Obtaining all of your financial records is crucial before making any divorce-related decisions. Money is one of the hardest part of the divorce process, which is why it is so important to enter negotiations and/or discussions with a financial advisor, lawyer, and/or mediator being prepared and avoid any unfair settlements and long-term financial hardship. Below, we're sharing more on what you to need to avoid any financial mistakes:
Collect your financial documentation: Gather at least 12 months of your personal bank statements. This may include kids' savings plans such as a 529, pay stubs, investment account statements, tax returns, mortgage documents, and retirement account statements.
Make an organization strategy: Create a digital or physical filing system for all of your records. You can use folders labeled by each account or document type for easy access.
Digital vs. physical organization:
Digital storage: This provides an easy way to search and back up, but requires strong passwords and secure cloud storage.
Physical storage: Tangible and accessible without technology, but can be at risk for loss or damage. Make sure to make copies for peace of mind and a backup.
2. Document Debts and Credit Lines
Get your credit report: Pull your credit report to know your credit score. This can help you to identify any debts in your name.
Joint liability concerns: Joint debts remains your responsibility - even after divorce -unless the creditor agrees to remove your name. Make sure you know which accounts are connected.
Debt documentation: List all loans, credit cards, lines of credit, and outstanding liabilities, noting which are joint and which are individual.
3. Collect Asset Valuations and Ownership Details
Professional appraisals: Hire professionals for complex assets like personal businesses, real estate, or debt.
Hidden value considerations: You also have to consider stock options, pensions, or frequent flyer miles.
Ownership verification: Check titles, deeds, and account registrations to confirm legal ownership.
Once you have all of your documentation, you can start to plan for your post-divorce expenses.
Plan For Post-Divorce Expenses
Most people underestimate their post-divorce living costs. This can include a range of situations such as moving into a new home, maintaining two households, alimony, childcare costs, and more.
1. Project Housing Costs
As you embark on a divorce, you may have different housing costs to consider such as either renting, buying, or staying in your existing house. Here's how each breaks down:
Renting: Offers flexibility and lower upfront costs. However, this leaves you with no equity and possible rent increases.
Buying: This can build your equity and offers stability. You will need good credit and higher upfront costs as well as maintenance responsibility.
Keeping a family home: This is something that has to be figured out by both parties, which can be very emotional and difficult to figure. A lawyer may have to be involved as well.
Location considerations: Location is key when looking for a new home where you have to consider the school districts, proximity to work, support networks, and the location of your ex.
Utility budget planning: In any housing situation, you also have to factor in utilities (electric, water, iInternet, etc.) and estimate monthly costs based on new living arrangements.
True cost analysis: Calculate mortgage, taxes, insurance, maintenance, and repairs.
Equity vs. liquid assets: Trading retirement funds for home equity can leave you cash-poor and unprepared for emergencies.
Future sale considerations: Understand potential capital gains taxes and the best timing for a sale.
2. Estimate Child Support and Childcare
Child support calculation basics: Courts use income, custody arrangements, and state guidelines to determine support. You can roughly determine this at home by using online support calculators. Every state might have different guidelines to factor in.
Childcare cost sharing: Agree on how to split daycare, after-school classes, and/or summer camps. Make sure all of this is documented.
School and activity expenses: Plan for tuition, supplies, and extracurricular activities.
3. Consider Healthcare and Insurance
Health insurance options: Explore COBRA, marketplace plans, or employer coverage.
Life and disability insurance: Update beneficiaries and ensure adequate coverage for dependents.
Long-term care considerations: Consider future healthcare needs and costs, especially if you have dependents or chronic conditions.
Understanding Tax Implications
Divorce will change your tax status and can have significant financial consequences. Overlooking tax issues is a common financial mistake in divorce.
1. Review Filing Status and Potential Credits
Filing status changes: After divorce, you may file as single or head of household. Head of household often offers better tax rates if you qualify.
Child tax credits: Decide who will claim children as dependents; this can be negotiated.
Alimony considerations: Alimony is no longer tax-deductible for the payer or taxable for the recipient for divorces finalized after 2018.
2. Consider Capital Gains On Property Sales
Primary residence exclusion: If you sell your home, you may qualify for a $250,000 (single) or $500,000 (married) capital gains exclusion. Divorce can affect eligibility.
