Being Financially Prepared for Life’s Transitions: Separation and Divorce

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Financial Impact of Separation and Divorce

In addition to the emotional impact, separation and divorce can have a financial impact when assets, debt and other financial connections need to be divided. The negative financial impact that separation and divorce can have has been written about extensively, and as with any major life transition, preparation is key. This article will discuss a few key issues that can have a large financial impact on both parties.

Focus on Financial Security

Maintaining financial security for all involved should be the focus. States often have laws regarding separation of property; however failure to understand your state’s divorce law could also potentially impact the division of retirement plans, alimony, and child support. Following are some of the critical financial issues you and your spouse will need to consider during separation and divorce.

Dividing Assets

Dividing assets: In common law states, all property acquired by you or your spouse from marriage onward is subject to division. The intention is that property will be distributed equitably, but not necessarily equally. A court will consider the length of the marriage, earnings potential, responsibilities for children, debt, and tax consequences in dividing assets.

However, in the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) almost all assets are divided equally. Assets acquired before marriage, gifts to an individual spouse, and individual inheritances are not subject to division in both common law and community property states.

Marital Debt

Marital debt: In common law states, in general, you are responsible for your individual debt and any debt in jointly held accounts and are not responsible for the individual debt of your spouse. However, in community property states, you will be responsible for half of all debt in jointly held accounts and potentially half of your spouse’s individual debt. You will be accountable for half of your spouse’s individual debt so long as that debt is for the “general benefit” of the marriage.

Retirement Accounts

Retirement accounts: Funds accumulated over the course of a marriage are subject to applicable common law and community property laws and may be subject to division during a divorce. If your employee benefit or pension plan is subject to ERISA (Employee Retirement Income Security Act), you will 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 to your spouse. The QDRO directs the plan sponsor to pay to your spouse all or a portion of the participant’s plan benefits, subject to the terms of the Plan.

Individual Retirement Accounts (IRAs)

Individual retirement accounts (IRAs) are subject to the Internal Revenue Code rules for transfers incident to divorce which does not require a QDRO, but does require a decree issued by a court in order to transfer assets between the IRAs of the spouses. The transfer incident to divorce rules can be applied before a divorce is finalized as long as there is a court order regarding separate maintenance and the division of the IRA.

Beneficiary Designations

In addition to dividing retirement funds, do not forget to update your beneficiary designations. Although a number of states have enacted statutes that automatically revoke beneficiary designations of an IRA upon divorce, some states have ruled that an ex-spouse is entitled to the IRA where the beneficiary designation is not updated. To avoid this scenario, discuss with your financial advisor or company’s benefits department to update your beneficiary designations upon divorce.

Legal and Financial Advisors

Having legal and financial advisors on your side is important to help educate you on your choices, advocate for your best interests and protect your financial future for years to come.

Author Information

Sean Howe is a Vice President, Wealth Management at UBS Financial Services Inc., Park Wealth Management Group, in Vienna, VA. He is a panelist on DiPietro Divorce Seminars, including Second Saturday and Divorce in the Golden Years.