How I’d Protect Myself Financially in a Divorce

Divorce is, among other things, the largest financial transaction we’ll likely sign in our lives. Divorces usually come to us at the worst time to think clearly. We might be feeling sad, angry, or relieved, all in the same day. While you’re dealing with those emotions, you’ll be making decisions about retirement accounts, and whether to keep the home. This guide doesn’t provide legal guidance. It provides information in plain language so that when you go to meet with an attorney, you’ll know what questions to ask.

If you’re in your late 40s or early 50s, you may also be providing financially for children and assisting older family members. If that’s true for you, your long-term financial stability may be the easiest item to cut corners on by mistake.

Collect and make copies of all your financial documents first

Before you do anything else, create a full picture of what you and your spouse own and owe. Make copies of your last 2 to 3 years of tax returns, current paystubs for both of you, bank and brokerage statements, retirement and pension statements, mortgage and loan documents, credit card statements, and the declarations pages of any life insurance policies. Get a copy of your credit report as well, so that you can view all accounts that include your name, even ones you may have forgotten.

Keep the copies out of reach of your spouse, such as storing them with a trusted friend or in a secure private cloud folder that requires a password only you know. When people feel trapped, they may begin to hide or move money, and the paper trail is difficult to reconstruct after the fact.

Create new accounts solely in your name

If you don’t have a checking or savings account and at least one credit card solely in your name, please establish these now. Having sole ownership of accounts helps protect against joint accounts being depleted or frozen during a separation. Your own established credit history also lets you rent, borrow, or buy once the separation has concluded. Direct deposit your paycheck into your newly created individual account, and speak with your attorney before closing or emptying any joint accounts, because the courts may view such actions as an attempt to conceal assets.

Know the difference between marital and separate property

The majority of the items acquired during the course of a marriage are considered marital property, regardless of whose name appears on the deed or title. Marital property is subject to division, either through a settlement agreement or as part of a court-ordered decision. Separate property includes property brought into the marriage by each party before the date of marriage, inheritances received by either party, gifts given exclusively to one party during the marriage, and income from separate property, as long as neither party mixes those funds with their shared funds. Most jurisdictions use equitable distribution methods for dividing marital property, although a few jurisdictions use community property methods. Under community property laws, marital property is usually split about equally. Under equitable distribution laws, marital property is distributed fairly, but not necessarily equally.

Use a QDRO to properly divide retirement plans

Retirement plans such as 401(k)s and pensions can’t be awarded through a divorce decree. They require a specific court order called a Qualified Domestic Relations Order, or QDRO, which allows the funds to transfer without triggering taxes and penalties. Don’t assume this issue will resolve itself. It should be addressed proactively.

Don’t overlook Social Security and pension benefits

When splitting up later in life, retirement-related benefits are frequently overlooked, and so lost.

“With the rise of “gray divorces,” pension plans, 401(k) plans and spousal benefits from Social Security all need to be reviewed and reevaluated, as money is being left on the table for some”

— David Freitag, financial planning consultant at MassMutual, quoted by AARP (source)

You may qualify to receive Social Security benefits based on your ex-spouse’s earnings record if your marriage lasted at least 10 years and you have not remarried. A pension earned during the marriage may also be divisible. Like Social Security, pensions are easy to overlook when your attention is on the house. But pensions and Social Security benefits are frequently worth more than the house being fought over.

The house: keep it, sell it, or buy each other out

The family home is often the most significant and, for some, the most sentimental piece of any couple’s portfolio. But in the heat of the moment, the urge to hold on to it can be a hindrance. When one income has to cover a house that was never meant for it, what was once an asset turns into a liability, siphoning off funds you’ll have to make do with down the line. It’s worth looking at the hard figures before making a stand: put the mortgage, taxes, insurance and maintenance side by side with your own earnings and see if it adds up.

Put it this way: as a rule, there are three ways to go. The most straightforward is to put the house on the market and divide what you get. Then there’s the option for one party to buy out the other; in that case, you’ll have to refinance the mortgage in your name and be able to stand on your own for the loan. A third possibility is to co-own for some time, perhaps until the kids are out of school. That means you’re still in the same financial boat with an ex, so any such arrangement needs to be well-documented. It isn’t about finding the right answer so much as the one that puts you in a secure position.

Health insurance after the split

A divorce will put an end to any health coverage you were on through a partner, and it isn’t something to be left unaddressed. There’s COBRA, for instance, as a way to remain on the employer’s plan for as long as 36 months post-divorce. The catch is that the ex-spouse has to foot the bill for the entire premium. After being used to a subsidized price for some time, the cost can come as a surprise. It’s a means of buying time, if nothing else, but it’s seldom an inexpensive option.

There’s another way to go about it. A plan via the health insurance marketplace, for instance. A divorce is treated as a qualifying life event there, which means a special enrollment period is available and you aren’t put on hold until the end of the year. On top of that, with an individual income that’s likely less than what was in place when you were a couple, one might be in line for some subsidies. In many cases this can be a better value than COBRA. It’s worth running the numbers on both before making a move, and to avoid any lull in coverage.

Update every document that still names your ex

Think about it: a divorce decree isn’t a magic wand for the documents that govern your finances, and that’s where some end up with a problem down the road. The reality is that a beneficiary designation on a 401(k) or an insurance policy will trump what you put in your will. An ex can come in and claim their share if they’re still on file, no matter what you intended. When the time is right after the papers are signed, make sure to review all your accounts, put in new beneficiaries and have a contingent one as well.

You can put the same order to the rest of your affairs. It’s time to have your will and powers of attorney redone, with the understanding that an ex shouldn’t be in a position to call the shots on your finances or health. Then there are the practicalities: new passwords for your email and accounts, any joint access done away with, and a credit monitoring service in your name. It isn’t much to look at, but as a whole it puts a finality on things a court order may not have.

Spousal support and the tax rule that changed

There’s the matter of alimony, or what’s more commonly referred to as spousal support. In short, it’s a way for one ex-spouse to put some money in the other’s pocket for a while after the divorce, to make up for a sudden change in lifestyle. The terms are all over the map, depending on which state you’re in and how long the couple was together; it’s invariably a point of hard bargaining in any settlement. A good idea is to get a handle on how it works before meeting with an attorney.

Here’s a way to put it. A lot of people are taken aback by one particular tax issue. If the divorce is put in the books after 2018, the payer can’t write off alimony and the recipient doesn’t have to declare it as income. The rules have been turned on their head, which has an effect on what a support figure is actually worth. So when you’re looking at an offer, look past the top-line number to see what’s left after taxes. Have your lawyer and a tax advisor put some numbers together for you.

Photo by Michael Pfister on Unsplash