While This specific may seem counter-intuitive, the more common divorce becomes, the more complicated This specific gets. One might expect of which because about half of today’s first marriages end in divorce (along with also around 60 percent of second marriages) the law, the process, even the outcome would certainly become standardized, predictable even. Yet nothing could be farther coming from the truth.
Finances quickly emerge as the most complicated issue facing a divorcing couple, along with also today’s finances can be extremely complicated. Years ago, ordinary people did not own mutual funds along with also stock options, create blended families, or accumulate mountains of credit card along with also mortgage debt. Dad went to work along with also Mom stayed home to raise the children. Life was simple, families were simple, along with also divorce, although rare, was often very simple.
As a result of these financial complexities, individuals along with also attorneys are asking financial professionals to play an active role in assisting them with sorting through the financial details related to divorce. However, although financial planners along with also accountants certainly understand investments along with also taxes, they have little or no professional training specifically related to the financial issues of divorce. When a divorcing client asks them for assistance, many financial advisors are unable to provide critical information or offer insightful advice. Too often, the client is usually unaware of which their financial advisors do not possess the required expertise; creating unintended, even adverse results. The long-term impact of generating uninformed financial decisions can be devastating to the client, their family, along with also their future.
Attorneys are trained to research the facts, apply the law, along with also navigate their clients through the legal system. Accountants calculate tax liabilities, along with also investment advisors build along with also manage your portfolio. Today, This specific is usually common for attorneys, mediators, along with also even judges to look to experts of which are knowledgeable about the financial issues around divorce to inform This specific process. A Certified Divorce Financial Analyst is usually just of which professional. Commonly referred to as a CDFA, This specific person is usually typically a financial services professional with additional training inside issues specifically related to divorce. A CDFA can assess your current assets, liabilities, along with also expenses. They are able to assist you with creating a household budget, proposals for division of assets along with also liabilities along with also assessing future, post-divorce needs. Without the informed input of an educated professional, you risk generating serious financial mistakes of which can create irreparable damage to your long-term financial condition.
Although under certain circumstances, a Divorce/Separation Agreement may be modified after the divorce is usually final, This specific modification process is usually expensive, time consuming along with also almost certainly contentious – along with also there is usually no guarantee of which you will get what you are asking for! This specific is usually your divorce – along with also This specific will impact your future. Do your homework along with also hire qualified financial professionals who are experts inside area of divorce financial planning, along with also get This specific right the 1st time.
A CDFA can help you avoid the following common mistakes:
1. Negotiating to keep the “marital home” when you cannot afford This specific
In many marriages, the marital home is usually the largest, most emotional along with also expensive joint asset. Should you stay or should you sell? Carefully consider whether you can afford This specific. A home is usually an illiquid asset of which can very expensive to maintain – mortgage, taxes, insurance, utilities, along with also daily operations add up quickly. Will you be able to meet all of these expenses once you are divorced? Call the utility companies along with also obtain your actual annual costs. Do you have money set aside in case the water heater, furnace, or air conditioning needs to be replaced? Run all of the numbers for a full year to determine a realistic evaluation of the expenses. If you do want to keep This specific, can you buy your spouse out of his/her half of the equity? You may be able to refinance your mortgage or take out an equity line of credit to fund the buyout. Consider a lower adjustable rate mortgage if you expect to sell a few years after your divorce. If you do sell, will there be a capital gains tax due on the proceeds? How much of the proceeds will you lose in realtor commissions, capital gains taxes, along with also moving costs?
