Financial Planning at Divorce
By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, [email protected] families often experience many stressful events (e.g., PCS moves and deployments). Another one is divorce. The period of time before and after a divorce is especially difficult because people are expected to make rational and far-reaching decisions at a time of emotional turmoil. This may also be their first experience with the court system and hiring an attorney. In addition, expenses often increase when a spouse moves out and sets up a separate household.Below is some key information to share with military families to help them cope with the financial stresses of divorce:Do not sign a property settlement agreement, or any divorce-related document, that you do not understand or you feel contains unfair terms. Consult your own attorney – not your spouse’s attorney – before signing anythingEstimate the dollar value of household property. Fair market value is the price at which a willing buyer will buy an item and a willing seller will sell it. Replacement value is the cost of replacing an item (e.g., refrigerator) at current prices. As spouses discuss how to divide property, the one who plans to keep property may think in terms of fair market value, while the other (who will be replacing property) may think in terms of replacement value.Determine who will pay debts incurred during a marriage. List all debts including a home mortgage, car payments, and credit card accounts. Usually, one spouse or the other will assume an obligation and agree to “hold harmless” the other party. However, it is important to note that, if either party doesn’t pay a jointly held debt, creditors may collect from either spouse. Creditors are not bound by the terms of a divorce decree.Plan for future retirement income. A divorced person is eligible for Social Security benefits based on former spouse’s earnings, even if the former spouse is not yet retired. In order to qualify for benefits, the marriage must have lasted at least ten years. For questions about division of military Retired Pay and the Survivor Benefit Plan (SBP), seek assistance from an attorney who is well versed in military divorce issues.Know the tax consequences of divorce decisions. Marital status on December 31 determines tax-filing status for the year. Usually, the custodial parent claims a couple’s children as dependents. However, a custodial parent can waive the right to claim dependents as part of a divorce settlement, thus allowing the other parent to do so. A signed waiver statement (IRS Form #8332) from the custodial parent is required to be attached to the non-custodial parent’s tax return. Child support is neither deductible by the spouse who pays it nor included in the income of the recipient. Alimony, on the other hand, is taxable to the recipient and deductible as an adjustment to the payor’s gross income.Recognize that 50/50 splits of assets are not necessarily equal. For example, if one spouse takes sole possession of the family home, he or she also shoulders the burden of future property taxes and repairs, as well as possible capital gains taxes. The other spouse, who receives the same dollar amount in cash, has an asset that will continue to grow. Clearly, this property distribution is not equal even though the dollar value is the same.Encourage divorcing couples to consider hiring a professional mediator to resolve issues related to divorce. Mediators are trained not to “take sides” but, rather, to work out a settlement that is fair and equitable for both spouses. This includes both financial issues and other considerations such as child custody. Once these issues are resolved, each spouse’s attorney can assist with a final agreement. This is usually a far less expensive and time-consuming process than letting lawyers negotiate a settlement.For further information about military family divorces, view the 2012 MFLNPF webinar, Financial Implications of Divorce. Additional information can be found here.