Divorce is inherently an end and a beginning. The same can be true for finances post-divorce, provided you know how to keep your money intact during the transition.
When going through a divorce, there are some financial aspects to keep in mind. Here’s how to prepare for the present and future costs of divorce:
Weigh the cost of disagreeing
Assuming your spouse is willing to divide assets fairly, an amicable separation may prove to be in your best financial interest, particularly considering the costly professional fees that come with a bitter and lengthy divorce proceeding.
Larry Rich, Divorce Magazine contributor and senior partner at Rich Rotstein, estimates average hourly rates for “intermediate level” lawyers and accountants at $275 and $250, respectively.
Even in the case of a “simple divorce” (meaning both parties manage and agree to the division of assets), Rich says you’ll likely pay about $400 to $700 for basic legal assistance. If a decision cannot be reached, those hourly rates accrue throughout the processes of preparing a pleading, financial statements, court documents, periodic meetings with one another’s legal representation, and actual court and/or trial time.
Prepare for taxes
Depending on the state you live in, the conditions of your settlement, and how you and your ex previously handled tax filing, you’ll benefit from paying a tax professional to guide you through at least your first post-divorce tax filing, to ensure that you are aware of the new tax advantages, and burdens, divorced life entails. (Remember that professional fees related to tax filings are deductible).
For example, alimony you might receive is considered taxable income, and can require that you pay quarterly estimated taxes. However, depending on the state you live, alimony you pay to your ex may be tax deductible. Cash or assets that changes hands among spouses (outside of alimony) may be subject to gift tax, and if you live or work in a community property state, you may be subject to additional taxes.
Aside from the burdens, however, there are some advantages. Though the Internal Revenue Service states that “you cannot deduct the costs of personal advice, counseling, or legal action in a divorce,” fees you paid to appraisers, actuaries, accountants or similar professionals in regards to alimony may be, as might fees related to property settlement matters in the divorce.
As soon as your divorce is final and you can reasonably predict your new income, adjust your payroll tax withholding to ensure that contributions are accurate.
Tend to your accounts
If you and your spouse had shared bank accounts, your first order of business should include closing joint accounts, and transferring direct deposits, automatic bill payments, and any retirement or savings contributions that you’ve automated into new, separate accounts.Update beneficiary information on liquid, retirement and brokerage accounts, too.
If you and your spouse shared lines of credit, Charles Schwab financial consultant Sande Taylor says that opening a major credit card in your name only to establish personal creditworthiness after divorce should be a top priority, as should monitoring your credit report activity the to ensure that old joint accounts are not being used.
If you’ve legally changed your name post-divorce, expect some delay with credit reporting agencies. Once you have your own line of credit in place, close joint credit card accounts. Date the letters or correspondence clearly stating that you’re no longer responsible for new charges, and keep copies.
While confronting your new income and (possibly) tighter budget may be the last stressor you need, planning realistically for your new lifestyle is the key to emerging from a divorce with financial wealth as in tact as possible.
Credit counselor Suzanne Cramer says that “many people assume they can keep up their standard of living following a divorce without giving up any of the ‘luxuries’ (like dining out). But, when the money falls short at the end of the month, they turn to credit cards and the debt quickly adds up.”
Think beyond the short-term
Divorce settlements can provide finality in terms of knowing what monthly income and expenses you’ll need to budget for, but there’s a longer-term viewpoint to consider when you may be the only contributor to your future retirement goals.
[pull_quote align=”left”]Women tend to struggle with long-term financial planning after divorce, despite being adept at day-to-day money management.[/pull_quote]Certified financial planner Samantha Fraelich of Bernard R. Wolfe & Associates, Inc. says that women tend to struggle with long-term financial planning after divorce, despite being adept at day-to-day money management.
If you’re not aware of where your finances stand post-divorce or how to start the rebuilding process, seek the advice of a financial professional. If you don’t have significant savings after divorce, focus on building a liquid savings fund equal to at least six to nine months of your income in the event of job loss.
Additionally, Fraelich says divorcees, specifically those with children, need current life and disability insurance policies with realistic coverage.
Divorce is also a critical time to be proactive in estate planning, including ensuring that a current and valid will, power of attorney, and medical directive is in place — and that a loved one aside from your spouse is aware of its whereabouts.
