Division of debt and assets may vary depending on whether a couple lives in a community property state.
To claim a portion of a spouse’s 401(k) or pension benefit, you need to obtain a Qualified Domestic Relations Order.
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Getting a divorce? Read this to determine the impact on your finances.
Divorce can be a complicated and challenging process in which details are easily overlooked. It is important to know the laws that shape divorce proceedings and to understand the impact they have on your assets.
Dividing the Assets
Typically, everything you and your spouse acquired from the day you were married is subject to division. Exceptions include individual inheritances, gifts to an individual spouse, and assets acquired before marriage. When assets are divided, the court considers each spouse’s earning potential, the length of the marriage, and each spouse’s contribution to building household assets.
The exception to this are the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Under the laws of these states, almost all assets are divided equally.
Dealing With Debt
Do not assume that a divorce will erase any debt. If you live in a community property state, debt, like your assets, will be divided with your former partner. You will be responsible for half of all debt in jointly held accounts and, in some cases, half of a former spouse’s debt as well.
If you do not live in a community property state, you remain responsible for your individual debt (but not your spouse’s) and any debt in jointly held accounts. Many couples include debt payment as part of the settlement. You may want to consider taking on the responsibility for a portion of the debt yourself, and using your portion of the divorce settlement to reduce it.
If you and your spouse own a home that has appreciated in value, consider whether you want to sell it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 in realized capital gains for married taxpayers. This amount is cut in half for single filers. Be sure to consult a tax advisor for additional information about these rules.
Your Retirement Assets
Money in your 401(k) or pension plan may legally be divided during a divorce. The divisible amount begins to accumulate on the day you are married and ends on the day you are divorced.
To claim a share of a spouse’s 401(k) or pension plan benefit, you need to obtain a court order called a Qualified Domestic Relations Order (QDRO) and provide it to your spouse’s plan sponsor before distributions are completed. You and your spouse have the option of deciding to not divide retirement plan assets. If you and your spouse elect this option, it may be beneficial to make this agreement in writing and include it as part of the settlement to prevent the courts from declaring the money divisible.
You may want to review your will, or have one created if you currently do not have a will. It may be beneficial to review and amend your estate plan at the same time you commence a divorce proceeding. Also review beneficiary designations for pensions, 401(k) plans, and life insurance policies. Federal law requires a spouse to be the sole beneficiary of pension or 401(k) benefits unless the spouse waives that right in writing.
If you find yourself faced with divorce, it is essential to protect your financial future. Enlisting the help of an attorney and carefully monitoring the process can ensure that your interests are considered and that you will not need to revisit the proceeding at a later time.
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© 2012 S&P Capital IQ Financial Communications. All rights reserved.
June 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by D3 Financial Counselors, a local member of FPA.