As financial planners, we walk with our clients through the changes and transitions in their lives. Many are phases of life that people envision and plan for, like education, marriage, children, and retirement. But some transitions are not in our dreams and can unravel without a plan, such as sudden death and divorce.
In our quarterly education series, we have focused on Financial Considerations Upon the Death of a Spouse. In addition to the death of a spouse, divorce is a life crisis that comes with many stressors. This quarter’s topic will focus on things to consider in the divorce process. By identifying specific needs and opportunities, we hope to help eliminate some of the stressors in financial areas.
Cash Flow
Will your cash flow needs change after the divorce?
One of the first financial effects felt by each party in a divorce can be cash flow changes. Splitting up two incomes can cause changes in daily living of each spouse and dependents. Make sure you have all information by organizing bills, identifying expenses, and tracking how much is paid. Expenses and bills should follow the person who gets the asset. Implementing a new income and expense plan can help track your money. And a spending plan between the two parties might need to be agreed to while the divorce is pending.
Many financial planners will help clients build a budget to help them reach their short- and long-term goals. Sticking to an expense plan can help decrease additional stress by living within your means and not incurring debt.
Do you need to adjust how much you are saving?
There are two timeframes for which you want to save—short-term and long-term. Your short-term savings is your emergency fund. Ideally, your emergency fund would be 3-6 months of non-discretionary spending (i.e., utilities, mortgage/rent, insurance premiums, groceries). It’s a cushion to cover life in the event of a job loss or other large financially impactful events. Emergency funds are important for a single person who might not have a financial back-up in an emergency. These short-term funds can help prevent the accumulation of high-rate debt that is hard to get out of.
Long-term savings is equally important. You can use this money for large purchases down the road, such as a car or down payment on a home. One of the most important long-term savings goals is retirement. Saving for retirement at appropriate rates offers flexibility, security, and freedom for the future.
Do you need assistance in managing day-to-day personal finances?
The stress from divorce and increased demand of duties that may have been shared can be overwhelming and affect the ability to get daily living tasks completed on time. Many of us have “get it done” attitudes that prevent us from seeking help. However, enlisting the help of others can be essential in making life work in this new season.
We often help clients analyze their spending and build a budget to live within a structure that helps accomplish life and financial goals. But day-to-day personal finances can be more about time than budget, which is where bill-paying services can help. It might be as specific as hiring a daily money manager or other bill-paying service or setting up automatic bill pay through your bank or creditor. Quicken also has a component called Quicken Bill Manager that can help organize all your bills and pay them from the dashboard.
As you begin the process of building your credit score on your own, it’s important to pay bills fully and on time. Organization can be key in making that happen.
Do you expect to receive (or to pay) alimony, child support, or property settlement payments?
Make sure you know the details of alimony, property settlement, and child support payments outlined in the divorce decree. Incorporate them into your monthly budget and know how long they last. That way you can be prepared to use the income — as well as be prepared for when the payments end.
Tax Planning
Do you expect there to be any tax impact in the year of the divorce (due to the sale of an asset or changes in tax filing status)?
The sale of assets can cause large tax bills of which you want to be aware. For example, you might have a capital gain from the sale of a home or other asset that affects your tax bill for the year. Through IRS Section 121, you might qualify for exclusions on capital gains on the sale of a home of up to $250,000 for a single filer, and $500,000 for those filing a joint return with a spouse. Make sure to work with a qualified tax professional to consider strategies to minimize or defer taxes, and to ensure you meet eligibility requirements.
Do you expect to receive or pay alimony (or child support)?
Understand the tax treatments of alimony and child support for both payor and recipient. In divorces after December 31, 2018, alimony and child support are not deductible to the payor and are not considered taxable income to the recipient. As stated above, know the details of the payments outlined in the divorce decree.
Do you have dependent children?
If you are the custodial parent, consult your tax professional to understand the tax impact and rules that must be followed to file as head-of-household, which may be the most tax-advantaged way to file as a single person. You might also be able to claim the Child Tax Credit or education credits (or waive your rights to the credits).
Long-Term Planning
Did the marriage last at least 10 years?
If so, you may be eligible to receive social security benefits under your spouse’s record after the divorce.
Do you need to update your estate planning documents and beneficiary designations (e.g., life insurance policies, retirement accounts)?
Whether or not you have a prior will, it is advisable to see an estate planning professional to review your situation and offer advice regarding executing new documents. In addition, review your beneficiary designations on life insurance policies, retirement accounts, and annuities. The designations may have been in place for years, and major life changes are a good time to review.
By educating those going through divorce, our hope is that the practical financial pieces can be considered and attended to without causing additional stress. Seeking the help of a financial, tax, or estate planning professional can help you come through the experience securely, allowing you time to care for yourself and those you love. Reach out to us to find out how we might be able to help.
Photo by Kathy Servian on Unsplash
