Divorce may cause uncertainty for some people, especially those focused on maintaining their current lifestyle and future well-being. At Flicker, Kerin, Kruger & Bissada LLP, we understand that sound financial planning is essential to navigate this challenging process. Whether you’re in the early stages of contemplating divorce or are already in the middle of your dissolution action, preparing financially is crucial to ensure stability during and after your divorce.
In this guide, we’ll cover practical strategies for managing your finances before, during, and after a divorce. By being proactive and organized, you can protect your assets, plan for your future, and avoid some of the common financial pitfalls of divorce.
Step 1: Gather Financial Documentation
The first and arguably most important step in preparing for a divorce is gathering and organizing your financial records. This includes documents that reflect your assets (including separate property, such as premarital assets, gifts, and inheritance), liabilities, income, and expenses. Some of the key documents you should compile include:
- Bank statements: Collect statements for all checking, savings, and investment accounts.
- Tax returns: Have copies of at least the last three to tenyears of tax returns.
- Pay stubs and income statements: If you or your spouse have fluctuating income, multiple sources of income, or own a business, ensure you have a clear picture of all earnings.
- Property records: Gather deeds and titles for any real estate you own, along with mortgage statements.
- Retirement accounts: Include statements for 401(k), IRA, and pension accounts.
- Debt records: Document any outstanding loans, credit card debt, or other financial obligations.
- Insurance policies: Include life, health, disability, and any other relevant insurance policies.
- Business financials: If you or your spouse own a business, collect all relevant documents, including profit and loss statements, partnership agreements, and other financial records.
Having all of these documents organized will help you and your attorney assess the full scope of your marital finances. Moreover, it will provide a clear understanding of what you’ll need to negotiate during the divorce process.
Step 2: Understand Marital vs. Separate Property
California is a community property state, which means that assets and debts acquired during the marriage are generally considered to be jointly owned. Generally, the marital estate will be divided equally between the parties.
- Marital property includes income, assets, and debts acquired during the marriage. Examples include real estate purchased during the marriage, retirement benefits earned while married, and income earned by either spouse.
- Separate property includes anything owned by one spouse prior to the marriage, inheritances, or gifts received by one spouse during the marriage. Separate property is usually not subject to division in divorces, but there are exceptions, particularly if separate assets were commingled with marital funds. Separate property assets may also impact support orders.
It’s essential to work with your attorney to determine which assets are considered marital and which are separate. This will ensure you have a better understanding of what assets will be considered income available for support and in the division process.
Step 3: Evaluate Your Financial Situation and Needs
Before entering negotiations or court, it is important to have a realistic picture of your financial situation and what you will need to maintain stability post-divorce. Ask yourself:
- What are my monthly expenses? Make a detailed list of your current expenses, including housing, utilities, transportation, groceries, insurance, and discretionary spending. This will help you understand your financial needs after the split.
- Do I need to make lifestyle changes? Depending on your financial situation, you may need to adjust your lifestyle to fit a single-income household. This could mean downsizing, selling property, or cutting unnecessary expenses.
- What will my child custody situation look like? If you have children, your custody arrangement will directly impact your financial obligations, including child support and potential spousal support payments.
- How will my income change post-divorce? If you are the primary breadwinner, you may have to pay spousal support. Conversely, suppose you have depended on your spouse financially. In that case, it is important to assess how much support you will need to maintain your standard of living.
Understanding your current and future financial needs is crucial to building a realistic post-divorce budget.
Step 4: Build a Divorce Budget
Once you evaluate your financial needs, the next step is creating a divorce budget. A divorce budget outlines your anticipated expenses during the divorce process and beyond. While it is impossible to predict every cost with complete accuracy, having a rough estimate can give you a sense of financial security. Key components of a divorce budget include:
- Legal fees: Attorney fees, court costs, expert fees, and other expenses related to legal representation. It’s important to plan for these in advance.
- Living expenses: Include housing, utilities, groceries, transportation, and any other essential costs.
- Child-related expenses: If you have children, plan for additional costs related to childcare, education, health care, and activities.
- Child or spousal support: Whether you expect to pay or receive child support or spousalsupport, make sure these are factored into your budget.
Having a well-thought-out budget will give you a clearer idea of your financial obligations and help you make informed decisions throughout the divorce process.
Step 5: Consider Your Credit Score and Debt
Divorce can have a significant impact on your credit score, especially if shared debt is not handled properly. To protect your financial future:
- Check your credit score: Obtain a free copy of your credit report to review your current score and ensure all accounts are accurate.
- Close joint accounts: Any joint credit cards, bank accounts, or loans should be closed or separated. This can help prevent your spouse from accruing debt in your name.
- Pay down shared debt: If possible, pay off or divide any joint debt before finalizing the divorce. You may also need to negotiate how existing debt will be handled.
Maintaining good credit is essential for your financial future, especially if you plan to buy a home, rent a property, or take out loans post-divorce.
Step 6: Protect Your Assets and Income
As you pursue divorce, it is essential to take steps to protect your financial well-being. You should consult with your attorney, who will help you determine the right time for the following:
- Open separate bank accounts: As soon as you know that a divorce is imminent, it is wise to open separate checking and savings accounts in your name.
- Change direct deposit and automatic payments: Redirect your paycheck into your separate account and ensure that any automatic payments for personal expenses are no longer coming out of joint accounts.
- Update beneficiaries: If you have life insurance policies, retirement accounts, or other financial products, review the beneficiaries and update them as necessary.
- Freeze certain accounts: In some cases, you may need to freeze joint credit cards or other accounts to prevent large withdrawals or the accumulation of additional debt.
Proactively protecting your assets can prevent future financial disputes and ensure that you have access to your funds during the divorce process.
Step 7: Plan for Taxes and Retirement
Divorce can affect both your tax situation and your retirement planning. It is essential to work with a financial planner or accountant to ensure that your long-term financial plans are still on track. Some considerations include:
- Tax filing status: Depending on when your divorce is finalized, your filing status may change from “married” to “single” or “head of household.” This can have a significant impact on your tax liability. An agreement on tax filing status should be discussed with your attorney and CPA and considered in your dissolution settlement.
- Spousal and child support: Spousal support payments may be taxable income for the recipient and deductible for the payer, but child support is not taxable. Understanding these distinctions and consulting with a knowledgeable accountant can help you plan for tax season.
- Retirement accounts: If you have retirement accounts, such as a 401(k) or IRA, they may be subject to division in the divorce. Ensure that any transfers of retirement assets are done using a Qualified Domestic Relations Order (QDRO) or IRA Transfer Order to avoid tax penalties.
By staying on top of these financial considerations, you can protect your retirement savings and limit surprises come tax season.
Step 8: Seek Professional Guidance
Financial planning for divorce can be overwhelming, especially if you have complex assets or own a business. In addition to hiring a skilled family law attorney, consider working with financial professionals who can guide you through the process:
- Divorce financial planner: A certified divorce financial planner (CDFP) can help you create a financial strategy tailored to your divorce.
- Accountant: A tax professional can ensure you’re prepared for the tax implications of divorce and help you avoid costly mistakes.
- Financial advisor: A financial advisor can help you reassess your investments, retirement accounts, and savings goals for your post-divorce life.
Working with a team of professionals will ensure that you have the best possible support and advice as you navigate the financial aspects of divorce.Divorce may be a life-changing event, but with careful planning, you can set yourself up for financial success in the next chapter of your life. At Flicker, Kerin, Kruger & Bissada LLP, we support you throughout the divorce process, helping you make informed decisions that will protect your financial future. If you need assistance with your divorce, do not hesitate to reach out to us for expert legal guidance.