Every month, our Partner, Director of Financial Planning, and Senior Financial Advisor Sheryl Parks leads the Second Saturday Divorce Workshop. As a Certified Divorce Financial Analyst®, she offers an overview of divorce and the most common concerns, including the top financial questions people have when contemplating divorce or separation. Here are some of the basic financial considerations when contemplating or undergoing divorce.
Understand the laws that divide property.
One of the most complex issues with divorce can be property division. The laws that impact this division vary by state of residence. For example, Maryland is an “equitable distribution” state. This means that property acquired during the marriage will be split “fairly” between the two parties, but this doesn’t necessarily mean it is a 50/50 split for each asset. There is no specific formula for determining this, so agreements can be personalized for each separation. In a litigated divorce, a judge will make the final determination, taking into consideration many things. In some other states, all marital property is divided evenly.
Debt will follow you post-divorce.
Unlike assets, debts are not split during a divorce. Debts will follow the parties that are obligated on the loan or debt. Joint debts are an obligation of both spouses (for example a mortgage on your home) and therefore will reduce each party’s share of assets distributed. However, debt that is in a single individual’s name will continue as individual debt post-divorce. In a case where you are not able to negotiate a settlement with your spouse outside of court and a judge is forced to divide assets, the judge typically will not address individual debts. You should make sure to understand all the debts you have and the impact that they may have on your financial planning following a divorce.
Know the tax impacts of your settlement.
If you receive assets pursuant to a divorce, the transfer of assets between spouses is typically not subject to income tax. It is important to note that this applies to nonqualified assets, meaning assets that are not in a retirement account. Retirement assets require a special process to transfer without current income tax liability. It is very important to work with a qualified professional to ensure a tax efficient transfer and a property split that is equitable, including the tax impact.
Retirement accounts can be marital property.
Retirement savings accumulated during the course of the marriage (and the growth of these investments) are considered marital property. This means that each spouse is entitled to one-half of the marital portion of each retirement account. Furthermore, if you have been married for more than ten years and do not remarry, you are eligible to receive spousal Social Security benefits based upon your ex-spouse’s Social Security. Retirement planning during the divorce process could be complex, and is one of the reasons we recommend speaking to a Certified Divorce Financial Analyst® when considering a separation or divorce.
Gather information and seek advice.
The common theme running through all of these considerations: this is potentially the largest single financial transaction of your life and it is important to have accurate information and professional advice. This applies to your family’s financial situation prior to separation or divorce. If your spouse has handled the bills, bank accounts, and investments, you may not be aware of all of the assets and where they are held. If a divorce is necessary, this information is crucial to move forward in developing an equitable distribution.
Navigating a divorce can be challenging on many levels. It is imperative that you remain focused on the final goal – a happy, financially secure future.
To learn more about the basics of separation and divorce in Maryland, register here to attend the upcoming North Chesapeake Second Saturday online divorce workshop.
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