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Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas.
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When it comes to divorce and money, at least some financial strain is to be expected on top of the emotional trauma of ending your marriage. Unfortunately, with so much going on, couples are sometimes surprised—and often overwhelmed—by the changes that their personal finances are about to go through.
However, if you go into the divorce process with a good understanding of how it will impact the various facets of your finances, and enlist a team of professionals to guide you, you’ll be able to handle it in the best way possible.
From splitting assets to understanding the tax implications of divorce, read on for expert advice on how to prepare for the most common issues relating to divorce and money.
There’s no way around it: Divorce can be an expensive legal process.
“The longer you spend with attorneys figuring out asset division and custody, the more you end up paying and the longer your dissolution drags out,” said Rachel S. Ruby, a California-based attorney, former divorce mediator, and the author of the book “Divorce To Bliss,” in an email interview with The Balance.
As someone who has been through a divorce herself, Ruby advised trying to seek amicable solutions for dividing assets and custody, if applicable, even before hiring lawyers. In her divorce, Ruby and her ex-spouse agreed to split everything, and it helped defray some of the costs (other than some issues that were spelled out in an attached stipulations list).
“Most divorces are or become contentious so this is not possible, but if the parties work together, they can save a lot of money,” she said.
An uncontested divorce—one in which spouses have reached an agreement on logistics, such as splitting finances and child custody logistics among themselves—is often a cheaper option. It can avoid the higher cost of legal bills, and a lengthy court process.
Divorce is a huge financial event. Seeking advice from financial professionals can be a smart investment in the long run, especially if your finances as a couple are complex, according to Samantha Garcia, CDFA and wealth advisor with California-based Halbert Hargrove.
Whether or not you hire a divorce attorney, working with a CPA, a financial advisor, and/or a CDFA can help you understand both the short- and long-term impact of how assets get divided. For example, said Garcia, a house worth $750,000 and an individual retirement account (IRA) worth $750,000 may look equal on paper today, but you have to look toward the future to see what the tax implications are and how the values may change after divorce.
Depending on where you live, there may be different rules around “who gets what” when it comes to marital assets. If you live in one of the nine community property states—AZ, CA, ID, LA, NV, NM, TX, WA, and WI)—the rule is that all assets acquired during the marriage by either spouse are considered joint marital assets. As such, they will be divided 50/50 between the spouses.
In all other states, how assets are divided varies case by case. For some, the soon-to-be exes (and their lawyers) may be able to strike up a deal and split assets pretty evenly. In other cases, such as if there are debts to be paid off, it might make more sense to sell the marital property and divide the proceeds after the bills are taken care of.
Mediators or arbitrators can help divorcing couples decide what’s fair, but when they can’t agree, that’s when lawyers may need to be retained and a judge must make a ruling.
If you and your spouse own a home together, it can be sold and proceeds split, or one spouse can buy out the other. But it may not always be as simple as an even split (especially if you’re not in a community property state), said Garcia.
Some questions that may come up, according to Garcia, include:
When Anna Maassel, an investment advisor representative and retirement planner at Voyageur Advisory Group in Maumee, OH divorced, there was a large amount of equity, and she and her ex had to pay $55,000 in capital gains taxes.
“That’s not an insignificant amount. I had to take that money out of the proceeds and put it in a separate account right away so that I could pay my taxes when they were due,” Maassel said in a phone interview with The Balance.
If you share checking and savings accounts with a spouse, it is recommended to either cancel those accounts and establish accounts in each individual’s name, or at least freeze them until the divorce process is final. If the account remains open, either spouse will be able to access the funds, and that can become a problem if one of the parties wants to be vindictive and drain the account.
State laws can often provide protection for you if your partner redistributes funds in a joint account to a separate one without consulting you. If this happens to you, consult with an attorney for the best guidance.
To close a joint account, you and/or your spouse may need to physically go into a branch, though some banks may let you close your account via email, by phone, or in writing.
