When a couple splits, they end up doubling their housing, utility and other regular costs. After this, there is the property division. This can stifle each spouse's progress toward long-term goals like retirement or the children's education.
Here are several important tips for those going through or recently completing the divorce process:
- Monitor assets in your divorce settlement: If you're in the midst of a divorce, examine the type of assets that you receive as part of your divorce property settlement. The reason for this is your cash flow. Even in cases where the math demonstrates an equal split between the two parties, one spouse could get stuck with a non-liquid asset, which might end up being difficult to liquidate if cash flow becomes a problem.
- Factor in an asset's taxable status: For many couples, a $100,000 brokerage account—for which you'll only pay tax on capital gains or dividends—might be of greater value than a $100,000 tax-deferred retirement account because you'd have to pay income tax on withdrawals from that type of account.
- Keep an eye on taxes and their effects: Taxation influences continuing income. For example, the payment of alimony is tax deductible, but the receipt of alimony is treated as ordinary income. However, child support is not taxable to the recipient, which may change the way you prepare your annual tax return and the amount you owe the IRS. Make sure you keep this in mind the next time you file your taxes.
- Review and update your estate planning documents: Once the divorce is final, both ex-spouses need to make sure to update all aspects of their financial lives. This includes beneficiary designations on pensions, 401(k)s, and life insurance (if not part of the settlement terms), as well as all estate planning documents—like your will, powers of attorney and trusts. This is especially important if you do not want your ex managing and distributing the assets that you have designated for your minor children. Creating a trust that appoints a Trustee to both manage your wealth and make the appropriate distributions is the best course to take in this situation. It is also vital to your well being that you designate someone who can make healthcare (and financial) decisions when you cannot make these decisions for yourself. I spend a lot of time talking about incapacitated seniors but the sad truth is that there are an equal number of people, regardless of age, that are incapacitated as the result of an accident. We all need an estate plan.
Reference: Money (March 1, 2016) "Keep a Divorce From Killing Your Finances"