What you need to know about state divorce laws
Keeping your own financial health in focus is critical in a divorce. Here’s what you need to know going into the process.
Synopsis: Even the most amicable divorce can have a significant impact on your finances. Knowing the divorce laws for the state where your marriage was registered before you begin proceedings is an important first step in protecting your own financial interests.
Divorce can be a complicated and challenging process regardless of where it takes place, but some states are more accommodating than others. While California divorce laws are notoriously complex with a mandated waiting period of at least six months, Utah’s waiting period can be as short as 30 days, even waived altogether in some circumstances.
Not only does state law dictate the amount of time your divorce might take, but also determines how your assets will be divided. While most states follow the common law formula, where a number of factors can sway the division of assets at the judge’s discretion, states like California follow community property rules and assets are divided more or less equally.
Whichever state’s gavel you divorce under, the first rule of thumb is to know the laws that shape divorce proceedings in your state so that you have a clear understanding of the impact on your assets – and your debts -- from the start of the process.
Below we cover the main areas of your financial life affected by divorce and provide guidance on what to know and what to do about each.
Dividing the Assets
As a general rule, assets, property and debt acquired during the course of a marriage are divided when the spouses divorce. While there may be exceptions for individual inheritances, gifts to an individual spouse, and assets or property acquired before marriage, the big difference among states is the particular formula they follow to determine the division. These state laws generally fall into one of two categories.
Some states follow yet a third principle. For example, Oregon is an equitable distribution state. This means that the division of assets is not necessarily divided 50/50, but in a manner the court deems to be fair to both parties.
Dealing with Debt
Divorce does not eliminate debt; it divides it between the two spouses. As with assets, practices differ according to state laws.
One important trap to avoid is maintaining joint accounts after the divorce. Your spouse could continue running up expenses and leave you with the debt. As soon as the divorce is finalized, freeze all joint accounts and have your creditors reclassify them as individual accounts. Most creditors will do this at your request, though they are not legally required to do so.
If you and your spouse own a home that has appreciated in value, you may want to sell it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 in realized capital gains for married taxpayers. This amount is cut in half for single filers. Be sure to consult a tax advisor for additional guidance.
Money in either spouse's 401(k) or pension plan may legally be divided during a divorce. To claim a share of a spouse's 401(k) or pension plan benefit, you need to obtain a court order called a Qualified Domestic Relations Order (QDRO) and provide it to your spouse's plan sponsor before distributions are completed to your spouse.
If you do receive a share of a spouse's 401(k) assets or pension plan benefit, it may be best to roll over your share immediately into an individual retirement account (IRA) to avoid taxes and maintain tax deferral. You should discuss this with your attorney or a financial advisor familiar with divorce proceedings as soon as you anticipate a divorce.
Be sure to review your will or, if you don't have one, draw one up. You should consult an attorney familiar with your state's estate laws to ensure that your assets are properly distributed. Do not wait until the divorce is final. You should review and amend your estate plan at the same time you decide to commence a divorce proceeding. Also make sure to review beneficiary designations for pensions, 401(k)s, and life insurance policies. Federal law requires a spouse to be the sole beneficiary of pension or 401(k) benefits unless that right is waived in writing by the spouse.
If you find yourself faced with divorce, it is essential to protect your financial future. Enlisting the help of an attorney and carefully monitoring the process can ensure that your interests are considered and that you won't need to revisit the proceeding later on.
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This information is not intended as legal or tax advice and should not be treated as such. You should contact your estate planning and/or tax professional to discuss your personal situation.
Wealth planning strategies have legal, tax, accounting and other implications. Prior to implementing any wealth planning strategy, clients should consult their legal, tax, accounting and other advisers.