Untangling Your Finances When You Divorce: Don’t Forget These Important Details
Whose name is on the title to the house? Is the person paying child support covered by a life insurance policy? Have you changed your tax withholding now that you won’t be filing as married? These are all important but often forgotten details.
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. Whether it is the husband or wife who has been in charge of the finances, it is important for both spouses to get familiar with their planning.
Let’s break up the task of untangling years of intermingled finances into three parts.
Part 1 of the Law of Division: Your Accounts
Get Your Home Title and Mortgage Squared Away
The largest asset to deal with in a divorce is usually the house. If the house needs to be sold, keep in mind there may be a large capital gain on the property, which needs to be accounted for.
Who is on the mortgage? Does one spouse need to come off the liability? This may be 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 getting 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 damages your property or a leak damages a neighbor’s property, you can potentially get sued just from 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 that 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 hurt your credit.
Undo Any Joint 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, relinking and direct deposits or EFT payments. If you have retirement accounts, the court may issue a QDRO (Qualified Domestic Relations Order), which will allow splitting these assets and putting half in the other spouse’s name. It is important to check the beneficiaries on IRAs after divorce to make sure the beneficiary is not the former spouse (unless that is what you want). Same thing with your retirement savings account at work: The beneficiaries on your company 401(k) can easily be overlooked, since statements may be sent annually.
You should make sure any individual accounts have a transfer on death listed. This is the person the account will go to if you pass away. If you have any joint credit cards, you may want to cancel them. 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.
Check Your Credit Reports
If your spouse has been dealing with the finances and most of the bills and credit is in their 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, otherwise your credit could suffer.
Part 2 of the Law of Division: Examine Your Insurance
Do You Now Have More Home Insurance Than You Need?
Oftentimes, 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 inventory your 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.
Prepare for Rising Car Insurance Rates
Your car insurance rates may increase. This is due to marriage discounts the insurance companies provide. Being married indicates some stability to the insurance companies and lowers your insurance premiums. 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 “housing” for the car changes, this could also affect your premiums. For example, if your car moves from a secure garage to an outdoor parking spot, this could cause your premium to rise, depending on the carrier.
Life Insurance Issues to Consider
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 plan with your attorney to make sure your trusts don’t 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 sustain themselves. The spouse who receives the child support should be the beneficiary of this policy.
How about Health Insurance?
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 go and find individual coverage on their own.
Part 3 of the Law of Division: Taxes & Financial Planning
Filing Taxes as Single Can Take a Toll
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 traditional IRA and retirement accounts. Work with your accountant/CPA to make sure these items are handled correctly.
Reconsider Your Financial Plan and Investment Allocation
After your divorce, can your financial plan work separately? Things are likely going to get tighter for both spouses because paying for one household may change to paying for two. Income in retirement may also decrease with respect to pensions and social security income.
If your income is significantly lower than your spouse’s, 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.
Time for a New 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 may have changed significantly or may be different to your collective results. You may need to go through the risk-analysis process again, which could lead to a change in your overall asset allocation.
About the Author
Senior Financial Adviser, Evensky & Katz/Foldes Financial Wealth Management
Roxanne Alexander is a senior financial adviser with Evensky & Katz/Foldes Financial handling client analysis on investments, insurance, annuities, college planning and developing investment policies. Prior to this, she was a senior vice president at Evensky & Katz working with both individual and institutional clients. She has a bachelor’s in accounting and business management from the University of the West Indies, she received an MBA at the University of Miami in finance and investments.