Money and Divorce
– A Brief Primer
By Lawrence H. Kohlenberg, CPA, CFP™, CDFA
There are approximately 1.4 million divorces
each year in the United States.
Lifestyles are drastically changed after
divorce; a major reason for this change is due to the financial
issues. Will you have enough money to live on after your divorce?
Will you have to change your spending habits? Will you be
able to retire? Do you want to keep the house? How will your
assets be affected? These are some of the issues briefly outlined
below.
Property:
The first thing to consider is identifying what type of property
does a married couples have, how much is it worth, and how
should it be divided?
In most states it is important to know if
the property is separate property (property that is brought
into the marriage, inherited during the marriage or received
during the marriage as a gift) or marital property (any property
acquired during the marriage, regardless of whose name it’s
in, and in some states, the increase in value of the separate
property.
Career Assets:
A major problem is whether a professional degree (i.e. a medical
degree, a law degree) and other career assets should be recognized
as marital property and divided. A monetary value has to be
placed on these and calculating that value presents a second
set of problems. One spouse may postpone or abandon education
to put the other spouse through school or help him or her
get established. Even in a two-income family, priority may
have been given to one spouse’s career in the expectation
that both would share in the benefits.
Pensions and Retirement Plans:
Principally, there are two types of employer retirement plans:
Defined Contribution Plans, which means that there is an account
with a certain amount of money in it as shown on your monthly
or quarterly statement, and Defined Benefit Plans, which is
the payout of a future stream of income, a promise to pay
by the employer, and is usually not held in a specific account.
To divide this asset in divorce, a QDRO is used. QDRO stands
for Qualified Domestic Relations Order. This is a legal document
that is sent to a qualified retirement plan to tell them how
much of the retirement money should be sent to the ex-spouse.
Specific rules determine the use of these funds and the court
can award any percent to the spouse.
Health Insurance:
This is another career asset which can create issues for the
non-wage earner, especially if there is any type of health
issues that may prevent a former spouse from securing his
or her own policy. The type of employer and type of employer
policy will determine whether one continues the same plan
or seeks alternate coverage.
Maintenance and Child Support:
Maintenance is really another name for alimony; maintenance
is taxable to the recipient, and deductible to the person
paying it. Child support is neither taxable as income, not
deductible from income for the payer. There are no tax implications
in child support. Child support guidelines vary by state,
and tend to take into account the gross income of each party,
the types of expenses the parents incur, and how long the
child (ren) stays with each parent.
Splitting the House:
There is almost always a house involved in a divorce; the
question of who gets the house is one of the biggest to deal
with. Should the wife or the husband get it, or should they
sell it and split the profit (if there is one)? Oftentimes,
the answer isn’t clear. One must remember that this
is an asset that does not create income. Determine if the
mortgage payments have been made on the home, and if not,
consider how the mortgage will be paid up current, before
the home goes to foreclosure.
Social Security:
If a couple has been married for 10 years or longer and they
get divorced, the spouse is entitled to half the other spouse’s
Social Security provided certain provisions are met. This
rule does not diminish the amount a spouse receives at retirement,
so this is usually less of an issue, especially in a marriage
of long duration.
In a divorce, a good knowledge of the financial
assets of the marriage and the impact of receiving an equitable
settlement (not necessarily equal settlement) can impact a
party in divorce for the rest of his or her life.
Like all major life changing events
one should be prudent in consulting with competent
financial and legal professionals.
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