Financial Planning for March 2012

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Financial Planning Indispensable When Faced With Divorce

Divorce rates in the United States have been declining for the past couple of decades, but are still quite common. Surprisingly, divorce rates drop during economic recessions. Still, an estimated 24 percent of couples 25 and older are expected to get divorced within the first 10 years of marriage.

The need for an attorney is standard advice for divorcing couples who can’t come to a mutual agreement on their own. But recommendations to consult a financial advisor, tax professional or even a certified divorce financial analyst are less common. Focusing on finances during the stress and emotional distractions of a divorce can be a challenge. But because it can lead to financial problems for one or both parties, divorce-related financial planning is essential. When children are involved, planning is even more crucial. While legal counsel during divorce is indispensable, financial or tax advice is equally valuable.

Handle the Preliminaries

You can save money in a divorce by doing as much preliminary work as you can before you meet with an attorney or a financial professional. Preparation might include gathering your financial records and legal documents such as tax returns, bank and credit card statements, loan agreements and insurance policies. Another money-saving consideration might be to use arbitration or mediation instead of an attorney.

Settle or Go to Court?

One important decision you might be confronted with early on is whether to settle out of court. Doing so can save a significant sum of cash compared to going to court, so that decision should be weighed carefully with the help of your attorney.

Evaluate Your Assets

Work with experts to accurately value your marital assets, including your home, automobiles, motorcycles, boats, stocks and options, retirement plans, pensions, businesses, benefits, art collections and other property. It might be necessary to hire a professional to accurately evaluate your home or determine the value of other property, such as a business in which both spouses were involved.

Newly Single Homeowner?

Think carefully and seek advice before agreeing to take the family home after the divorce. Will you be able to afford the maintenance, repairs, property taxes and other house-related expenses on your own? If not, it might be better to sell the home and plan to purchase or rent a less expensive home or apartment.

Take Care of the Kids

If you have children, you will want to ensure that they are taken care of financially. Your goal should be to reach a child support agreement that is fair, reasonable and meets your children’s needs. If your agreement requires you to pay child support, work with a financial advisor to plan a budget that will ensure you can meet your legal obligation.

Community Property or Equitable Distribution

Check the divorce laws in your state. Some are “community property” states, meaning that the marital assets (assets accumulated during the marriage) must be divided equally. Other states leave it up to the court to equitably distribute assets based on personal and financial information provided by each party.

Retirement Plans, Employee Benefits and Social Security

Retirement plans are major assets that will need to be considered during a divorce. Talk with your attorney and financial advisor about how divorce laws in your state and federal regulations affect retirement plans, employee benefits and Social Security benefits after the divorce.

  • Your attorney might draft a Qualified Domestic Relations Order to detail how a spouse’s employer-sponsored, tax-qualified retirement plan account will be divvied up when the divorce is finalized. The plan can be a 401(k) or pension plan, as long as it is covered by the Employee Retirement Income Security Act.
  • Discuss with your attorney the rules for Social Security benefits and employee-based health insurance coverage. Social Security has specific rules that determine how much, if any, of your spouse’s benefits you are entitled to after the divorce. Collecting benefits on your former spouse’s income depends on how long you were married, whether you remarry and at what age you remarry.
  • If you need health insurance coverage after your divorce, you might be able to continue on your former spouse’s employee-based plan through COBRA for up to three years after the divorce. Be sure to find out how much the premium will cost so that you can build the expense into your post-divorce budget.

Many other considerations may be part of a divorce. Don’t get into a hurry or allow emotions to cloud your judgment and cause you to miss out on your fair share of the marital assets. It is also important to make sure that you keep paying your bills on time, even if the process is chaotic or stressful. The last thing you need after the divorce, and possibly living on a reduced income, is a damaged credit profile.

Finally, work with your financial advisor and tax professional to plan your budget and your financial future. Divorce is an unpleasant, stressful experience, but a little help from trusted sources can cut some of the stress and help put your life and finances back in order.


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