus, is becomes crucial to protect your financial security by untangling savings and investment accounts, real estate, and other assets you have accumulated during your marriage. You must also update your estate plan and replace health insurance coverage that might be lost when you split from your spouse.
Here are key questions to ask before, during, and after a divorce proceeding, so you may ensure your financial security:
- Where is the money? Before you can divide marital property, you need to know what the property consists of. Marital property is money you or your spouse earned during the marriage and the things you purchased with that money. Collect tax returns, pay stubs, property deeds, vehicle registrations, insurance policies, account statements, and awards-program documents.
- What are the tax consequences? Alimony is taxable to the recipient, and tax-deductible for the payor. If you are receiving alimony, you may want to have more money withheld from your paycheck. Consider whether alimony may bump you up to a higher tax bracket or make your Social Security benefits taxable.
- How will we split retirement savings? Moving IRA assets between divorcing spouses is relatively simple. The transfer is tax free if done under a divorce decree. Make sure it is direct from the custodian of one IRA to the other. On the other hand, dividing a 401(k) can be more complex, and you typically need a qualified domestic relations order. In these situations, it can pay to find a lawyer specializing in estate planning to help guide you.
- Should I keep the house? Oftentimes keeping the house can be the biggest mistake, especially if you give up other assets in exchange for the house. Some planners suggest keeping the family home for a few years after the divorce to preserve the tax advantages of selling the home as a couple.
- Will I be insured? Denial of health insurance is a looming fear of divorcees, however the Affordable Care Act should ease health-coverage concerns for many divorcing souses. Under the new law, insurers can no longer deny coverage or charge people more based on preexisting conditions.
- How will my estate plan change? You should begin updating your estate plan as soon as you see a divorce in the future, otherwise it may be too late. While some state laws aim to protect people from accidentally leaving property to an ex-spouse—such as by automatically removing an ex-spouse as beneficiary of a life insurance policy after a divorce—those protections generally kick in only when the divorce is final. There is no protection if you are going through the process of divorce when you die, having not yet updated your estate plan.
See Eleanor Laise, Keep An Eye On Finances During A Divorce, Kiplinger Retirement Report, June 2014.