Picking Up the Financial Pieces After Divorce

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Picking Up the Financial Pieces After Divorce
By Jane Taubner Barney, JD, CFP®

Divorce is not one of the happy milestones in life that we plan for, but, unfortunately, it does happen. If you are dealing with the end of a marriage, consider the following issues to protect yourself from major financial obstacles and liabilities.

Retirement planning
Most people are concerned about having sufficient funds for their retirement years. When you are going through a divorce, this becomes paramount if your spouse will be taking half of the nest egg. In terms of updating your IRAs and other retirement accounts, you most likely will need to change your beneficiary designations.

In addition, if you are transferring your interest in an IRA to your former spouse, you could get hit with extra taxes and penalties if the transfer is not done properly.

There are two commonly used methods to transfer some or all of the assets in a traditional IRA to a former spouse. The first method, appropriate when transferring the entire account, is to simply change the name on the IRA from one spouse’s name to the other. The second method is the direct transfer method, whereby the trustee of the traditional IRA transfers specified assets to the trustee of the new or existing IRA set up in the name of the other spouse.

Estate planning
You should execute a new will to remove your former spouse as a beneficiary. Trusts may have to be set up for children to prevent your former spouse or his or her new spouse from controlling the assets you want to leave to your children.

Insurance planning
You should reexamine your coverage for life insurance, health insurance, and possibly long term care insurance during a divorce. If your former spouse carried health insurance for you, you may need to purchase new, additional, or COBRA coverage for yourself and any dependents. Be sure to update the designated beneficiaries on your life insurance policies if the current ones no longer apply.

Property issues
Final disposition of the marital home is a highly emotional issue. Often in a divorce, one party gets the house in exchange for any claim to the other’s retirement savings. This is the one part of the settlement that is usually irreversible, unlike custody or visitation, so proceed carefully.

If you end up with the home, you will need to get the deed re-titled. But a bigger question is whether you should keep the house at all. Property taxes and upkeep expenses can be prohibitive. Selling the home, although devastating in the short term, can provide you with a fresh start emotionally, and can leave you with an investable nest egg and a cushion to pay expenses.

Standard of living
If your former spouse made a higher income, or if you are responsible for alimony or child support payments, your income may decline significantly after the divorce. You may need to take a long, hard look at your spending habits and expenses. Although budgeting can be a challenge for individuals facing big lifestyle changes, be prepared that you may have to live on one.

College planning for children
If your divorce settlement requires you or your former spouse to contribute to or completely pay for your children’s college education, establish a way to ensure any special funds for college are maintained and that they provide sufficient monies for room, board, books, and fees.

Joint liabilities
Joint credit accounts opened during a marriage may have potential benefits (establishing a good credit history) and pitfalls (being liable for a former spouse’s debts). It is important to know the extent of your joint credit and liabilities and to separate yourself from them as soon as possible as you approach single status.

Get your credit report as early as you can in the divorce process. If you were a stay-at-home spouse, you may find that it is easier to set up new credit and bank accounts while you are still legally married. Otherwise, your former spouse may simply have you deleted from the account—without notice. Three months after your divorce is finalized, check your credit report again to make sure you are not still financially attached to your former spouse.

Divorce causes an enormous amount of emotional distress. You may find it helpful to have an outside financial professional look at the situation objectively to help with your decision-making. When you consider the financial issues, look at them collectively to determine how they impact your overall needs. Looking at your divorce as a business transaction and having a secure financial plan can help to make the process less taxing for you. Take the time to carefully consider all of your options. Never act in haste or act emotionally, and never sign any legal document unless you are completely certain of the ramifications. With the help of your legal counsel and a financial professional, you can begin your life after divorce with confidence.

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Jane Taubner Barney is a financial advisor with Canby Financial Advisors in Natick. She offers securities and advisory services as a registered representative of Commonwealth Financial Network—a registered investment advisor and member firm of the NASD/SIPC. She may be reached at (508) 655-5355 or at jbarney@canbyfinancial.com