Key Financial Planning Steps in a Divorce
Sadly, when couples divorce, it’s the finances that end up causing so much pain. Divorcing spouses are often caught unawares, not realizing that if they had done a little financial planning earlier, their split up could have been a lot easier. Even just a few steps taken proactively would leave them better prepared to be single again.
Like any large project, if you break it down into smaller parts, it will become a lot more manageable. The four major areas to consider when planning for divorce (and in some cases even years beforehand) are: dealing with debt, dividing the assets, handling the retirement plan savings, and planning for your estate. Since retirement assets are typically the largest financial asset in a family, and dealing with them can be challenging, we’ll look at this first.
Your Retirement Assets
If you’re planning to get a separation or divorce and you or your spouse has an employer-sponsored retirement plan such as a 401(k) or pension plan, you (or your spouse) are legally entitled to part of the balance. But, considering that a third party, the plan administrator, is involved, how do you ensure your share is protected?
You will need a Qualified Domestic Relations Order (QDRO, pronounced “quad row”). A QDRO is a court order, judgment, or decree related to child support, alimony, or property rights, which instructs your spouse’s pension plan administrator on how to pay you your share of plan benefits. QDROs only apply to plans that are IRS tax-qualified and covered by the Employee Retirement Income Security Act (ERISA). They do not apply to military or government pensions, which are governed by other laws.
A QDRO gives you protection that a marital settlement agreement does not, so don’t assume you’re covered just because your divorce decree states that you have a right to part of your spouse’s retirement funds.
You have other options. For instance, you and your spouse might choose to not divide the retirement plan assets. In that case, you should make this agreement in writing and include it in the settlement to prevent the courts from declaring the money divisible. Be sure to find an attorney who is knowledgeable about complex QDROs.
Everything you two have acquired since you were first married is subject to division. This doesn’t include anything you acquired before the marriage, nor any individual inheritances and personal gifts made just to one of you. Of course, if you live in a community property state, almost all assets are divided equally.
The debts of spouses in community property states also are divided equally. But, in general, if you live elsewhere, you are only responsible for your own debt and any debt in a jointly held account.
Your Estate Plan
When you consider how a divorce can affect so many aspects of your life going forward, you’ll see how essential it is to consider preparing a will now or updating a current will. You also should ensure that beneficiaries listed on legal entities, such as insurance policies, are updated. Note that unless you waive your rights on a pension or 401(k) in writing, you will be the sole beneficiary of them.
Your financial advisor will be able to guide you as you sail into the uncharted waters of estate planning and divorce.
Peace of Mind
During stressful times of divorce, it helps to know that all your finances are in order. If you could look into the future and see how you’d fare financially in five, ten or twenty years, you’d probably feel a lot better. This is where having a financial advisor is helpful in divorce situations. A professional advisor can forecast the long-term effects of the settlement, and both you and your spouse will have a clearer view of your future. Having that clear view also helps in negotiating the settlement.
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Provided by courtesy of Herb White, MBA, CFP, a Certified Financial Plannerª with Life Certain Wealth Strategies, 8400 E Prentice Ave, #715 Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor. Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities.