Just as marriage can have a major impact on a person’s financial situation, so can a divorce. The end of a marital union typically brings lifestyle changes for each spouse. These adjustments require careful consideration and planning.
Since the events of 2020, top matrimonial attorneys are seeing a 50% increase in potential client inquiries. If you are contemplating a divorce, be sure to understand key practical steps to safeguard your financial future.
Understanding the Divorce Process
Dissolving a marriage includes three main components:
- Dividing the assets and liabilities
- Planning for spousal support
- Planning for any children
Often the financial component is the simplest to resolve. Issues like child support and alimony (also known as maintenance) can be difficult to work through and will likely require time in a courtroom to reach an agreement. An experienced attorney can assist in negotiating the terms and reviewing specific laws that apply in your state.
Dividing the Assets and Liabilities
Married couples typically accumulate several jointly owned assets (e.g., cars, real estate, investments), as well as liabilities like mortgages, credit card debt, and student loans.
The legal standard calls for a “fair and equitable” division of assets. That doesn’t always mean a 50%-50% share, but rarely is the split wider than 60%-40%. Assets acquired before marriage, after separation, and inheritance, that are not comingled, are generally considered individual property. These types of assets will often be rewarded to the respective spouse.
The line between joint and individual property gets blurred over time. A marriage of 5 to 7 years is considered a short-term marriage. In this case, a family court judge will generally attempt to unwind the marriage cleanly. They will aim to leave each party with what they originally owned and divide only what was acquired jointly during the marriage.
A marriage between 7 and 25 years is something of a “gray zone.” It can be more difficult to determine asset ownership and outcomes can vary widely.
After 25 years, a marriage is considered a long-term union and the court will attempt to put each spouse in a position of parity for the rest of their lives. In this case, the appropriate distribution of assets and support can be difficult to establish. For example, if one spouse is nearing a big career milestone which will lead to significant earnings growth, it could affect the court’s estimates of each spouse’s future financial needs and contributions. In a long-term marriage all property, including separate property, is brought before the court for consideration when calculating the division of assets.
In the case of a significant gap in the expected future earnings of a divorcing couple, one spouse will typically pay alimony or provide other forms of support as set by the court. This support may terminate after a fixed period, or if the recipient spouse remarries.
Alimony, unlike child support, is generally not based on a set formula. It’s negotiated by the parties or mandated by court order in a contested divorce. Factors include:
- How long the marriage lasted
- Contributions either spouse made to the other’s career advancement
- Income needs and employability of the lower-earning partner
- The asset and debt division of the settlement
- Separate property of either spouse
- Each spouse’s age or health
- Support needs for children and/or elderly parents
For couples that co-own a business, which can’t easily be divided or sold, the court typically awards the asset to the person responsible for the income of the business. For example, the spouse running a restaurant would usually retain ownership. The court may award partial ownership to the other spouse.
A custody plan for minor children can be the most complicated and emotional component of a divorce. The court will determine where the children live and how much time each parent can spend with them. Child support is generally based on the income of the divorcing spouses. There are reasons the court will consider deviating, including when the combined income of the spouses is greater than $12,000 net per month.
One spouse may be required to pay child support until a minor reaches the age of 18. It’s beneficial to have a written plan for expenses after this age such as college tuition, insurance, and medical bills.
Consider including costs of living adjustments in the custody agreement. It will protect the children over the years by increasing payments as needed. If necessary, the parties may return to court every two years to adjust support until the minor children reach age 18.
Costs of Divorce
The divorce process itself can be expensive. Complicated or contentious breakups, that end up going to trial, could ring up more than $100,000 in legal bills which need to be paid up-front.
Another option is to work with a mediator. If relevant documents and discovery are completed in advance, a mediator can reach a resolution in a matter of hours at a cost of approximately $5,000.
Keeping the House
A house is often one of the most valuable assets obtained in a marriage. It’s natural for one or both parties to want to keep it – particularly if they have children.
However, it’s also a large expense neither party may be able to afford alone. The family home comes with property taxes, insurance costs, maintenance expenses, and renovations needed to maintain its value. Additionally, real estate cannot be quickly converted to cash, whereas investment assets can be easily liquidated and historically have much higher growth potential.
Selling the house and using the equity to buy a smaller home might be a better option. If one party does keep the house, that spouse will need to buy out the other party or refinance the mortgage to release the other spouse from ownership.
Create a Spending Plan
It’s hard to stay disciplined when your life is undergoing major changes, but it is important to create a spending plan and to stick to it. Keep in mind that when you divide the household, you lose the financial benefit of sharing certain costs.
Both during and after divorce proceedings, it is important to understand what your “new normal” will look like with a spending plan. Determining what your share of assets, debt, and income will be, as well as how to live within these means, is imperative to safeguard your financial future.
Take a hard look at what your post-divorce needs will look like. Build projections based on where you might live or what aspects of your lifestyle you want to maintain. Once you have estimated your spending costs, you can determine if you need to seek additional sources of income. Are you willing or able to compromise on anything, or do you need to make a transition in the workforce?
Social Security Benefits
Social Security may pay benefits, as much as 50% of a retiree’s benefit, to a divorced spouse if the couple was married for at least 10 years. This percentage is reduced if claimed prior to full retirement age. Eligibility for spousal benefits is lost when a divorcee remarries. However, they become eligible to file on their new spouse’s record.
Considerations for Women
It’s becoming much more common to see women be the primary earner in the household, or equally earn as much as their spouse. They are also set to inherit a whopping amount over the next decade as baby boomer wealth changes hands – an estimated $30 trillion in financial assets, with the majority anticipated to go to women.
However statistically, nearly half of women defer to their husbands for financial decisions. Only about 20% say they participate equally in financial decisions. Through the divorce process, it’s imperative to take an active role in the financial details.
Since divorce can trigger complex financial changes with significant tax implications, we recommend consulting a tax attorney, financial advisor, and consider the potential impact to your budget.
Over the years, Coldstream’s team has partnered with many clients during this life transition by integrating financial and emotional strategies into their future plans. If you would like to learn more about our confidential and comprehensive services, please call or email our team.
We’d like to thank Jillian Pressnall at Pressnall Law Group for her contributions to this article.