Key Takeaways:
- Create a budget for your current and projected living expenses. Anticipate your monthly recurring expenses and don’t forget to plan for large one-time expenses.
- Before divorce, you had a targeted retirement date. After divorce, you will need to revisit that number to ensure you are still on track. Be ready to make adjustments.
- Your financial and tax situation will change after the divorce, including your estate plans. Be prepared to review, consider and revise.
For many people, going through a divorce is emotionally and logistically taxing. It requires wading through key financials and making important decisions, all while experiencing varying levels of emotion. A support team, including attorneys, accountants and wealth advisors, can be a valuable resource while working through divorce proceedings. For decades, Comerica has been a trusted partner, offering services to help make this transition easier. Frequently, our clients ask where they should start. Answering the five questions below can provide a solid foundation for moving forward feeling prepared and confident.
1. What are my living expenses?
The most important question you should answer is this: how much money will be required to cover your needs on a daily basis. While the court determines any child or spousal support, you need to make sure you can cover your living expenses. Whether it’s a mortgage, childcare, groceries, gym membership, or other recurring costs, you need to know your total monthly expenses.
Don’t forget to include any additional expenses that may be temporary, such as therapy for your family, or large one-time expenses like planning a vacation or furnishing a new home.
2. What are the impacts to my retirement?
Spouses often share a vision for life after retirement. When their plans change, so do timelines, savings and budgets. Therefore, it’s important to know how much money you need now and in the future. For joint business owners, divorce often leads to selling off shared business assets and splitting retirement. You’ll need to recalculate how much money you need to retire comfortably.
Note: Your retirement date may change based on how you envision life after work. Are you planning significant travel or donations? Paying for college or building a dream home? These are all major considerations for your retirement timeline.
3. How will our assets be divided?
Division of assets varies from state to state. Community property states, for example, generally split assets 50/50. But prenuptial agreements supersede state default laws when it comes to the division of assets. However, in the absence of a prenup and in non-community property states, if there are disputes over assets, you will need to work with your attorney and possibly a mediator to come to an agreement. For example, if high-value jewelry was gifted during the marriage and both parties want to keep it, negotiations will need to take place.
Regarding co-ownership of businesses, lending options exist for this exact reason. You shouldn’t have to sell your business to pay off your spouse. Comerica offers lending options so you can keep your business up-and-running.
Personal goodwill is not subject to equitable distribution when businesses are valued during divorce. Keep this in mind if you’re counting on personal goodwill to add significant dollar value to your co-owned business.
4. What are the tax implications?
After divorce, your tax filing status will change. You need to prepare for property settlements, estimating tax liabilities, assigning responsibility for tax payments and recipients of refunds and any changes to your business valuation. Timing of the divorce determines whether you can still file jointly for that tax year. If the divorce is final before December 31 of that year, you cannot file jointly, but you may be able to file as head of household.
Regarding property, if it is transferred “incident to the divorce,” the IRS will generally consider this transfer a non-taxable event if it occurs within one year of the divorce. Further, some states offer a homestead exemption1, which may limit state taxes on transfers due to divorce. If transferring property, take steps to identify any timing restrictions and applicable state homestead exemptions.
Lastly, court rulings and the divorce decree will impact your tax payments. For example, if you have children, a custodial parent will be named by the court and that parent could be eligible to claim the children as dependents. Further, child support will not be factored into your adjusted gross income, but spousal support can be included1.
Once the divorce is finalized, work with an accountant to ensure you file all necessary tax documents.
5. What changes do I need to make to my estate planning?
In the midst of a divorce, it’s easy to focus on the present and lose sight of the future. An important part of the divorce process is completing any changes to your estate planning as soon as the divorce is final. If you no longer want your former spouse as your beneficiary or to make financial or health care decisions for you, make sure to name someone else across all your estate documents, such as wills, trusts and powers of attorney. You should also review any estate policies or investment vehicles, such as life insurance, 529 plans and annuities. This includes changing your named beneficiary and adjusting the coverage amount to reflect your new insurance needs. Finally, you’ll need to communicate these estate plan changes to other family members, such as parents who may have dedicated assets or gifts for your spouse.
Money managers, banks, accountants and estate attorneys are used to treating you and your former spouse as a single client. Post-divorce, you’ll need to determine if you will continue to work with these service providers or find new ones.
Summary
There is no easy way to navigate a divorce. By answering the questions outlined in this article, you can work toward a more positive outcome for both parties. During this time, Comerica can be a valuable resource. We understand the divorce process and can help you think through budgets, expenses and other commonly overlooked financial considerations. Additionally, we provide expert wealth advisors for every situation. Remember, you do not have to go through this alone. Establishing your financial services team early will help the process go smoother and provide the support you need now and in the future. Contact your Comerica Relationship Manager or request to speak with a Comerica Wealth Management professional today.
1 Do I have to include the child support payments and ... (n.d.). https://taxaideqa.aarp.org/hc/en-us/articles/207754988-Do-I-have-to-include-the-child-support-payments-and-alimony-I-receive-in-income-when-I-compute-the-earned-income-tax-credit
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