Case in Point
In 2005, Heather insisted on keeping the house of which she along with also her husband had bought when they were first married years earlier. As their marriage had been ‘on the rocks’ for a few years, the house had not been maintained along with also there were leaks inside plumbing, stains on the ceiling, along with also This specific desperately needed a fresh coat of paint. When she traded a portion of his 401(k) to keep the equity inside house, Heather was elated. She thought she had won until 10 months after the divorce, the water heater broke. This specific caused water damage inside basement along with also the cost to replace along with also install a brand-new unit was $2,400. Heather had not anticipated This specific nor some other expensive repairs required over the next few years. Finally, since her alimony was running out along with also she was losing patience, Heather decided to sell. She met having a realtor who informed her of which the housing market had softened significantly since her divorce, values were down, along with also her equity had narrowed considerably. In addition, if she wanted to get a “Great cost” for the house, she was going to have to make certain repairs. When the house eventually sold, the real estate agent’s commission, along with also capital gains tax further reduced Heather’s proceeds. Since Heather was not married, she was not eligible for the $500,000 capital gain exclusion although rather the single rate exclusion of just $250,000. While Heather was saddled with the upkeep along with also expenses of This specific home, her husband enjoyed tax along with also expense free growth in his 401(k) investments, along with also purchased a smaller dwelling in a less expensive part of the state. He was elated.
2. Understanding the complications of a QDRO to divide retirement assets
A Qualified Domestic Relations Order (QDRO) is usually required when one spouse incorporates a qualified retirement plan of which is usually subject to division pursuant to the divorce agreement. A qualified retirement plan is usually a plan of which is usually covered by the federal laws of ERISA along with also offers its participants protection coming from creditors. If both parties have negotiated to equalize your retirement assets by using a QDRO when you could have used assets coming from an IRA, you have potentially walked into a hornet’s nest. A QDRO is usually a complicated document of which is usually generally drafted by a financial or legal specialist, who typically charges a fee for service ($400-$800). Once the QDRO is usually approved by the plan administrator, This specific has to be filed with the court.
The alternative to This specific time consuming along with also costly process is usually to take retirement assets coming from an IRA. Since an IRA is usually not a qualified plan, the IRA owner just needs to submit a letter of authorization to the financial services firm housing the IRA along with also a copy of the judge-signed divorce decree, along with also the firm will open an IRA for the receiving spouse along with also deposit the funds according to the divorce agreement. This specific can be done at no cost along with also typically completed within 10 business days.
Case in Point
As she was negotiating her divorce, Lisa had the choice of taking $100,000 coming from either her husband’s 401(k) at his job or his IRA at a local bank. Since she didn’t know of which This specific made a difference, she chose to take the funds coming from his 401(k). Her agreement stated of which she would certainly pay all costs associated with transferring the retirement assets to her account. Once the divorce was over, her lawyer contacted a QDRO specialist along with also began the process. of which was a year ago, along with also at This specific point the market value of the 401(k) is usually lower. Additionally, she paid $600 to the specialist to draft the QDRO, paid the lawyer to file This specific with the court twice, (the documents were lost the 1st time), along with also she still doesn’t possess the money. Had she had consulted having a CDFA, she would certainly have known to take her interest inside retirement accounts directly coming from the IRA. At the time he signed the divorce decree, her husband could have signed the bank authorizations allowing them to distribute the funds into her IRA. This specific process would certainly have been free along with also she would certainly have had her funds within 10 days of receiving the final divorce decree coming from the judge.
3. Realizing the importance of generating the spouse who receives spousal along with also child support payments the owner of a life insurance contract
Life insurance is usually a common vehicle used to secure support inside event the ‘paying spouse’ dies. Before any divorce is usually final, the ‘receiving spouse’ should determine how much they would certainly receive in total for the full term of support. If the support order is usually open-ended, you should do your best to calculate how much money you would certainly need to have inside bank earning 5% interest to replace your support inside event the paying spouse dies. The paying spouse should obtain life insurance on his/her life to ensure of which funds will be available upon death. If the paying spouse is usually obtaining a brand-new policy then the insurance application should be approved along with also issued before the divorce is usually final. If the paying spouse is usually not insurable (unable to obtain life insurance) along with also the divorce is usually over, the opportunity to renegotiate or obtain different asset is usually lost. Also, the spouse who receives support should be the owner of the insurance policy on the paying spouse’s life. This specific would certainly give the receiving spouse control over the policy to ensure of which This specific does not lapse due to non-payment, or of which the beneficiary has been changed to someone else.
