Life Changes

5 Financial Considerations for After a Divorce

Make sure you have these financial needs squared away after filing.

by Mark Tosczak - December 03, 2018

While it’s no surprise that getting a divorce can be emotionally taxing, you may be unprepared for the toll it can take on your financial situation.

This isn’t something to overlook or set on the back burner. In fact, Karen Josephson, a senior wealth planner at Wells Fargo Private Bank, says people must secure their own finances first—especially if you have dependents. “There’s no way you can continue to be responsible for them if your own financial situation crumbles,” she says.

So how do you take care of your finances in the wake of divorce? Make sure you’ve got these five categories covered.

1. Income and budgeting

Where will your income come from and how much will you need? These are the most important financial considerations after divorce. “You may not have the same lifestyle that you had before the divorce,” Josephson says.

She also notes that many couples divide financial responsibilities. For example, one spouse may have been responsible for paying all the bills. After the divorce, budgeting may be difficult for the spouse who is unused to handling that task.

If your divorce involves alimony, make sure you understand the tax implications. For divorce agreements executed after December 31, 2018, alimony will no longer be deductible for the person paying it—and recipients won’t have to pay taxes on those payments.

As a result, Josephson says, “alimony figures going forward will probably be smaller, all else being equal.”

The new tax treatment for alimony may also apply to some existing alimony agreements that are modified starting in 2019. Consult a tax professional to make sure you understand what the implications might be for you.

For divorce agreements executed after December 31, 2018, alimony will no longer be deductible for the person paying it—and recipients won’t have to pay taxes on those payments.

2. Housing

Determining where to live can be a big decision for both parties. In some cases, the spouse caring for the children may want to stay in the family home to avoid disrupting their lives even further.

Even if both spouses agree to that situation, they’ll need to consider how realistic it is. Will one spouse be able to pay for maintaining the house and also cover other living expenses? “You may have to make a choice between staying in the house or maintaining the same standard of living in a smaller home,” Josephson says.

There’s also the mortgage to consider. Even if a couple agrees on who’s going to be responsible for mortgage payments, the lender might not be on board.

“Optimally you would find a way to refinance and get the non-obligated spouse off of the debt,” Josephson says.

3. Division of assets 

Making sure that assets are properly evaluated is one of the trickiest areas of divorce agreements. Even if some assets have the same dollar value, they can have different financial impacts. For example, financial investments can provide income now or in the future, but luxury goods, such as fine art or vintage automobiles, generally can’t, even if they have the same appraised dollar value. Also, some assets come with different tax consequences. Taking distributions from a qualified retirement account such as an IRA or 401(k) will trigger income tax, and the distributions are subject to age-based rules. This is not the case with non-qualified investments.

Resolution of ownership and roles in a family business can also impact future income. Be sure to get assistance from your financial advisors, your attorney, and other experts as you evaluate assets to determine how those assets will be divided.

Making sure that assets are properly evaluated is one of the trickiest areas of divorce agreements.

4. Benefits and beneficiaries

Frequently, one spouse receives benefits (such as health, dental, and life insurance) through his or her employer and the other spouse is a beneficiary. The same is true for insurance purchased independently.

But when you divorce, the beneficiary spouse may no longer be able to access that insurance. It’s important to update those benefits to reflect your non-married status, and the non-covered spouse should consider finding alternate coverage.

In fact, you’ll want to update anything that includes a beneficiary designation, Josephson says. Along with insurance, this applies to retirement accounts such as IRAs and 401(k)s and other employment benefits.

5. Estate plan updates

Finally, update estate plan documents, including wills, revocable trusts, powers of attorney, and health care directives.

“A lot of couples have reciprocal estate plans, meaning they leave everything to each other,” Josephson says. Forgetting to update these plans has the potential to create awkward situations, or worse, may transfer your estate to someone you divorced years earlier.

These challenges can be complicated, and can bring a number of financial and legal issues on top of the emotional and social pressures you’re already feeling. You can ask for help, though, and not just from your divorce attorney.

“Don’t wait too long to get advice from a professional,” Josephson says. “Financial advisors are very well equipped to address many of these issues. Some financial firms may have a suite of advisors with different specialties, so don’t just rely on your attorney. Every professional is going to be looking at it through their own lens.”

Mark Tosczak has spent 25 years wrangling words for newspapers, magazines, businesses, nonprofits, and other organizations. He focuses on health care, science, and business.

Image by iStock

Additional Resources

If you remarry after divorce, it’s important to make sure your estate plan matches your new situation. Here are five things to keep in mind.

Wells Fargo Advisors is not a tax or legal advisor.

Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.