The financial effects of divorce
Divorce can be an extremely devastating experience, both emotionally and financially. According to some researchers, divorced spouses would, on average, require a 30 percent rise in their income to retain the same standard of living that they had before the divorce. Upon finalizing your divorce, it is recommended that you follow through on important actions that can have considerable financial consequences. In many instances, spouses are unaware of the steps they need to take to safeguard their financial security with respect to the division of property, child support, tax management and estate planning.
For example, with regard to the division of property following divorce, it is imperative that the spouses have correctly drafted documents for the transfer of retirement assets in order to ensure that the transfer is not subject to income tax. If pension plans are involved, then you should be very attentive to the execution of the division of assets because the regulations differ with respect to each plan’s rules.
Divorcing spouses also need to update their beneficiary designations on IRAs, 401(k)s and insurance policies, because the person(s) named on such documents will inherit those assets, and not the person(s) named in the will. Where there are minor children, it may be necessary for parents to create a testamentary trust, and to name a trustee to make certain that the assets go to the proper beneficiary in the event a parent death predeceases the children reaching a designated age.
Furthermore, if you are a recipient of alimony, which is deemed income, you may qualify to make IRA contributions on the basis of that income is contingent on IRA income limitations. In the case of child support, where one spouse may think that the custodial spouse is wasting the child support payments or that the required amount of child support is excessive, these payments are court mandated and can be readjusted in cases of major life changes. Similarly, alimony payments can be a much-needed financial relief for the recipient-spouse, but can prove to be a financial hardship for the spouse who is ordered to pay spousal support.
Once your divorce is close to being finalized, close all joint bank accounts. Cancel all credit cards and obtain new cards in your own name. In addition, close all credit card accounts that have not been used, and inform your creditors of the change in your marital status. By implementing certain measures, you can help reduce the adverse financial impact that divorce can have on you and your family.