Most couples do not enter marriage planning to get a divorce; however, the reality is that divorce occurs in about half of all first marriages, and about 60% of all second marriages. Both parties must be very careful in planning for his, her, and the children’s financial well-being during this time; this is an extremely emotional period much like the death of a spouse or family member.
The division of assets is dependent upon the state of residence. There are nine community property states, where property is evenly divided. There is one title state, Mississippi, where individuals keep only the property in his or her own name, and the court divides the rest of the assets. The other 40 states (including Georgia) use the principle of “equitable distribution.” Equitable distribution allows a judge to split up the assets, as he or she deems fair. Ninety-five percent of divorces are settled out of court using a mediator to work out the settlement. Mediation lowers the legal cost of divorce, depending on length of the negotiations, etc.
Upon entering the proceedings for divorce, couples must address several points. While all divorces are different in their process and outcome, taking into account the following elements will affect both the proceedings and the outcome:
Children:
- Decisions have to be made regarding physical and legal custody.
- How much child support (non-taxable income to custodial spouse) is needed?
- Is anything in place for the expense of college, and should this be considered in the division of assets?
Alimony:
- Will alimony, which is typically taxable income to the spouse receiving it, be required? This is called “rehabilitative maintenance,” and is generally used to help the lower-earning spouse get back on his or her feet. It is usually a stream of temporary payments.
Financial Planning:
- Inflation-adjusted cash flow projections should be run (ideally for both parties) addressing all the financial issues, not the least of which is who should keep the home or if it should be sold. This will help determine the ability of one or both parties to meet living expense, retirement and education goals.
- At Henssler Financial, we follow our Ten Year Rule, which illustrates how much of the assets should be in fixed income investments versus growth investments. In this stage of decision-making, pensions and 401(k) plans need to be evaluated, because unless you divide these plans the right way, you may incur unnecessary penalties. A Qualified Domestic Relations Order (QDRO) can be used to transfer money from a 401(k) to the non-employee spouse’s IRA. Also, it is prudent to include your tax consultant in on this process as well.
Insurance:
- How much life and disability insurance should be maintained on each party should also be addressed.
- Separate health insurance may need to be obtained if one spouse was covered by the other’s insurance.
- Beneficiaries need to be changed on retirement plans and life insurance policies.
- Homeowners and auto insurance policies will have to be changed; this can increase rates because of various reasons, such as losing a multi-car discount, etc.
- It is very important that new Wills and other estate planning documents be written by parties after divorce to ensure their assets will be distributed as they desire.
Seeking the advice of legal and financial professionals during divorce is wise; their ability to be unemotional about decisions can have long-term effects that might otherwise be dismissed. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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