All Things Financial Planning Blog

Sometimes It Doesn’t Work Out – Considerations in Divorce


It was marital bliss then life happened. Now you are getting a divorce! It is a stressful and emotional time and there are important decisions that you must wrestle with. Each divorce situation has different dynamics of emotional, family, financial and legal issues so professional guidance is clearly well advised but that being said; let’s look at a sampling of some of those issues and factors of consideration.

In many cases, divorces are an emotional roller coaster not only affecting the divorcing partners but affecting those who know and or work with them if nothing more than through their emotional support. Decisions, during this period of upheaval, need to be thoughtfully weighed and outcomes should be properly explored before coming to a binding agreement.

When there are others who depend upon the marital partners there are legal issues of care, custodianship and financial support.

  • Who will become the custodial parent for the child, for example, and will there be alimony and child support?
  • Under the provisions of COBRA, health care coverage might be available for limited periods of time so we will want to begin the process of considering how we will want to cover health care costs after that limited period of Cobra availability.
  • Should there be life insurance coverage that is being lost that needs to be then replaced, or do we need to insure the payor of support against their loss of life and, therefore, their ability to continue to provide that economic support? The same family need of support guarantee might suggest the need for disability insurance on the payor.

Ok, we split the checking account, we split the savings accounts and we split the stock accounts, now what? Well first off we should know that the general rule of transfers between spouses that are so-called ‘incident-to-the-divorce’ are that they are treated like a gift in that your tax basis and holding period generally remain the same as they were when the asset was owned by the marital estate. When that transferred-in-the-divorce-asset is later sold the entire gain (or loss) is yours so you want to make sure the division of assets between yourself and your former spouse take into consideration tax attributes of those assets – things like unrealized gains, losses or other tax benefits, whatever they might be.

Retirement assets that are divided can continue to grow tax deferred so long as the money is not taken out and spent – distributed but not ‘rolled over’. Distributions pursuant to a divorce or a so-called qualified domestic relations order are not subject to the 10% premature penalty before 59 ½ but, as always, when those retirement monies are spent there will be regular income taxes due on the taxable portion of those expended monies. Please note that you must take care in how you establish and ‘custodian’ that premature divorce distribution so that you will still qualify it as a distribution from an account pursuant to the divorce!

How do we file our tax return and whose income is whose? Those questions depend on which state you live in. Community property states have different rules than common law states. Additionally, tax issues can be determined by when you legally become separated or when you might be deemed to be unmarried. So check with a professional for clarifications on these matters as they apply to your facts and circumstances.

Now that the marital estate is dissolved you are going to want to revisit your estate plans. Who will take care of your children or pets, hopefully they are not one in the same, lol, should you pass before them? Who will take care of things for you should you become incapacitated? You may have had a living trust and durable powers in place so you will want to get those items updated if appropriate. Who should be your beneficiaries on your life insurance policies (do you need to start or add death benefit coverage now?) and retirement accounts? What happens if you are naming under-aged children as beneficiaries to those accounts? Who would need to be ‘guardian’ for those assets until the children were of age? These matters need to be reviewed and structured to fit your new situation and your goals and objectives so seek a professional to give you appropriate guidance.

If you are going through a divorce, I wish you and your former marital partner and your families the very best. I hope that the process can be as little disruptive to your personal and financial lives as possible and that it is as amicable a separation as it can be! Take your time and seek appropriate advice and counsel before bringing things to a final conclusion. Many of your decisions will be irrevocable so make them wisely. Signed, a one-time veteran to the process …. lol

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA

Author: David Bergmann, CFP®

ACADEMIA David has been an instructor in UCLA’s CFP Board Accredited Personal Financial Planning Certificate Program since 1995 and he is a member of the Program’s Academic Review Committee. David has taught both the Financial Analysis and Employee Benefits/Retirement Plan courses and regularly teaches the Federal Income Taxation in PFP class. He is also the instructor for the Ethics course and oversees the internship program. PROFESSIONAL CONTRIBUTIONS David has served as an editorial reviewer for the Journal of Financial Planning since the magazines inception. He has been a reviewer for the FPA’s Financial Planning Perspectives publications and other various National publications. David served from 1988 through 1990 as President of the Los Angeles Society of the Institute of Certified Financial Planners (ICFP). He also served on the National Board of the ICFP from 1988 through 1993 having chaired The Education, The Communications, The Regional Directors and The Case Law Oversight Committees as well as serving a year on the Executive Committee. David has been a mentor and since 2006 has been a Dean in the nationally recognized FPA’s Residency Program. PROFESSIONAL ACTIVITIES The David R. Bergmann Group is a comprehensive services firm supporting the work the firm does in, and with the process of, comprehensive Life Financial Planning. In our life financial planning process we focus on the client’s life goals and individual passions in the context of what brings joy, purpose, fulfillment and sense of valued legacy and then we structure their financial affairs and personal resources to enable, inspire and empower them to live their impassioned and fulfilled life. David was twice named as one of the Top 100 Financial Advisors in the country by Mutual Fund Magazine. He has appeared on CBS Nightly News and in many National print publications, including the Wall Street Journal, Investor’s Business Daily, Business Week, and others.

2 thoughts on “Sometimes It Doesn’t Work Out – Considerations in Divorce

  1. It’s unfortunate that during such a stressful time as a divorce, money tends to make matters worse and can lead to more hurt feelings and emotions than the divorce itself.

    I think this article shows how simple it should be to solve financial issues during a divorce, although I imagine this is often not the case.

    Thanks for sharing.

    – Mary

  2. This is a great article. The hardest thing to do is get a divorce gracefully, but with a roadmap like this,and just the shear recognition that there are some business issues that need to be approached unemotionally, I believe it can be done! Thanks, Dave, for excellent advice!

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