Divorce is hard. Let’s face it: Splitting up from the person you thought you were going to spend the rest of your life with never gets easier.
The financial side of a divorce, though, that just stings.
Not protecting your assets properly during divorce can cost you tens of thousands of dollars over time. The average divorce costs $7,000 – $15,000 by the way. Even if you make up that initial cost fairly quickly, the decisions you make around your money during your divorce can have financial consequences that follow you for the rest of your life.
Want to see what’s waiting for you, and why you need to get started today?
Why divorce planning matters more than you think
Did you know 24% of couples say financial reasons are the number one cause of their divorce?
Money causes divorce and divorce causes money problems. If you go into the process of ending your marriage completely blind, you’re just setting yourself up for financial heartbreak down the road.
That’s why you need an experienced divorce attorney in Memphis who knows divorce laws inside and out. But even beyond legal help, you need help understanding and making smart financial decisions during what is, by nature, one of the most emotionally charged and stressful processes you will ever have to navigate.
Think about it:
Your retirement savings are cut in half. You lose half of your income. You’re going to be on the hook for new housing expenses. If you have children, figuring out child support is going to dramatically change your monthly budget for years to come.
The money rules for dividing assets during divorce
Most people have no idea how their assets are even divided up during a divorce.
They assume everything just splits 50/50 down the middle. But that’s not always the case…
How the assets are divided during your divorce depends on if you live in a community property state or an equitable distribution state, and those two have completely different rules.
For community property states like California and Texas: Everything that’s acquired during the marriage gets divided right down the middle, no matter what.
For equitable distribution states like Tennessee and Mississippi (where Memphis is) things get more complicated…
Equitable distribution means dividing your assets “fairly” which doesn’t always mean equally. In an equitable distribution state, the courts will look at a variety of factors including:
- Length of the marriage
- Income and earning potential of both spouses
- What both spouses contributed to the marriage
- Age and health of both spouses
Figuring out which is which is where proper financial planning comes in.
Protecting your retirement accounts during divorce
Here’s something that keeps a lot of financial advisors up at night:
Divorce and retirement planning. Most people don’t fully understand the long-term impact a divorce is going to have on their retirement savings until it’s too late.
Women who are divorced have average retirement account balances of $38,613 compared to $50,126 for married women. That’s a long-term impact that you may not fully realize when your divorce is happening.
You need a QDRO, a Qualified Domestic Relations Order, which is a legal order that will allow retirement accounts to be split without incurring tax penalties. If you don’t get this right, you could lose thousands.
Get a jump on this in the planning stages of your divorce. The earlier you are on top of this the easier it will be to protect your assets.
Smart tax planning strategies to help you avoid the IRS
Everything about your taxes changes when you get divorced. Your filing status. Your deductions. Even your tax bracket might change.
Here’s the big three tax considerations that you need to plan for:
First, know that alimony is no longer tax-deductible after 2018. This means the amount you have to pay or receive has to be negotiated knowing alimony is no longer a tax deduction.
Second, if you have children, who gets to claim them is a big deal. The dependent exemption is worth thousands and only one parent gets to claim this.
Third, be smart about which assets you’re walking away with. A $100,000 home and a $100,000 IRA are NOT the same value. The IRA is subject to taxes on withdrawal.
Common financial mistakes that are costing you thousands
I’m going to let you in on some of the biggest financial mistakes I see people making during a divorce:
Mistake #1: Trying to keep the house at all costs
Make sure you can actually afford it on one income. I see people win the house in a divorce only to lose it to foreclosure down the road because they couldn’t make ends meet.
Mistake #2: Not updating beneficiaries
Update your life insurance, IRAs, and other financial products to remove your ex as soon as your divorce is final.
Mistake #3: Hiding assets
It never works out. If you hide assets during a divorce you can face serious penalties and just look bad in the eyes of the judge.
Mistake #4: Making decisions out of emotion
Letting your emotions rule your financial decisions during divorce is the worst thing you can do. Focus on what makes sense for your long-term financial security.
Mistake #5: Not getting professional help
If you don’t have a financial and legal team behind you that you can trust, it’s a really bad idea to take this on completely on your own.
Getting your financial house in order
The best time to start financial planning for divorce? Before you file.
Start by getting a handle on your financial documents:
- Bank statements
- Credit card statements
- 3-5 years of tax returns
- Investment account statements
- Property deeds and mortgage documents
Opening accounts in your name only is going to be a critical next step. Checking accounts, savings, credit cards, anything you need to start to establish your separate financial identity.
Get a budget in place as well. A budget that really reflects your new life as a single person.
The bottom line on financial planning during divorce
Financial planning for divorce isn’t a luxury, it’s a necessity.
The decisions you make during and after your divorce are going to have an impact on your financial well-being for years to come.
Protect yourself by:
- Hiring experienced legal and financial professionals
- Understanding how your assets will be divided
- Protecting your retirement accounts
- Planning for taxes
- Avoiding common financial mistakes
Don’t let short-term emotions dictate your financial security in the long term. Take the time to protect what’s yours. Get the help you need to make the right decisions.
Your future self is going to thank you for it.
Key Takeaways
Financial planning for divorce isn’t optional, it’s essential. Asset division, retirement planning, and tax planning all need to be top of mind when protecting yourself and your financial security in a divorce. Hiring experienced legal and financial professionals to help you early in the process is one of the most important steps you can take to prevent financial mistakes that will impact you for decades.