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Below are some tips on how to divide money and property in a divorce.
Before even telling your spouse that you are planning to leave them for good, you should consult a divorce attorney and a financial advisor to plan the disentangle of your finances from your spouse. The financial advisor should be a Certified Divorce Financial Advisor/Planner or a Certified Divorce Financial Analyst or a Certified Financial Mediator so that they are familiar with divorce-related issues. On average a divorce can cost anywhere from $10,000 to $25,000 per party. However, with good documentation preparation, you can significantly reduce the cost and expedite the divorce process.
When you speak to an attorney or a divorce financial advisor, you may come across the words such as community property or separate property. Every state's family law determines how the property should be divided between the parting couple. If you are in a common-law marriage, the same rules may or may not apply.
The community property states divide everything gained during the marriage equally. This includes both assets and debts. Even if one spouse didn't earn anything or earned much lesser they still have the right to half the assets. Similarly, both spouses are equally responsible for the debt even if one is responsible for all or most of it. Some states such as Washington have an exception of excluding any inheritance or gifts before or after the marriage to be excluded from the division. In other states such as Alaska, Tennessee, and South Dakota allow spouses to hold some or all of the property acquired during the marriage in a trust-like entity. This helps them avoid the selling of any underwater assets such as the primary home. It also reduces their tax obligations. In the future, they can dissolve the entire trust or parts of it if they have a mutual agreement.
List of the US States that have the community property law:
The separate property law in most of the US states allows the spouses to keep their assets and divide them based on each spouse's contribution. However, a judge may decide differently based on each spouse's financial condition and contribution to the marriage. For example, if one spouse stayed home to raise kids then the judge may consider that as a lost opportunity and compensate the spouse accordingly. However, any inheritance still may not be shared. Prenup and postnups may also stand very well in the court.
Almost every couple has one or more joint bank accounts. The money in these accounts will be what both of you need to pay for your divorce and any ongoing living expenses. The separation of bank account is the first crucial step in untangling your finances. How to separate your bank accounts during the divorce:
When things are not going well in a marriage, one of the spouses may go on splurging by getting credit cards and loans that you may not be aware of. Or under stress, you may forget some of your own. Regardless both partners will be responsible for loans unless the judge decides otherwise. If any loans were taken after you told your spouse of your intent to separate then the signing spouse will be responsible for them. The same applies to any assets acquired after that.
To get a complete list of credit cards and loans you can run the credit check on both spouses to get a full picture. Add all the debts and loans to your spreadsheet with bank accounts and list them as debts. Then you and your spouse can do one of the following:
Usually, one spouse will always feel that the other one has taken too much debt. As a matter of fact, debt is one of the reasons why a lot of marriages fall apart. If both spouses cannot come to an agreement, a divorce finance mediator might be helpful. It is probably one of the cheapest options. Else the judge will make the final decision.
Ideally, it would be beneficial to both to agree to pay off the debt before the divorce and close all the accounts. If it is not feasible then an agreement must be reached on splitting the debt. In either case, both should cease to use the shared credit cards and loan accounts to draw additional funds. You should get statements of all the credit cards and loans before you announce your intent to separate from your spouse. That will set a baseline for what loans you can be potentially responsible for. You should also remove your spouse as an authorized user from any cards that are in your name only.
Make a list of all the investments including bonds, cash, collectibles, jewelry, real estate, and stocks. Determine the estimated cash value of each. Then decide how would you like to divide them. Would you like to liquidate everything in cash and split the cash? Or would you like to divide the assets? Another option could be that one of the spouses can buy out the other's interest. Things may get even more complicated if one of the spouses has fully vested employee stock options that haven't been exercised yet. A financial mediator can help with this process as well. In case of no agreement, the court will decide. Regardless you should be fully prepared with all the documentation.
The primary home is where both you and your spouse have lived during the marriage. One spouse will get the house. The other will be paid their share by the spouse who is keeping the house. If the house has a mortgage, the bank will require the spouse keeping the house to get a refinance loan and pay off the other. This will result in a "quit-claim deed" by the spouse who is getting paid. Their name will be removed from the title and they will no longer have any loan or tax obligations for the house. The spouse who is getting the house must make sure that it makes financial sense. Another option is that both spouses can agree to sell the house and split the cash.
