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Life challenge checklist: divorce

Heart Breaking in Two

Taking a thing apart is always faster than putting something together. This is true of everything except marriage.

Joe Hill

The process of divorce takes time, money and emotional energy. While there aren’t many life hacks to get around the emotional toll, you can take steps to protect your financial security for the next stages of your lives and make the transition as smooth as possible for everyone involved.

Of course, protecting your children’s well-being is your primary focus. But there are also several important decisions to be made, such as dividing property, outlining custody and determining child and spousal support.

We’ve put together a checklist to help organize these action steps.

Start saving money.

If possible, wait to file until you have enough to pay for legal fees and at least three months of expenses depending on the living situation.

Even if you both stay in the same house during the process, future changes and adjustments are coming. Maintaining your current lifestyle is not in the cards unless you’re wealthy and have a prenup.

Decide how you want to approach divorce before going straight to hiring an attorney.

There are four main approaches to divorce: mediation, collaborative law, litigation, and pro se.

Mediation and collaborative law may work if no one is contesting the divorce and you can focus on agreement and resolution. Both ways are private and less expensive than litigation.

Litigation is the most traditional method. It makes sense if there are complicated assets and liabilities involved, or someone is contesting the divorce. It’s also the most expensive and time-consuming.

Pro se is the DIY path to divorce. Handling the legal aspects of a divorce is complicated, so don’t consider pro se unless the marriage was short, there are no children, no property to split and the divorce is uncontested. It’s the least expensive way but won’t apply to many situations.

Hire Representation

When you know which approach to take, start interviewing legal professionals.

Whether hiring an attorney or mediator, you want a professional whose experience and training matches the appropriate method. You wouldn’t want a divorce attorney with a combative reputation for mediation or collaborative law.

Consider whether to bring in your financial advisor or consider a Certified Financial Divorce Analyst (CFDA).

CFDAs specialize in divorce finances and focus on the long-term valuations of (including depreciation and inflation):

  • assets and debts
  • marital home
  • retirement and pension accounts
  • spousal support (alimony)
  • tax implications of spousal support and property division

CFDAs can also create a post-divorce budget. They work with both spouses during the divorce as a neutral party. The cost of their expertise is similar to attorney rates.

Hiring a CFDA is worthwhile if spouses own a business together or have significant and complex assets and liabilities.

Discuss Living Arrangements and Custody

Most attorneys will advise you to stay in the marital house unless you re in an abusive situation.

If you move out, a judge will factor that in for property division if the divorce goes to court. Moving out before the divorce finalizes also reduces household income immediately.

If you can’t stay in the house together, consult with your attorney before acting.

Gather Financial Documents

You’ll need to gather documents for yourself and your attorney to get an idea of where you stand. One of the main goals during the divorce process is to agree on the division of assets and debts.

If divorce is a mutual decision, you’ll be gathering and sharing information voluntarily.

In other cases, you may need to be prepared to get this information before filing, possibly before having the divorce discussion. A hostile spouse could delay releasing documents, hide assets, run up debt, or empty bank accounts.

New Mexico and Texas are both community property states – assets and debts acquired during the marriage by either spouse are considered joint property and divided equally. However, this principle only applies if spouses can’t come to an agreement and go to court.

Types of financial documents you’ll need:

  • Income-related information
  • Joint and any individual bank account information
  • Insurance documents
  • Real estate documents
  • Retirement and pension account information
  • Debt related information
  • Auto-related information
  • Investment accounts and any other asset information
  • Estate planning documents
  • Monthly budget information

Here’s a more detailed list of documents from Findlaw.com.

Cut Expenses

Reducing expenses goes along with saving money before starting the divorce process. It’s best for both spouses to preserve income until the divorce is final. As co-parents, you each need to be financially able to take care of yourselves and your children.

Don’t make any major purchases or sales until the divorce is final. If anything was already in process before the divorce, make sure all parties are aware and agree it’s okay to complete the transaction.

Create a Post-Divorce Budget

There will be less money to live on whether you will be making or receiving child support and spousal support.

The budget should include both short-term and long-term planning goals, so use a personal finance app or software if you don t already.

If your finances are complicated, look to your financial planner or a CDFA to help with a post-divorce budget.

Keep in mind the family s financial planner will probably have a stronger tie with the spouse that primarily handled the finances. If you didn’t maintain that relationship, you may need to hire a new planner or manager.

Pay Off Debt

This may not be possible with all marital debt like a mortgage. However, if you can pay down joint credit card debt or smaller debt balances, do it before the income gets divided.

True joint credit card accounts are rare. If you have one, pay off the balance and close it. If you have no other credit cards besides the joint account, it’s a good idea to open at least one new account separately.

It’s more common for one spouse to be the primary account holder and add the other as an authorized user. The primary account holder should remove the other spouse as an authorized user and document this action.

Lingering marital debt is risky because there’s no guarantee your ex will make the payments. Lenders don’t recognize divorce and could go after you.

