Divorce – Its Impact On Your Financial Plan

Sometimes we develop well thought-out financial plans and then life throws us a curveball. One of these is the break-up of a marriage. The divorce rate in the U.S. is around 50% and even higher in many other countries. One interesting tidbit is that similar credit scores are a good predictor of marital compatibility.  Nevertheless, it is unlikely that the divorce rate will be falling anytime soon as couples who meet online (a growing segment) have three times the divorce rate of couples who first meet face-to-face. When a marriage breaks up, there are significant financial impacts, in addition to the emotional ones.

How are assets divided up in a divorce?

The division of “marital property” is a potentially thorny issue. Marital property includes all assets acquired during the marriage with the exceptions of gifts or inheritances. The following should not be commingled (in jointly titled accounts) if you do not want them to be considered marital property: gifts, inheritances, assets brought into the marriage, or property deemed separate according to a prenuptial agreement.

Marital misconduct is not a factor in the property settlement, so don’t waste $400 an hour trying to convince your attorney that your ex was a jerk.

Community Property vs. Equitable Distribution:

The framework for dividing marital property is based on the rules of your state. Nine states (CA, AZ, ID, NM, WA, WI, TX LA and NV) follow community property law, which generally divides marital property equally.

The other 41 states follow a division of property known as “equitable distribution,” in which fairness is the prevailing guideline. Fairness does not mean 50/50. The Uniform Marriage and Divorce Act §307 (UMDA §307) lists factors the court should consider in determining an equitable distribution. These include: the duration of the marriage, prior marriages of either party, age, health, occupation, amount and sources of income, vocational skills, employability, liabilities, and each of the parties’ needs.

The court may also consider such factors as who played the biggest role in accumulating the assets, emotional value of specific items, alimony payments, child support obligations, tax consequences, and any other factor relevant to an equitable outcome.

Despite the efforts of the courts to be fair, many studies have shown that a woman’s standard of living takes a bigger hit than the man’s after divorce. This is especially true when the woman gets custody of minor children. Even in cases of split custody, women typically spend more hours taking care of kids and make more career sacrifices.

Here are some financial tidbits to consider in regards to divorce settlements:

  1. Alimony is no longer taxable income to the person receiving the income and is not tax-deductible to the person paying it.  This changed with the Tax Cuts and Jobs Act of 2017, ending a decades-long practice. The changes affect divorce agreements signed after Dec. 31, 2018.
  2. Spouses can no longer deduct legal fees or any expenses related to divorce like they could before. Those are now considered personal expenses under the law.
  3. Child Support is tax-free to the recipient and not deductible for the payer. On a side note, only 61% of agreed upon child support payments are ever made.
  4. Many times both spouses want to keep the house, only to find out that the cost of maintaining it is too high based on their new income. Divorce is a good time to downsize.

Any way you slice it, divorces are expensive. I would never encourage anyone to get a divorce, but I also hate to see people stay in impossible marriages.   I am happy to report that some of my clients have found true happiness in 2nd marriages.  That being said, the wealth-maximizing strategy is usually to stay married.