Retirement accounts and social security benefits are usually equally divided. While the social security benefits kick in later, retirement accounts such as 401K, 403B, and IRA are divided through a Qualified Domestic Relations Order (QDRO) by the court. The process is also called "transfer incident to divorce" per IRS topic 412. This is done to make sure that both spouses are taken care of in their old age. Any pre-mature withdrawals can result in penalties and income taxes. A qualified divorce financial advisor can guide you on avoiding penalties and taxes. They can also guide you on how to maximize the returns on your retirement account.
If you will be receiving child support from your spouse, please make sure that it is approved and ordered by a judge. The same applies to the spouse who will be paying the child support. Just keep in mind that certain expenses as kids piano lessons and medical deductibles may require additional contributions from one or both spouses as the child support is not for such activities. Child support pays for the living expenses.
If you will be receiving spousal support from your spouse, please make sure that it is approved and ordered by a judge. The same applies to the spouse who will be paying it. You may want to have additional sources of income to live the same living standard that you were used to while in matrimony.
You also need to understand all the tax obligations during and after divorce.
If both spouses had started one or more 529 plans to fund their children's education, each 529 plan be divided equally and rolled over into two separate plans. After divorce, each parent can contribute separately to the plans under their name.
While most states do not require parents to fund their education, in some cases the judge may order you to start a 529 plan or savings account to fund your children's education.
If there was a 529 plan started by you and your spouse to fund your education, then you might be able to keep those funds to pay for your education.
It is typical to find couples where one spouse was the primary breadwinner, made more money, or was a super saver. The separated couple may wonder how to split the money and property during the divorce. A lot of it depends on the state laws.
Let's take a look at the few scenarios.
Primary Breadwinner Spouse
Peter is a primary breadwinner, and Nancy didn't work or only part-time to take care of the children and/or home. If they live in a community property state, all the money and property earned during the marriage will be divided equally unless there was a prenup agreement in place. Even with a prenup, the judge may divide everything equally to compensate Nancy for her opportunity cost to take care of children and home. In addition to that, Peter might have to pay child support and spousal support.
If Peter and Nancy do not live in the community property state, the judge will decide to divide the property based on the prenup and other circumstances. Peter still might be required to pay child support and spousal support.
Both Spouses Work Full Time
Mike and Alexa work full time and Mike earns more. If they live in a community property state, all the money and property earned during the marriage will be divided equally regardless of who made more, unless there was a prenup agreement in place. In addition to that, Mike may have to pay child support and spousal support.
If Mike and Alexa do not live in the community property state, the judge will decide to divide the property based on the prenup and other circumstances. Mike still might be required to pay child support and spousal support.
Both Spouses Work Full Time But One Saves More
John and Peggy work full time. They deposit their paychecks in separate accounts and transfer equal amounts of money to a shared account for household expenses. Peggy makes 20% less than John. John spends almost all of his remaining funds on his hobbies that Peggy is not part of. On the other hand, Peggy is a super saver. She has been saving most of her remaining income and even making extra mortgage payments to pay off their shared primary home. Now Peggy is wondering how the money and property will be divided during the divorce.
If John and Peggy live in a community property state, then regardless of who made more or who saved more, everything will be divided equally unless there is a prenup in place. If they have children, John may have to pay the child support.
If John and Peggy live in a non-community property state, then Peggy might be able to keep her money and get a larger share in the property unless there was a prenup in place. If they have children, John still may have to pay the child support.
Divorce and separation times are difficult times for the parting couple and their kids. A divorce can make one or both parties very anxious and nervous. To fight the anxiety they might just want to get over with it. But that can lead to some serious financial mistakes. Below is a list of some of the common mistakes you can make during the divorce pricess:
Warning: This post is neither financial, health, legal, or personal advice nor a substitute for the advice offered by a professional. These are serious matters, and the help of a professional is recommended as it can impact your future.