Therefore, the best practice is to eliminate as much marital debt as possible so that each of you can have a clean break and start fresh.

Close Joint Bank Accounts

Joint bank accounts should be closed with each spouse opening new separate accounts. Discuss what is fair for each of you to retain in your new separate accounts, and keep your attorneys informed if you do this before the divorce decree.

Run and Monitor Credit Reports

Your credit scores could take a hit during the divorce. Not because of the divorce itself, but from a missed payment or a spouse maxing out credit limits.

Monitor your credit report now and post-divorce. It’s also a good idea to run your ex’s credit report to see if there are any unknown debts or even hidden assets such as a property holding.

You can get a free credit report every 12 months from each of the three major credit reporting companies at www.annualcreditreport.com

Anticipate Necessary Insurance Changes

Health Insurance:

Which one of you covers the family? You ll need to discuss how to move forward with changes and who will cover the children. Divorce is a qualifying event so you should be able to make mid-year adjustments once the divorce is final.

Auto Insurance:

Update the insurer if someone moves out during the divorce as rates may change for the new garage location. Each spouse will need separate policies once the divorce is final. Any teen drivers should be added to both policies.

Homeowners Insurance:

If one spouse is keeping the house, both of you need to stay on the policy during the separation. When finalized, then the spouse keeping the house can remove the ex.

Disability Insurance:

Both of you should have disability in place, especially with kids involved. However it’s especially critical that the spouse paying any support has disability insurance.

Life Insurance:

If you or the ex will be paying child support or spousal support, divorce agreements often require life insurance be in place for the duration of support payments.

Don’t depend on group coverage through your employer, as it ends if you leave the company.

If there’s an existing policy or policies, consult with attorneys and a financial professional about whether the policy should be increased or a separate policy purchased.

Existing life insurance may also need to be updated with changes in beneficiaries.

Know the Value of Retirement and Pension Accounts

Retirement accounts are one of the most valued assets people own. Divorcing spouses may be entitled to a portion of their spouse’s retirement accounts accrued during the marriage.

You’ll want to know the current and future value of all retirement accounts, as well as tax treatment. And it’s a good idea to consult a financial professional.

This area starts to get complicated when you bring in benefit (pension) plans and estimate share amounts and payouts. Pensions are based on complex actuarial calculations and years of employment. Your attorney may hire an actuary to calculate your share.

Your attorney may use a Qualified Domestic Relations Order (QDRO) to protect your share of an ex’s pension plan. QDROs are separate from the divorce decree and offer more protection and guarantees when it comes to property rights. (Note: QDROs do not apply to military or government pensions.)

If there’s a significant pension involved, you may want to consult an attorney who specializes in QDROs.

However, you don’t need a QDRO for contribution (IRA, 401(k), SEP) plans which are easier to calculate.

If you’re concerned your spouse is a risk for emptying contribution accounts, ask the court to prevent withdrawals until the divorce is final.

Discuss College Assets

You’ll want to know where all college savings are located (529, Coverdell Education Savings, Savings Bonds, Custodial Accounts, UGMA/UTMA accounts), as well as balances, listed beneficiaries, and account owners.

There are also several decisions to make. Decide which plans will continue under each parent and update the beneficiaries and account owners accordingly. You’ll also want to reach agreement on how to handle future payments and contributions from relatives.

It’s also a good idea to review all the contingencies. What if unused or leftover funds exceed education expenses? Who are alternate beneficiaries if you only have one child? Who will be a successor owner if one of you dies?

In a worst-case scenario, there is no way to restrict the account owner from pulling money out of the accounts. There are a few blocking measures you can take to protect your child’s interests:

  • Ask the court to prevent any account owner from pulling money out until the divorce is final.
  • Request that the divorce decree include language that requires permission from both parents before money can be withdrawn.
  • Ask the court to make statements available to you if you re no longer an account owner.

Get New Tax Projections

Based on your post-divorce budget, how will your taxes change? Who will claim dependent children?

Consult with a tax professional or type “how does divorce impact me” into the search bar on irs.gov.

Something else to keep in mind is the Tax Cuts and Jobs Act impacted spousal support for divorces settled after 1/1/19. Spousal support is no longer tax deductible for the payer and is not considered taxable income for the recipient.

Update Estate Planning Documents

You’re considered married until a judge signs your divorce decree. This might sound alarming if you’re concerned about how your net worth would get distributed if something happens to you before the divorce decree is signed..

If this is a concern, do not make changes without your attorney involved and agreement from the court.

Focus on What’s Most Important

During a divorce, people sometimes get caught up in being reactive and focus too much on winning. The more resistant each party is to working together and resolving issues, the more complication, time and expense gets added.

Keep in mind that your ex is still the other parent of your children, the person you need to reach an agreement with, and who will continue to co-parent your kids.

Remember the big picture and do what’s in the best interest of your family and your own sanity and health.

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