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5 Financial Considerations After a Divorce

Make sure you have these financial needs squared away after filing.

woman looking out over water

While it’s no surprise that getting a divorce can be emotionally taxing, you may be unprepared for the toll it can take on your financial situation.

This isn’t something to overlook or set on the back burner. In fact, Karen Josephson, a senior wealth planner at Wells Fargo Private Bank, says people must secure their own finances first—especially if you have dependents. “There’s no way you can continue to be responsible for them if your own financial situation crumbles,” she says.

So how do you take care of your finances in the wake of a divorce? Make sure you’ve got these five categories covered.

1. Income and budgeting
Where will your income come from and how much will you need? These are the most important financial considerations after divorce. “You may not have the same lifestyle that you had before the divorce,” Josephson says.

She also notes that many couples divide financial responsibilities. One spouse may have been responsible for paying all the bills, for example, which, after the divorce, can make budgeting difficult for the nonpaying spouse. If your divorce involves alimony, make sure you understand the tax implications.

For divorce agreements executed after Dec. 31, 2018, alimony will no longer be deductible for the person paying it—and recipients won’t have to pay taxes on those payments.

As a result, “alimony figures going forward will probably be smaller, all else being equal,” Josephson says.

The new tax treatment for alimony may also apply to some existing alimony agreements that are modified starting in 2019. Consult a tax professional to make sure you understand what the implications might be for you.

For divorce agreements executed after Dec. 31, 2018, alimony will no longer be deductible for the person paying it—and recipients won’t have to pay taxes on those payments.

2. Housing
Determining where to live can be a big decision for both parties. In some cases, the spouse caring for the children may want to stay in the family home to avoid disrupting their life.

Even if both spouses agree to that situation, they’ll need to consider how realistic it is. Will one spouse be able to pay for maintaining the house and also cover other living expenses? “You may have to make a choice between staying in the house or maintaining the same standard of living in a smaller home,” Josephson says.

There’s also the mortgage to consider. Even if a couple agrees on who’s going to be responsible for mortgage payments, the lender might not be on board.

“Optimally you would find a way to refinance and get the non-obligated spouse off of the debt,” Josephson says.

3. Division of assets 
Making sure that assets are properly evaluated is one of the trickiest areas of divorce agreements. Even if some assets have the same dollar value, they can have different financial impact. For example, financial investments can provide income now or in the future, but luxury goods, such as fine art or vintage automobiles, generally can’t, even if they have the same appraised dollar value. Also, some assets come with different tax consequences. Taking distributions from a qualified retirement account such as an IRA or 401(k) will trigger income tax, and the distributions are subject to age based rules.  This is not the case with non-qualified investments.

Discussions around ownership and roles in a family business can also have impact on future income. Be sure to get assistance from your wealth advisors as well as your attorney as you determine how assets will be divided.

4. Benefits and beneficiaries
Frequently one spouse receives benefits (such as health, dental, and life insurance) through his or her employer and the other spouse is a beneficiary. The same is true for insurance purchased independently.

But when you divorce, the beneficiary spouse may no longer be able to access that insurance. It’s important to update those benefits to reflect your non-married status, and the non-covered spouse should consider finding alternate coverage.

In fact, you’ll want to update anything that includes a beneficiary designation, Josephson says. Along with insurance, this applies to retirement accounts such as IRAs and 401(k)s, and other employment benefits.

5. Estate plan updates
Finally, update estate plan documents including wills, revocable trusts, powers of attorney, and health care directives.

“A lot of couples have reciprocal estate plans, meaning they leave everything to each other,” Josephson said. Forgetting to update these plans has the potential to create awkward situations, or worse, have your estate go to someone you divorced years earlier.

These challenges can be complicated—bringing in individual tax issues as well as the additional emotional and social pressures. You can ask for help, though, and not just from your divorce attorney.

“Don’t wait too long to get advice from a professional,” Josephson says. “Financial advisors are very well equipped to address many of these issues. Some financial firms may have a suite of advisors with different specialties, so don’t just rely on your attorney. Every professional is going to be looking at it through their own lens.”

Mark Tosczak is an experienced business writer and marketing consultant based in North Carolina. Image by iStock

What can Wells Fargo do for you?

Creating a plan for every generation of your family can be a challenge. Schedule time with your team to get started.

Wells Fargo Wealth Planning Center, part of Wells Fargo Private Bank, provides wealth and financial planning services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.

Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies. Not available in all states.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a tax or legal advisor. Please consult your legal and tax advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.


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