Financial planning is one of the essential components of an individual's long-term well-being. However, it becomes more critical if you face the prospect of a divorce. Hence, financial divorce planning is the most significant area of concern for individuals facing relationship uncertainty.
Realities are hard to accept, but we must take them and move on. However, planning for uncertainties, especially independent financial liberty will cover turbulent waves.
Divorce is full of loose ends, including financial and emotional. Focusing on the financial aspects of the future is vital for individuals going through the separation process. So, we will discuss the key economic features of a divorce.
Although it is not an advisory, we will cover all aspects of financial divorce planning and its practical implications.
Let us move on to discuss it in further detail.
Financial Divorce Planning Steps
We have divided the financial side of divorce into steps to help individuals go through this challenging transition relatively smoothly.
Step 1: Assess Financial Information
You first need to gather financial information to get the best possible divorce settlement. The more comprehensive the data, the better the chances of a reasonable compromise. If you are still determining the inclusion or exclusion of any document, you can consult your lawyer for advice.
Stay open to sharing correct information regarding marital assets and liabilities. Your divorce financial planner can only negotiate a better settlement if you provide them with accurate and detailed info.
Step 2: Analyzing Financial Information
The best way to achieve better results is to run a budgeting and cash flow analysis of the information gathered in the first step. You can quickly sketch your post-divorce life once you have projected your cash flow.
Step 3: Developing and Analyzing Settlement Options
Every state has its own set of rules while developing settlement options. Generally, assets get divided on a 50-50 ratio; however, this is not always true. There are scenarios where one spouse will forgo a more significant share of joint assets and vice versa.
Therefore, depending on your local laws, you can develop numerous settlement scenarios depending on the nature of assets and liabilities and choose the best suits you.
Step 4: Asset Protection
Risk management will help you make better financial divorce planning for your loved ones, for instance, a loss of child support. Likewise, you can design and cover life insurance through proper coverage and choose a cost-effective plan.
Moreover, you can quickly identify and choose future insurance plans.
Step 5: Estate Planning
Continually update your wills and financial beneficiaries to indicate correct post-divorce desires. You can quickly achieve this feat through your financial planner. Likewise, plan to ensure power of attorney, minor children's guardianship, and other similar directives are set in place.
Executive Equity Compensation
Equity compensations are a significant portion of the wealth; however, such compensations are the most difficult to settle. Therefore, stay in close contact with your planner for the division of equity compensation, such as stocks.
Once you are ready with your financial divorce planning, you must file suit for divorce through your attorney. A divorce hearing date will determine the future course of action for settlement through arbitration and mediation.
Financial Divorce Checklist
For your reference, we have compiled a list of documents usually required to file for divorce. These will help you cover all bases for your financial divorce planning.
- Updated financial statements include bank, credit cards, investment, retirement plans, etc.
- Loans statements
- Tax returns
- Titles of property, including home, car, etc.
- Insurance policy
- Make a list of post and pre-marital assets.
- Get beneficiary designations updated on all forms like IRA, annuities, etc.
- To maintain a high credit score, clear all pending payments on time.
- A professional divorce mediator will help lower legal costs and guide you through the procedure.
Assets Division in Divorce
One of the most challenging tasks in a divorce settlement is the division of assets between spouses. Getting the proper compensation can help you settle quickly in life post-divorce. On the contrary, it could become a tough road if you fail to impose your right to assets during their division.
We have divided assets into five categories and will elaborate on each for better understanding. However, remember that states have different rules regarding asset division during a divorce.
Primary Income Earner
- Alimony (spousal maintenance payments) are payments one spouse makes significantly less money than the other does or in a non-earner.
- In the case of a minor child, if one spouse cares for them, the other has to pay regularly as support. For instance, both spouses will contribute child health insurance premiums and deductibles for medical visits.
Dividing Primary Residence
- If you intend to stay in your current house, you could have to forgo a more significant part of the other asset as compensation.
- Depending on the house's condition, it may require heavy repair and maintenance costs. Therefore, choose wisely because the other spouse will not contribute to house repair and maintenance post-divorce.
- If the house is sold out, receipts get divided among spouses on a fifty-fifty portion or as decided between both.
- You can avail of post-retirement spousal social security benefits if you have been married for at least ten years. The second condition to avail of this benefit is that such benefit should have more financial strength than your work record. Likewise, you must have remained unmarried for at least two years.
- Such benefits will equal one-half of the ex-spouse's benefit if both reach full retirement age (65 to 57 years). If one spouse starts receiving benefits before retirement age, their advantage will be halved.
- Retirement savings are generally divided equally. However, any funds saved before marriage are excluded from such calculations. Likewise, retirement plans become significant if a couple gets divorced around 50 or above.
- The 'Married, Filing Together' facility is unavailable for divorced couples. So, you will have to choose to file tax returns either as a single individual or head of household.
- Property taxes can have multiple implications; you can split these taxes or let one spouse pay it while the other compensates for this obligation.
- Divorces before 2019, maintenance payments are deductible. However, in divorces after 2019, maintenance payments are no longer available for tax deduction; instead, they are treated as income.
- Child support payments are not taxable, and those receiving them can deduct them from tax returns.
Frequently Asked Questions
What is financial divorce planning?
It develops personal strategies to help individuals find the best possible divorce settlement.
Is it better to appoint an attorney for divorce processing?
A professional attorney can help you with smooth divorce processing and significantly reduce divorce procedure costs. Therefore, it is always better to seek professional advice.
What information do I need to start divorce financial planning?
You need to gather the following information at the least,
- Bank statements
- Credit card statements
- Stock, bond, and mutual fund assets
- Income tax returns
- Personal and retirement plans
Financial divorce planning is the first step towards an uncertain future hanging post-divorce. Many individuals do not take it seriously because of their mental and emotional state. But, seeking professional advice and looking into the foggy future, staying ahead of time is critical.
Staying practical by keeping emotions aside can lead to better financial settlements during a divorce. Therefore, start by clearing your head and collecting the latest and most accurate financial information relating to financial statements, home ownership, loans, retirement plans, etc.
Furthermore, it would help if you appointed a Financial Power attorney to guide you and process your documents for a smooth transition into your new life.