Having a firm understanding of finances in divorce can be difficult, but it’s important. When you’re in control of your finances, you’re in control of your future. Whether you’re considering divorce, going through the process right now, or rebuilding your life, here are strategies and resources that can help.
How long do you have to pay alimony? (Alternatively, how long will you receive alimony?)
While a marriage’s length doesn’t technically matter when it comes to alimony, also called “spousal support,” it can have a considerable impact on whether or not it’s awarded. How long does alimony last? The payments are negotiated as part of the divorce process. Typically, the longer the marriage, the more likely it is that one spouse has focused more on professional advancement, leading to higher pay, while the other has taken on the primary responsibility of taking care of the family or home. There aren’t federal or state regulations stating how long someone has to be married to receive alimony, or how long it has to be paid, but some experts suggest using 10 years as a rough dividing line when thinking about spousal support.
Children only impact alimony with regard to whether or not one person chose to stay home with them or changed his or her career to accommodate childcare. It’s a different issue from child support, which is negotiated separately in the divorce process. That’s not to say that having children guarantees that one member of a divorcing pair will get alimony.
As part of the negotiation, it’s important to consider your financial needs and expectations for your next phase. One tangible way to do this is to create a post-divorce budget. If you plan to request alimony as part of your divorce agreement, you’ll want to start with a clear picture of your current and future financial circumstances. Doing so can help you develop a compelling rationale to share during the divorce process. Your reasoning and insight are needed to convince a judge or your spouse of your need for financial support.
An important consideration early on in a divorce is the method you and your spouse will use to end the marriage. This is where the financial story will unfold. There are several options available for ending a marriage, including uncontested divorce, mediation, or legal court proceedings. I typically advise my clients to seek mediation, which can be less expensive, faster and less emotionally draining than going through the court. (That said, there are some circumstances that make court a better forum for presenting what qualifies you for alimony; look to your lawyer for advice on this.)
Also, lock in your alimony payments. An unexpected event, such as death or disability, may leave your spouse unable to make alimony payments required by the divorce settlement. Payments should be secured with a life insurance policy that names the person who receives alimony listed as the beneficiary.
How is credit card debt split in divorce? What about other bills?
To avoid legal responsibility and a damaged credit score in the event your ex is late with payments, it is vital that any co-signed debt, such as credit cards or the mortgage, be paid off or retitled before your divorce is finalized. The same goes for utility bills and any other jointly held account.
Negotiating credit card debt quickly gets complicated because of the high interest rates involved, so you need an attorney and financial advisor who know the right questions to ask and steps to take to ensure you’re protected. If possible, start by settling on who is responsible for which purchases and, if you can, pay off any debt before the assets are divided, particularly cards you and your spouse have shared. Once the debt is paid, cancel all cards shared with your spouse and establish cards in your name only. In most cases, paying the debt in full isn’t an option. For debt you can’t pay off, there are a number of factors that help determine how debt is split during a divorce. Generally, courts will divide assets and liabilities to separate shared debt in the following ways:
- Split 50/50
- One party is responsible for more of the debt if there is documentation/proof demonstrating a 50/50 split is not equitable
- One party is responsible for more of the debt because of the division of assets and/or alimony
No matter the process, keep it simple when it comes to addressing debt. Keep track of finances to plan for the future, retitle and work with legal counsel so they can guide you through the process.
Also, remember to consider the tax implications and advantages/disadvantages of keeping certain debts. If you decide to keep the mortgage instead of credit card debt in the divorce, you receive a tax deduction on the interest payments, but these could be offset by the costs to maintain a home. Using credit card debt as a bargaining position becomes more effective with a spouse who has, or will have, an immediate need for cash once the marriage ends. Your professional team should also consider the implications of living in a common property state, where assets acquired during a marriage are split 50/50.
What happens with debt you already had when you got married? Usually, debt that you had when you entered the marriage would be seen as yours. However, you should consider what you brought to the marriage. Ask yourself, who did the debt benefit, and is it equitable?
Can my spouse get my IRA in a divorce? What about other assets?
Divorce can be painful, with emotions running high. That’s why you need to take extra care when handling your retirement benefits. A carefully divided—and distributed—nest egg can be crucial in securing your financial future.
Retirement portfolios are usually the most valuable asset within a household (aside from the house itself). When dividing them between spouses, it’s important to consider the different ways to get divorced because the route you choose may have implications on how you decide to split pensions, annuities and retirement accounts, including IRAs.
If the divorce is contested and goes through the court system, it will be up to a judge to decide how things are split. Judges aren’t necessarily trained in financial planning, and there’s a tax complexity surrounding annuities, for example. It takes specialized training to understand the specific rules and value of an annuity, and what a fair split would look like. You may consider bringing a certified financial advisor into the picture who can help you (and possibly the judge) fully understand the after-tax consequences of owning this type of asset.
Divorces that aren’t contested have the potential to be more amicable and comes in three flavors: arbitrated, mediated and collaborative. Keeping a divorce outside of the courtroom means there’s more flexibility to consider the tax nuances of complicated investments. Often there’s a team approach involving a financial advisor who specializes in divorce settlements.
A common pitfall for divorcing spouses is assuming that everything is joint property, especially if there was no prenuptial agreement stating otherwise. Whether any assets are considered joint or not generally depends on when they were paid for—or earned, in the case of pensions. Contributions made to an IRA before your wedding day won’t be considered joint, as a rule. Likewise, you won’t necessarily have a claim to the annuity your husband purchased prior to your big day—even if you’ve come to view the asset as shared.
As part of your divorce settlement, it is necessary to divide all “qualified” retirement benefits (such as 403(b) or 401(k) accounts and pensions, but not IRAs) under a qualified domestic relations order. A QDRO is basically a judgment from a court ordering the custodian of a qualified retirement plan to pay a former spouse or other dependent.
If you receive QDRO payments from your ex-spouse’s plan, moving those funds won’t trigger the 10% early withdrawal penalty (although spending them generally will). In some cases, you may be able to roll that money over to an IRA as if it were a distribution from your own retirement plan. In others, you may be required to leave the funds in the employer plan until distribution time. In either case, you may continue to enjoy tax-deferred growth on those payments.
QDRO payments are governed by the specific rules of your ex-spouse’s retirement plan. So even if you want to make a clean break—to take the assets and run—but the plan dictates that the first distribution cannot be made until the participant (your former spouse) experiences a triggering event (such as retirement or termination of employment), no court order can speed up that process. All plans are different, though, and the QDRO may itself be considered a triggering event.
What else should people do to prepare financially in a divorce?
Consider seeking professional advice. You may have heard the term “divorce brain,” which can temporarily cloud judgment. By recognizing the phenomenon, you can better avoid rash decisions—like which attorney to use. Rather than picking someone who merely feels right, employ more practical criteria, like whether you want someone who charges by the hour or works on a retainer, or practices collaborative divorce. Also, consider using a Certified Divorce Financial Analyst (CDFA), who can help you and your attorney understand the long-term effects of dividing assets. And don’t forget to consult with your professional team about estate planning on your own.
Adjust your lifestyle expectations. Splurging on designer shoes and taking an expensive vacation may make you feel better in the short term, but living off of one income when you’re used to two requires a readjustment of expectations, especially if your spouse was the breadwinner. In your new economic paradigm, that country club membership may no longer be feasible, and you may have to trade in your luxury car for a less glamorous automobile.
Don’t spoil the kids with “things.” No matter how good it feels to spend money on the innocents caught in the crossfire of your divorce, showering them with presents sends the wrong message. Providing them with time and attention, rather than indulging them with expensive toys and treats, will send a better message in the long run—and set a better example for how to handle money well.