Ruby advised speaking with an attorney or financial advisor to understand the best timing for this process, however. For example, if you’re selling a home that is in both spouses' names, there may need to be one joint account in which to deposit proceeds until the sale.
“Our escrow officer was able to deposit net proceeds of the sale equally (what we had agreed upon) into our individual accounts, and once everything was done, we both signed off and closed the remaining joint account,” said Ruby.
When it comes to who will pay off outstanding debts, lenders and creditors expect payment from the person whose name is on the loan or account, said Maassel.
The same is true for credit cards or other debts that were incurred during your marriage. In most cases, the person whose name is on the account will be responsible, while joint debt will be split equally and impact both spouse’s credit scores.
Until everything is settled and officially divided, though, be sure to continue paying at least the minimum amount due on all bills to protect both of your credit files. Once shared debt is paid off, it’s advisable to call each creditor and follow their procedures for closing any joint credit card accounts.
For a quick financial inventory, order your credit report from each of the three credit reporting agencies: Equifax, Experian, and TransUnion. These reports list every account you have and every debt you owe, including joint accounts you share with your spouse.
Typically during divorce proceedings, the spouse that is on the other’s health insurance cannot be kicked off, said Maassel. But once the actual divorce has been granted, the spouse without coverage will have to pay for COBRA, go through the healthcare marketplace, or apply for Medicaid benefits.
When in the midst of divorce, speaking with a tax accountant is a smart idea, especially if you have complex assets, said Maassel.
“For example, it was better for me to file as head of household than single. Those are the types of nuances that tax pros understand,” she said.
Other tax to-knows from the IRS include:
Your tax status is based on what your marital status is on Dec. 31 in the year prior to filing. So if your divorce was final on Dec. 15, 2022, you would claim single (or head of household, if applicable) when filing in 2023.
When going through a divorce, changes to your retirement plan are likely.
“If your retirement goal is 65 and you’re getting divorced at 55, will you still be able to meet your goal?” said Garcia. This is an important question that likely requires the help of a professional.
Beyond that, you’ll also want to understand what happens to retirement funds after divorce. Retirement accounts, including 401(k), IRAs, and pensions are considered marital assets. In other words, as part of your divorce settlement, retirement accounts will be divided just like other assets. It could be 50/50, or it could be done in another way.
Splitting retirement accounts requires a legal process called a qualified domestic relations order (QDRO). You’ll need the help of a lawyer to do this, and it will result in rolling amounts into each individual’s own account or rollover IRA.
Financials will look very different for each individual after a divorce, so it’s important to take a holistic look at other expenses, said Garcia.
The first place to start is by listing and then keeping tabs on what’s coming in and what’s going out. In other words, each party should work out a brand new budget for themselves. From there, you’ll need to sort out how existing bills will be dealt with, and examine new expenses that may emerge.
With any life change, your expenses may change drastically and it's important to prepare accordingly. This is especially true in the case of divorce, going from two shared incomes in one household to an individual stream of income. Some potential cost changes to plan for include moving to a new home, pet care, and therapy.
If you share children, custody arrangements will likely impact just about everything else money-wise, said Garcia. Some questions she recommends you and your spouse work through together include:
When children are involved, a CDFA or financial advisor can help you think through some of the key questions that need answering.
The cost of a divorce can vary depending on location, the complexity of the financial assets, and how amicable the divorce is. Even the simplest of splits will incur at least a filing fee of a few hundred dollars, while more contentious divorces that involve various assets can reach as much as $20,000 or much more.
Having a team of advisors, including an attorney, a CDFA, and a CPA can help ensure that you aren’t agreeing to terms that are unfavorable. It’s also wise to have bank accounts and credit in just your own name so you have access to supporting funds. Finally, pulling each person’s credit report during the process will ensure that all financial obligations and accounts are disclosed so there are no surprises later on.