4. Considering your Social Security benefits
If you were married for at least 10 years, you can collect retirement benefits on your former spouse’s Social Security record. You must be at least 62 years old along with also your former spouse must be entitled to or currently receiving benefits. If you remarry, you generally cannot collect benefits on your former spouse’s record unless your subsequent marriage ends by death or divorce.
If your divorced spouse dies, you can receive benefits as a widow/widower, if the marriage lasted 10 years or more. Benefits paid to a surviving divorced spouse who is usually 60 or older will not affect the benefit rates for some other survivors receiving benefits.
If you change your name, make sure to tell the Social Security Administration along with also your employer. This specific will assure of which your earnings will be properly reported along with also recorded in your SSA records. You should obtain a brand-new card coming from SSA with your brand-new name.
In general, you cannot receive survivor’s benefits if you remarry before the age of 60 unless the latter marriage ends by death or divorce. If you remarry after age 60, you can still collect benefits on your former spouse’s record. When you reach age 62, you may get retirement benefits on the record of your brand-new spouse if they are higher. Your remarriage would certainly have no effect on the benefits being paid to your children.
If you are collecting survivor’s benefits, you can switch to your own retirement benefits (if you are eligible along with also your retirement rate is usually higher than the widow/widower’s rate) as early as age 62.
5. Understanding the implications of Modifiable vs. Non-Modifiable Separation Agreements along with also Alimony
In most states, alimony is usually either modifiable or non-modifiable. When a separation agreement involving alimony is usually “merged” into a Judgment of Divorce, its terms are incorporated into the judgment along with also can be modified by the court at the request of either party. In order to prevail in a request for modification, the requesting party must show the court of which there has been a “material change of circumstances” which justifies modifying the original agreement/judgment.
If a separation agreement is usually non-modifiable with respect to alimony, the agreement “survives” a Judgment of Divorce, along with also although its terms are also incorporated, This specific does not “merge” into the judgment. Yet the agreement stands as an independent, legal contract between the parties. As such, the contract would certainly be litigated in a civil proceeding in Superior Court along with also treated as an agreement of which the parties entered into voluntarily. For a court to modify the contract against the wishes of the some other party is usually highly irregular. The requesting party must show a graver concern over along with also above the “material change of circumstances” standard, such as when the some other party is usually at risk of becoming destitute.
Even if the separation agreement is usually non-modifiable with respect to alimony, a modification of child support is usually always possible, if This specific is usually determined there has been a material change of circumstances, since parents may not take away the rights of their children to receive support coming from either one of them.
6. Factoring the tax implications of alimony vs. child support payments
Support payments resulting coming from divorce receive different tax treatment depending upon whether they are characterized as “child support” or “spousal support” (sometimes referred to as maintenance or alimony). Payments classified as child support are not taxable to the receiving spouse along with also not tax- deductible by the paying spouse. Payments classified as spousal support or alimony are taken into income for tax purposes by the receiving spouse along with also deductible coming from income by the paying spouse.
These payments are not only tax deductible, although “above the line” adjustments to income, meaning of which the paying spouse takes the deduction to arrive at their adjustable gross income (AGI) rather than adding them to their itemized deductions on Schedule A of their tax return. Divorcing spouses may be able to save money in taxes by taking advantage of This specific difference, although must be careful in how they structure the payments.
For these along with also many some other reasons, any person considering (or facing) divorce would certainly do well to consult a CDFA. As you have seen coming from these few examples, some of these pitfalls are very technical, along with also the consequences of generating an ill-advised choice in any one of them can last a lifetime. Divorce is usually always difficult, although This specific needn’t necessitate a lifetime of regret. Get professional advice coming from the start, along with also make your best effort at a brand-new beginning!