Untangling Your Finances When You Divorce: Don’t Forget These Important Details
- September 8, 2021
- By: Roxanne Alexander, CFP®, AIF®, CAIA, ADPA®
Whose name is on the title to the house? Is the person paying child support covered by a life insurance policy? Have you changed your tax withholding now that you won’t be filing as married? These are all important but often forgotten details.
Divorce is an emotional time for everyone involved, but neglecting diligent follow-up can impact your finances. There are several areas that can easily be overlooked when you are constantly having disagreements, child custody battles, and alimony issues. Whether it is the husband or wife who has been in charge of the finances, it is important for both spouses to get familiar with their planning.
Let’s break up the task of untangling years of intermingled finances into three parts.
Part 1 of the Law of Division: Your Accounts
Get Your Home Title and Mortgage Squared Away
The largest asset to deal with in a divorce is usually the house. If the house needs to be sold, keep in mind there may be a large capital gain on the property, which needs to be accounted for.
Who is on the mortgage? Does one spouse need to come off the liability? This may be easier said than done, but most banks will require a new loan in the name of the party who gets the home. If the person granted the home in the divorce cannot qualify for a new loan, this can be a problem. Banks allow loan assumptions for several reasons, but the process is similar to getting new financing. Avoid removing your name from the title before the liability is released.
If you are not granted the house or other real property, but your name is still on these assets, you are still subject to liability if something happens. For example, if a natural disaster damages your property or a leak damages a neighbor’s property, you can potentially get sued just from being listed on the title. An umbrella insurance policy is fairly low cost and can help in these circumstances.
You are also still liable for any maintenance fees or assessments that are not paid, along with property taxes, if your name remains on the title. If your former spouse fails to pay these fees on time, this can hurt your credit.
Undo Any Joint Bank and Brokerage Accounts
“Removing” a joint owner on an account is easier said than done. After divorce, you will need to open individual or trust accounts and close existing joint accounts. This requires ordering new checks, relinking, and direct deposits or EFT payments. If you have retirement accounts, the court may issue a QDRO (Qualified Domestic Relations Order), which will allow splitting these assets and putting half in the other spouse’s name. It is important to check the beneficiaries on IRAs after divorce to make sure the beneficiary is not the former spouse (unless that is what you want). The same thing with your retirement savings account at work: The beneficiaries on your company 401(k) can easily be overlooked, since statements may be sent annually.
You should make sure any individual accounts have a transfer on death listed. This is the person the account will go to if you pass away. If you have any joint credit cards, you may want to cancel them. If the joint account is linked to any other individual accounts you may have, you will probably want to unlink it.
Setting up a trust for minor children should also be discussed with your estate attorney.
Check Your Credit Reports
If your spouse has been dealing with the finances and most of the bills and credit are in their name, you will need to establish your own credit. You want to make sure your name is not on anything belonging to your former spouse just in case a payment is missed, otherwise, your credit could suffer.