There’s no sugarcoating it. Divorce is just plain hard. But you’re not alone. According to research, nearly 1 in 2 marriages in the U.S. – or nearly 50% -- end in divorce or separation.
Most couples going through the legal process of divorce find that dealing with the financial aspects is just as difficult as coping with the emotions. One of the most difficult tasks – and potentially one of the trickiest – is deciding who owes what to whom and who is assuming which obligations.
Let’s consider an example of a couple whose joint assets are a sizable 401(k) account and an equally sizable cash savings account. Would it be fair to trade one of these assets for another? Not exactly. The 401(k) comes with tax penalties for early withdrawal and each withdrawal, even once permitted without penalty, is fully taxable to the recipient, while the cash is immediately available with no penalties and is not subject to income taxes.
Your separation agreement will spell out how property is to be divided, therefore, it is important that you are comfortable with the details prior to signing the agreement. You also need to make arrangements for your own responsibilities going forward and remove yourself from title of assets and liabilities that no longer belong to you.
Here’s a checklist to get you started and help you transition from "ours" to "mine" and "yours" in a fair and financially sound way.
Day-to-day transactions and financial accounts
- Divide all bank account balances as called for in the separation agreement.
- Cancel joint checking, savings and revolving credit accounts, such as credit cards.
- Establish individual accounts in your name for ATMs, checking, savings and credit cards.
- Let your utility companies know if you're assuming responsibility for the bills or if your name should be removed from the accounts. These updates would include: accounts for gas, electric, heating oil, water, sewer, cable/satellite television, telephone and broadband Internet.
- Clarify responsibilities for any condo, co-op or HOA fees.
- Convert family mobile plans to individual contracts, if applicable.
- Notify all of your creditors of your changed circumstances and responsibilities, including change of address if applicable. Make sure you notify organizations with whom you may have automatic payment arrangements such as private schools, religious congregations and associations.
Other financial assets
- Revoke any joint authorizations or powers of attorney you gave to your ex-spouse over investment accounts and assets.
- Remove yourself from any joint accounts your spouse intends to maintain independently. (You may have to explicitly notify the institutions that you claim no future responsibility for the account.)
- Remove your ex-spouse from any accounts you intend to maintain individually.
- Make suitable arrangements (opening new brokerage or trust accounts, if necessary) for any securities due to you from the divorce settlement.
- Open new trust accounts for any assets you expect to receive on behalf of dependents.
Retirement plan issues
- Update the beneficiary designations of your existing retirement accounts and insurance policies.
- Seek a qualified domestic relations order (QDRO) for any retirement assets you are entitled to in your spouse's employer-sponsored plans. (The QDRO is a tax-efficient way to preserve and enforce your financial interests in your ex-spouse's pensions and defined contribution plan assets.)
- Create rollover IRAs in your name to receive any assets that might be due to you immediately from your ex-spouse's IRAs. (Taking those transfers as cash distributions could trigger immediate and costly tax consequences.)
Property and other resources
- Update the deeds and title papers to reflect any changes in property ownership status. Notify any mortgage holders and lienholders of the changes.
- Notify all taxing authorities (city, country, school district, etc.) of any changes in responsibility for real estate tax payments.
- Update motor vehicle title, tax, insurance and lease arrangements.
Moving forward on your own
- Take a fresh look at your plans for the future to determine whether your divorce will affect your financial needs, risk tolerance and time frames. Among the things to reevaluate are:
- Current and future cash flow needs
- Life insurance and disability insurance needs
- Investment allocations
- Retirement savings
- Review your estate planning documents to be sure that the provisions reflect your new circumstances (if you have no estate plan for yourself, create one).
- Evaluate your Social Security status. (A divorced person may be eligible for Social Security benefits based on his or her ex-spouse's earnings record if he or she is at least 62 years old, was married for at least 10 years, and does not remarry before age 60.)