/// By Sheara Friend & Aviva Sapers
Regardless of circumstance, divorce is always a life-altering event that brings emotional and legal challenges. Despite all of the internal and logistical hurdles to navigate, one of the most significant impacts divorce can have is on your financial situation. The economic ramifications of divorce can be long-lasting and complex, often affecting your lifestyle, savings, and future plans. Understanding these potential consequences can help you to navigate the process more smoothly and make informed decisions.
- DIVISION OF ASSETS:
Perhaps the most impactful financial consequence of divorce comes with the division of assets. Depending on the laws of your state, this process can vary considerably. Generally, assets accumulated during the marriage by either party are subject to division, including real estate, vehicle ownership, savings, investments, and retirement accounts. This division can sometimes feel unfair and may leave both parties with significantly less than they had anticipated for their future.
COMMUNITY PROPERTY VS. EQUITABLE DISTRIBUTION:
Community Property States: In community property states, assets and debts acquired during the marriage are typically divided equally. This can simplify the process but may not always result in an equitable distribution that considers each party’s contributions and needs.
Equitable Distribution States: In equitable distribution states, like Massachusetts, assets and debts acquired during the marriage are divided in a manner deemed fair but not necessarily equal. Various factors, such as the length of the marriage, the contributions of each party to their finances and household, and each parties’ future earning capacity and inheritances are considered.
- ALIMONY AND CHILD SUPPORT:
These payments are designed to provide financial support to the lower-earning spouse and to ensure the well-being of any children involved. Child support is customary in divorces with unemancipated children. Alimony (spousal support) should not be assumed as a given and is influenced by many factors. Each of these can significantly impact the finances of both parties, and it is important to consider any tax consequences. If the payor fails to fulfil their support obligations, they may face legal consequences, and the recipient can be severely burdened by not receiving support.
Alimony: Alimony is intended to help the lower-earning spouse maintain a similar standard of living post-divorce. If alimony is deemed appropriate by the court, the amount and duration are determined by various factors, including the length of the marriage, each parties’ income, the recipient’s need, and each state’s laws and regulations. Lifetime alimony is dependent on numerous factors and is rarely awarded.
Child Support: Child support is calculated based on the income of both parents, certain child-related expenses, and the number of children involved. These payments are crucial for covering the child’s expenses, including everyday living costs such as housing and food, healthcare, and childcare. Expenses for uninsured medical costs and extracurricular activities are often addressed separately and shared equitably.
- CHANGES IN INCOME AND EXPENSES:
Post-divorce, adjusting to a single-income household or the demands of supporting two households on one income can be very challenging. You may also face new expenses, such as legal fees, moving costs, and the need to establish a new household.
- BUDGETING AND FINANCIAL PLANNING:
Creating a realistic budget and financial plan is essential for post-divorce success. Assess your new income, including an accurate accounting for alimony, child support, and any related tax consequences, and prioritize your essential expenses moving forward. Cutting unnecessary costs and finding ways to increase your income flow can help stabilize your financial situation.
- IMPACT ON RETIREMENT SAVINGS:
Divorce will likely have a substantial impact on your retirement savings. Splitting retirement accounts can dramatically diminish your nest egg and future plans—making it crucial to consider the long-term implications of dividing these assets with financial experts in order to explore the various options for rebuilding or reallocating to meet your retirement needs post-divorce.
QUALIFIED DOMESTIC RELATIONS ORDER (QDRO):
A QDRO is a Court Order which, in most cases, is required to divide retirement accounts without incurring taxes or penalties. They are often prepared by specialists who work with the retirement plan administrators to ensure the QDRO meets specifications. Financial advisors or attorneys are necessary to navigate this process correctly and to help both parties to understand how your retirement plans will be affected.
- CREDIT AND DEBT:
Lastly, divorce can influence your credit score and debt situation with lasting ramifications on borrowing potential and payment cycles ahead. Joint debts, such as mortgages, credit cards and loans, remain the legal responsibility of both parties until they are paid off or refinanced—even if one person has taken on the payment of the debt. It is essential to address these debts during the divorce process to avoid future complications.
Regardless of the financial standing and level of communication between you and your spouse, the process of going through a divorce is almost always marked by unexpected financial pitfalls and surprises. Consulting with experienced financial planners and divorce attorneys will be a vital step toward achieving good outcomes and setting you up with secure footing for a fresh start.
If you need help with your own situation or have any questions on the above, feel free to reach out to either of us directly.
Tax and legal advice is not offered by Lion Street Financial, LLC.
