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Getting finances in order before and after a divorce

| Jun 5, 2017 | Divorce

Many people in Michigan understand the importance of planning ahead for a wedding, but few may realize the potentially devastating consequences of failing to plan when a marriage is ending. While divorce is usually a complicated and emotional matter, it may be even more so for those who have been married long enough for their finances to become entangled. When this is the case, careful preparation may mean a more positive financial future.

If a couple does not already keep track of spending, the hint of divorce may provide the incentive to do so. Not only will this help one anticipate a post-divorce budget, but it will provide information for the court when the time comes to divide assets and determine support amounts. Tracking spending should include daily expenses like bills and groceries, as well as spending for household repairs and holidays.

Marriage advisors recommend that divorcing spouses refrain from making any major financial decisions or purchases. Meanwhile, one of the first things divorcing spouses are encouraged to do is to gather as much of the marriage’s financial documentation as possible. This includes bank and retirement accounts, investments, tax returns, debt and proof of income. Many spouses are reluctant to share this information after divorce papers have been filed, so gathering the information beforehand may be necessary.

Friends and family may wish to offer advice, but acting on questionable information could damage one’s chances for positive results in court. Because divorce laws vary from state to state, seeking counsel from someone who is well-versed in Michigan divorce law will provide a decided advantage to a resident of the state. An attorney with decades of experience will focus on acting with the client’s best interests in mind.

Getting through a divorce without losing your assets

As divorce rates continue to soar for adults over 50 – particularly for baby boomers 65 and older – many divorcing spouses worry about splitting up their assets. Those with significant assets to protect have misgivings about losing what they worked a lifetime to enjoy.

It’s a valid concern. Just when your earning capacity is in its downward trajectory after peak salary years have passed, you face the prospect of living on roughly half of your income. While retirement account or pension benefits could provide a couple with a comfortable lifestyle as they enter their golden years, halving those assets to support two separate individuals can be tight.

For this reason, many baby boomers fight tooth and nail to salvage the most from their retirement accounts. Learn how you can make the most of your nest egg in a property settlement.

Defining the ownership of the accounts

For long-married couples who have been together for decades – often through several career evolutions – there could potentially be multiple retirement accounts to divide in a divorce. If one spouse was the primary wage-earner while the other stayed home to rear the children or worked at lower-paying jobs without retirement benefits during the marriage, the spouse with the pensions can resent having to share these benefits with an ex.

However, the law is clear in this area. Marriages are viewed as economic partnerships, with both parties making vital (if not necessarily equal) contributions to the whole. So when divorce looms, the higher earner in the marriage must accept that a significant portion of his or her retirement benefits will now go to the ex.

The other man in your divorce

No, this isn’t about infidelity. The other man here is your good old Uncle Sam. He’s got his hand outstretched, too, when the retirement accounts get divvied up. Certified financial planners advise their clients to consider the impact after taxes on any retirement accounts when attempting to valuate them. To do so accurately, you have to consider the tax implications.

Individual retirement accounts and most 401(k)s get taxed when you withdraw money from them. However, if you have Roth IRAs, your contributions are taxed, but after specific retirements have been met, there are no tax penalties to withdraw. When valuating each account, you must factor in the after-tax value to accurately assess its worth.

The real estate over retirement account dilemma

It can be tempting to want to cling to the former marital home after a divorce. This is particularly common when a couple has reared their children in the home and each nook and cranny are full of memories of happier times.

But letting sentimentality overrule good sense during the division of assets is a foolhardy mistake. Trading the value of half of a decent retirement or pension account for full ownership of the family home can be shortsighted at best.

Women are at greater risk of falling into this trap. But home maintenance on a single income is expensive, and you will also be solely responsible for the upkeep. Here in Michigan, that includes snow and ice removal, and for some, dealing with heavy yard work. As you enter your golden years, do you really want to be burdened with those types of problems?

Taking the cash and using it to down-size into a smaller, more manageable property with fewer upkeep issues is often the wiser choice in these situations.

Seek out competent, experienced legal counsel

Whether the divorce was your idea or you are an unwilling participant, it’s important to realize that you don’t have to go through this alone. Retain a family law attorney who is willing to fight to see that you receive your fair share of the assets from your marriage. This will leave you in the best position to embark on the latest chapter of your life.

Who pays shared debts after a divorce?

After marriage, couples often build a life together that may include taking on shared debt. If they help each other through college, buy a home, purchase cars and raise children, they likely amass thousands in debt. It may seem like this is just another part of married life until the marriage begins to falter. What happens to all that debt when a couple files for divorce?

Most people understand that assets are divided according to some formula. For example, the state of Michigan has laws which may be different from other states, but their purpose is to protect spouses with a theoretically equal distribution of assets and debts. Individual debts typically remain the responsibility of the spouse who incurred them, especially if the spouse took on those debts before the wedding. However, if a couple has shared debts, these are not as easy to divide.

The divorcing spouses may be able to come to an agreement about who will take responsibility for which debts. A judge may even order one or the other spouse to pay on the balance owed to a particular creditor. However, even such an order may not relieve one spouse of liability for the debt in the eyes of the creditor.

If both spouses’ names are on the loan, both spouses may be sought by the creditor. If the spouse ordered by the court to take on the debt refuses to pay the bill, the other spouse may face the consequences in the form of damage to credit history, foreclosure or repossession, wage garnishment or other forms of debt collection. There are ways to minimize these possibilities, but they are best initiated as early as possible to avoid negative consequences. An attorney can assist anyone in Michigan with concerns about debt and divorce.

Financial Matters After A Divorce

It is very tempting to try to finalize the divorce as quickly as possible so that you can move on. However, even after the final divorce papers are signed there still may be some more work to do when it comes to updating your estate plan.

Wills and Trusts

Many people work with their divorce attorney to make sure that their spouse is cut out of their will automatically, but some have named other in-laws who may not be. If those people have a copy of a will that shows them as inheriting something, they may be able to claim it if no one else can find evidence that they shouldn’t.

This is exactly what happened after the death of a woman who had died at age 46, years after her divorce. Her ex-husband had no claims to her estate, but her former father-in-law produced an old will that passed property on to him. Since no one else in her family could find an updated will, he was able to collect the inheritance.

Lesson: After a divorce, it is important to draft new estate planning documents that will supersede any old documents, and make sure your family is able to locate the documents.

Beneficiary Accounts

Accounts including life insurance plans, savings accounts, or other financial accounts often have a person designated as a beneficiary when they are set up, but people have a tendency to forget about the designations over time. In many cases, spouses are named as beneficiaries, and remain beneficiaries after a divorce even though these were not the account holder’s wishes.

Lesson: A divorce doesn’t usually remove your ex-spouse as beneficiary automatically, so it is important to have these changed to someone else, if that is what you would prefer.

Reinforcing Terms of the Divorce

Sometimes divorce settlements indicate that retirement accounts should be split between spouses once they reach maturity. This may mean that you are supposed to receive a portion of your ex’s account when this happens at some point in the future, or when they die.

Paperwork for these agreements should be updated with the ex’s employer and/or financial institution involved. A Qualified Domestic Relations Order (QDRO) is a document that can help reinforce your claim on those assets that were awarded to you in a divorce settlement.

Lesson: Make sure you ask your lawyer about whether a QDRO is necessary in your case, and be sure to follow up with it after the divorce, if necessary.

If you are divorced while you are relatively young, it is easy to think you will have plenty of time to double check your will and financial accounts to assure that your wishes will be carried out, but life can be unpredictable. Working with a family law firm that also handles estate planning issues can help you to avoid any pitfalls.

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