Financial Impacts of Divorce
Just as marriage can have a major impact on a person’s financial situation, so too can a divorce. The end of a marriage typically brings lifestyle changes for each spouse – adjustments which require careful consideration and planning.
Dissolving a marriage includes three main components:
1) Dividing the assets and liabilities
2) Planning for spousal support
3) Setting a custody plan for any minor children
Often the financial component is the simplest to resolve. Issues like child support and alimony can be more difficult and more likely to require time in a courtroom to reach an agreement.
1 Dividing the assets and liabilities
Married couples typically accumulate a number of jointly owned assets – cars, real estate, investments – as well as liabilities like mortgages, credit card debt and student loans.
For some people, the things they own are symbols of who they are. It can be hard to give them up. The legal standard calls for a “fair and equitable” division of assets. That doesn’t mean a 50%-50% share, but rarely is the split wider than 60%-40%.
Washington is a community property state: which means that all property acquired during marriage is considered shared, or community property. Assets acquired before marriage and after separation are generally considered individual property.
The line between community and individual property gets blurred over time. A marriage of five to seven years is considered a short-term marriage. In this case, a family court judge will generally attempt to unwind the marriage cleanly and leave each party with what they originally owned.
A marriage between seven and 25 years is in something of a “gray zone”. It can be more difficult to determine asset ownership, and outcomes can vary widely.
After 25 years, a marriage is considered a long-term union and the court will attempt to put each spouse in a position of parity for the rest of their lives. In this case, the appropriate distribution of assets and support can be difficult to establish.
For example, if one spouse is nearing a big career milestone, which will lead to significant earnings growth, that could affect the court’s estimates of each spouse’s future financial needs and contributions.
2 Planning for spousal support
In the case of a significant gap in the expected future earnings of a divorcing couple, one spouse will typically pay alimony or provide other support as set out by the court. This support may terminate after a fixed period, or in the event the spouse receiving alimony should remarry.
For couples that co-own a business, which can’t easily be divided or sold, the court typically awards the asset to the person responsible for the income of the business. For example, a spouse that runs a landscaping company would usually retain ownership. The court may award partial ownership to the other spouse.
3 Child custody
A custody plan for minor children can be the most complicated and emotional component of a divorce agreement. The court will determine where the children live and how much time each parent can spend with them.
One spouse may be required to pay child support until a minor reaches age 18, and the plan may include payments for college tuition or medical bills.
Should you keep the house?
A house is often one of the most valuable assets of a marriage and it’s natural for one or both parties to want to stay in it, particularly if they have children. The house is an essential part of many families’ lifestyle.
However, it’s also a large expense that neither party may be able to afford. Selling the house and using the equity to buy a smaller home, maybe even in the same neighborhood, might be a better option. If one party does keep the family home, that spouse will need to buy out the other, or refinance the mortgage to release the other spouse from ownership.
Social Security Benefits
Social Security may pay benefits – as much as 50% of a retiree’s benefit – to a divorced spouse, if the couple were married for at least 10 years. This percentage is reduced if claimed prior to full retirement age. Eligibility for spousal benefits is lost when a divorcee remarries. However, they also become eligible to file on the new spouse’s record.
In marriages where both spouses earn a large income, resources are generally not a major issue and the settlement will focus instead on each spouse’s relationship with any children they may have.
Costs of Divorce
The divorce process itself can be expensive. Complicated or contentious breakups that end up going to trial could ring up more than $100,000 in legal bills. And those bills need to be paid up front.
Another option is to work with a mediator. If relevant documents and discovery are completed in advance, a mediator can reach a resolution in a matter of hours, at a cost of about $5,000.
Divorce can trigger complex financial changes with significant tax implications. Before filing for a divorce, consult a tax attorney and consider the potential impact to your budget. Your Paracle advisor can also help you understand the impact on your financial plan.
We’d like to thank Jillian Pressnall, from Elise Buie Family Law Group, for her contributions to this article.
Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. This material provides general information only. Paracle Advisors does not offer legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.