Even in the most amicable of situations, divorce is challenging. The transition during divorce can be stressful physically, mentally, and emotionally — and of course, financially.
You and your soon-to-be ex will need to make many important financial decisions together that will impact each of your futures. Here are five of the most common ones, as well as how to ease the decision-making process.
1. Dividing property
You and your partner will need to determine how to divide shared property and assets, which can be particularly challenging if you share a marital home. Decide together whether you will sell or keep the home, and if you keep it, who will stay there. Some divorcing couples decide to refinance their joint mortgage into one name, making only that party responsible for mortgage payments.
In Virginia, couples filing for an uncontested divorce typically develop a plan to divide up property themselves via a Marital Settlement Agreement. However, you can always bring in a third-party mediator to facilitate discussions. If you and your spouse still cannot come to an agreement, your divorce will become a contested case, and the Court will decide how to divide your assets.
2. Dividing debts
In addition to dividing any property and assets, you’ll also need to determine who will be responsible for any jointly-incurred debt over the course of your marriage.
Ordering and going through a credit report can help you determine which debts are shared, and which ones are only in yours or your spouse’s name. Additionally, you will want to ensure your debts don’t increase during the divorce process — cancel any joint credit cards, maintaining one in case of emergency.
You and your spouse can take a few different approaches to handling shared debt. The easiest way is to pay off your debts (or any portion thereof) immediately to lessen the burden on you later. If this is not feasible, you or your partner can cover the debt in exchange for more assets, or you can agree to equal responsibility for the debt.
3. Tax implications
With all of the logistical elements of a divorce, people can easily forget about the tax implications. Some common issues that may arise include determining who will claim dependents and Head of Household status, child tax credits, and work-related childcare tax credits. It is important to note that spousal support payments are no longer tax deductible to the payor nor taxed to the recipient, nor are child support payments.
Additionally, selling or buying out your partner’s share of the marital home can also impact your taxes depending on whether you do so while you are still married, versus waiting till after you are granted a divorce. Married couples enjoy a capital gains exemption of $500,000 when selling a home, while a single person only enjoys a $250,000 exemption. In addition, married couples have unlimited gifting and transfer rights to one another for purposes of agreeing to a non-taxable buyout between each other, while couples who delay a buyout until after they are divorced will be limited to the $250,000 exemption.
To help you navigate these issues, you may wish to consult a CPA or tax professional who can advise you on how to proceed.
4. Retirement plans and updating your overall estate plan
If either you or your spouse has a 401(k) or other employer-sponsored retirement plan, the other party is typically entitled to half of the value of these plans funded during the marriage, also known as “the marital share,” unless otherwise specified in a prenuptial agreement. These funds can be used for your own retirement or any other current expenses; however, you will want to review IRS regulations to avoid a 10% penalty for early withdrawal.
If you are concerned about receiving your share of retirement funds, you may consider getting a Qualified Domestic Relations Order (QDRO), which provides an exemption to the 10% penalty and allows spouses to transfer to a former spouse their marital share of a retirement plan.
You should also consider the need to update any beneficiary designations on your retirement accounts after a divorce, as well as life insurance and other non-retirement accounts. If you have a Will, Trust, or powers of attorney, it is also imperative you update each of those documents as part of your overall financial plan in a divorce.
5. Protecting your credit
During the divorce process, you and your spouse should both continue to pay any joint bills in order to protect your credit. If you argue over who will pay a bill and it doesn’t get paid in time, you will both take a credit hit — something that will negatively impact your financial future, including your ability to get loans.
To avoid this outcome, consider closing any joint accounts and establishing (or re-establishing) individual ones, and follow any parameters set in your Settlement Agreement.
Navigating a DIY divorce in the Commonwealth of Virginia? My Legal Case Coach is here to help. Schedule a free 15-minute consultation today to discuss your case.