On a recent trip to Kroger, I couldn’t help but notice the barrage of magazines covering the marriage, and perhaps divorce, of golf great Tiger Woods. I’m not sure I understand why so many people find the marriages of famous people so interesting. Unfortunately, thousands of marriages end across our country every month, yet they somehow don’t make the evening news.
Over the past two weeks, I have had the displeasure of learning that clients in two families have separated and intend to divorce in the near future. Although these were very difficult conversations, they were very important conversations that needed to happen. Divorces often turn many aspects of life upside down. However, your finances are often one thing that can remain intact even if your marriage has not.
Having gone through this process with clients many times before, I thought it would be helpful to share some mistakes and issues many forget to address…
Cash Flow – There are many issues that will be taken into consideration when determining who is going to pay or receive alimony and child support. From a budgeting perspective, it is important that you get a handle on what you can expect to pay or receive and plan on living within these newfound means.
Health Insurance – Will each spouse have health insurance coverage after the divorce? Who is going to cover the cost of the children’s health insurance coverage?
Joint Accounts – Although not all couples have joint accounts (checking, savings, investments, credit cards, etc), it is important that all of these accounts are inventoried and accounted for during the divorce process. If they are not, you could be paying for divorce well after the final decree is signed.
Dividing Assets and Debts – It is often best to start out requesting a joint credit report from the three major credit reporting agencies to confirm you are fully aware of all of the debts you and your spouse have. It is important to understand your home state’s definition between marital and non-marital assets and debts. Assets accumulated before and during your marriage may be divided differently.
Failing to Update Estate Documents – As easy as this is to do, you would be surprised how many people fail to change beneficiaries on their life insurance policies, retirement accounts, and wills.
Separate Your Emotions and Your Finances – Although I understand this is a very emotional process for all involved, your emotional attachment to certain items can cause problems and may lead to poor choices. “Keeping the house at all costs” is a great example of this.
Overlooking Income Tax Implications – If you have young children, who will get the tax annual exemption? Will my maintenance or child support payments be taxable or tax deductible?
After-Tax Value of Your Assets – It is imperative that you have a clear understanding of the after-tax value for all of your assets. For instance, consider that most likely all of the funds within your 401(K) will be taxed upon distribution… similar to the difference in your gross and net paycheck. Additionally, make sure to take cost basis of taxable accounts into consideration.
Unfortunately, many marriages don’t end the way they start. However, the more amicable you and your former spouses are in the process of settling the divorce, the more money each of you will have at the end.