Investment property considerations: Dividing or selling investment properties can trigger capital gains taxes.
Timing strategies: Coordinate sales to minimize tax impact.
3. Handle Retirement And Investment Taxes
Pre-tax vs. after-tax accounts: $100,000 in a 401(k) (pre-tax) is not the same as $100,000 in a Roth IRA (after-tax).
Early withdrawal penalties: Use proper legal orders to avoid penalties when dividing retirement accounts.
Tax-efficient transfer strategies: Work with a financial advisor to minimize taxes on asset transfers.
Divide Retirement Accounts Properly
Retirement accounts are often a couple’s largest asset. Mishandling them is a major financial mistake in divorce.
1. Follow QDRO Requirements
QDRO definition: A Qualified Domestic Relations Order (QDRO) is a legal order required to divide certain retirement plans.
Process timeline: Draft, review, and file the QDRO with the court and plan administrator; this can take several months.
Common QDRO mistakes: Failing to specify account types, incorrect calculations, or not submitting the order promptly.
2. Figure out How to Split IRAs and 401(k)s
Account type comparison: Consider your 401(k), QDRO, IRA, etc.
Rollover considerations: Use direct rollovers to avoid taxes and penalties.
Long-term growth potential: Consider investment options and fees when deciding how to split accounts.
Watch Out For Hidden Assets or Debts
Unclear or unorganized finances can lead to unfair settlements. During this process, transparency is key. Here's some things to monitor as you get organized:
1. Monitor Bank Transfers and Unusual Activity
Red flags checklist: Watch out for large withdrawals, new accounts, or sudden asset sales from your ex.
Documentation strategies: Keep detailed records of all financial transactions.
Digital asset considerations: Don’t forget about cryptocurrency, PayPal, and/or shared Venmo accounts.
2. Check For Undisclosed Liabilities
Debt discovery methods: Review credit reports, loan statements, and court records.
Protection strategies: Negotiate indemnification clauses to protect against unknown debts.
Credit monitoring importance: Set up alerts for new accounts or changes to your credit report.
3. Avoid Emotional Decision Making
Emotions can cloud judgment and lead to costly mistakes. Divorce financial planning requires a clear head.
Cost of conflict: Prolonged disputes increase legal fees and reduce the marital estate.
Decision-making framework: Pause before big decisions, consult professionals, and focus on long-term goals.
Support resources: Seek help from therapists, support groups, or divorce coaches.
Update Beneficiaries and Estate Documents
Failing to update estate plans can unintentionally leave assets to an ex-spouse.
1. Change Life Insurance Policies
Policy inventory: List all life, disability, and long-term care policies.
Beneficiary update process: Contact insurers to update beneficiaries; follow their specific procedures.
Court-ordered requirements: Sometimes, courts require you to keep an ex-spouse as beneficiary for child support or alimony security.
2. Revise Wills And Trusts
Document checklist: Update wills, trusts, powers of attorney, and healthcare directives.
Guardian designations: Revisit guardianship for minor children.
Asset protection strategies: Use trusts to protect children’s inheritance from future claims.
Get Professional and Tech Support
Professional guidance and technology can prevent costly mistakes and simplify divorce money management.
1. Work with a Financial Advisor or Mediator
Attorney: Helps with legal advice, settlement negotiation
Financial Advisor: Asset division, planning. Can be helpful for complex finances
Mediator: Facilitates agreement. Can be helpful for high-conflict or DIY cases
2. Use a Co-Parenting App for Shared Expenses
Digital tracking benefits: Apps like Blended can help create records of shared expenses and reimbursements.
Communication improvements: Reduce misunderstandings and conflict with organized, transparent records.
Long-term co-parenting: Establish healthy financial habits for ongoing collaboration and communication.
Tools like Blended can help parents with expense tracking and reimbursements between co-parents, reducing conflict and keeping finances organized. Start your free 30-day trial at https://blended.onelink.me/dIWL/5bfk9rxo to simplify your co-parenting finances.
Track, Share, Settle Co-Parenting Expenses; Learn more at blended.app
Serena Norr
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Head of Content and SEO
Serena Norr is the Head of Content/SEO and a digital editorial leader with over 20 years of experience.
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