There’s property to divide, a house to deal with, shared friends and relatives to tell—to say nothing of the emotions involved.
With that daunting process ahead, sometimes the last thing you want to think about is everything you need to do to take care of yourself financially.
We consulted Jeffrey A. Landers, a certified divorce financial analyst and president of Bedrock Divorce Advisors, LLC, and Ellen Derrick, a LearnVest Planning Services certified financial planner™, to get an overview of how to prepare yourself—and protect yourself.
1. Budget for divorce expenses.
Divorce can be expensive. The final price tag for divorce proceedings typically falls between $15,000 and $30,000, with hourly rates for divorce attorneys ranging anywhere from $150 to $1,000 per hour. As soon as you and your spouse decide to call it quits—or even before if you feel like that talk may be approaching—start putting money away to cover these costs.
Also, if your divorce will likely be amicable, you can look into using a trained mediator rather than attorneys, which is much less expensive.
2. Put together a team.
“Find an attorney who specializes in divorce—80 to 100% of his or her time should be devoted to divorce law,” Landers says. “You don’t want a jack of all trades.” Other sources you may require—depending on your individual circumstances—include:
- A divorce financial advisor, who will partner with your attorney to help you get a favorable financial outcome.
- A business valuation expert, if you or your spouse owns a business.
- A forensic accountant, especially if you did not handle the finances during your marriage and have limited knowledge about them. He or she can delve into your household finances to make sure no assets are being concealed during the divorce.
- A vocational expert, who would be the one to evaluate a non-working spouse for employability.
3. Budget for the essentials.
You need to consider what you’re going to need to “set yourself up in a household,” Derrick says. Since many couples combine expenses, a lot of times, the person who shopped for the furniture, bedding or dishes will keep those things when you split. That means the other person will need to budget for those “immediate costs”—things like towels and plates. Be sure to include the cost of basic items to get your life up and running again when budgeting for a divorce.
4. Update your beneficiary forms.
Make sure to review the beneficiary forms for any life insurance policies, retirement accounts at work, IRAs and bank accounts—the beneficiary listed for each of these accounts will receive these accounts if you die. “These forms are contracts between you and the account-holding company. Even if you get remarried and change your will if those designations still say your ex’s name, your ex is still getting that money,” Derrick says.
5. Handle your health care.
If you are on your spouse’s health care plan through his or her job, you’re going to have to secure your own health insurance after the divorce. This is something to consider early in the divorce process because if you wait too long, you could get stuck without coverage while you wait for your new plan to go into effect.
If your spouse works at a company that employs 20 or more people, you are eligible for continued coverage on the insurance company’s plan through COBRA (Consolidated Omnibus Budget Reconciliation Act). In order to qualify, you must contact your ex-spouse’s employer within 60 days of the divorce.
Keep in mind: COBRA coverage expires after 36 months, and it is likely cheaper for you to obtain health insurance through your own employer, if possible.
6. Settle the kids’ college savings.
“If you have children, you have to decide who’s going to take ownership of their college savings,” Derrick says. 529 plans only have one owner, with one successor owner. Depending on the nature of the ex-spouses’ relationship, the owner of the 529 plan may not even want the ex-spouse as the successor owner of the account. “Each parent may want to have a separate account so that he or she doesn’t have to mix funds with the ex-spouse,” she advises.
7. Divide your accounts—and create a new budget.
For example, if only one spouse has a 401(k), that asset will usually be split, but the spouse without the 401(k) has to determine where to put his or her retirement contributions now. Also, many of the pricier things you enjoyed as a couple—season tickets to sports teams, a country club membership, a fancy cable subscription—you may only have been able to afford as a couple. “Look at what your budget is going to look like as a single person,” Derrick says.
8. Maintain bank accounts and credit in your own name.
If you don’t currently hold bank accounts or credit in your name, it’s important to open some before you start the divorce process, Landers says. He recommends opening the accounts at a different bank than the one you used during your marriage, for privacy’s sake. You should cancel any joint credit cards you kept as a couple, as well.
9. Figure out individual property vs. shared property.
Any property obtained after the date of the marriage is communal property—including things like funds in 401(k)s through a spouse’s company and gifts between spouses. (Exceptions typically include inheritances and gifts from others, but even this varies by state. Landers recommends that you keep these kinds of funds separate from your partner’s money even while married.)
But after the date of separation, any assets obtained are separate property rather than marital property. When exactly this date is varied by state: For some, it’s the date the action is filed, for others, it’s the date someone moved out of the communal home or when the couple decided the marriage was over. “Knowing the date of separation is critically important,” Landers says.
10. Decide how you’re going to handle taxes in the future.
First of all, your filing status doesn’t change to “single” until your divorce is finalized, so when you file, the I.R.S. will want to know what your marital status was on December 31 of the previous year.
If you have children, things get a little more complicated. First, you need to decide which of you is going to claim “Head of Household” status. Filing your taxes as Head of Household typically results in a lower tax bill than both single filing status and married filing separately status.
Whichever parent has the child or children for more than half the year can file as Head of Household. The other criteria include:
- You must maintain a household for your child, even if you aren’t claiming him or her as a dependent
- Your household must be your child’s primary home
- You must be unmarried/living apart from your spouse for more than six months as of the end of the year
- You must provide more than half the cost of maintaining the household
- You must be a U.S. citizen or resident alien for the entire tax year
You don’t have to claim your child on your taxes as a dependent —which gives you a $3,800 exemption for the tax year 2012—to claim Head of Household status, which is one way to compromise with your soon-to-be ex-spouse: one claims the child as a dependent while the other claims Head of Household.