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
The David Bergmann Group
Marina Del Ray, CA