Good advice and a cool head can help you protect your financial security in a divorce.
A divorce is almost always an emotionally and financially challenging experience. But if you understand the laws that apply to the property that you and your about-to-be-former spouse own and know the benefits to which you’re entitled, you’ll be much more likely to reach a resolution you feel is acceptable.
Marital property, both real and personal, is property that was acquired during your marriage, regardless of who paid for it. A family home is one example. So are investment accounts, bank accounts, artwork, and automobiles.
On the other hand, separate property includes assets that were owned by one spouse before the marriage and continued to be owned solely by the same spouse during the marriage. Separate property may also include inheritances and gifts that were made to you or your spouse rather than to both of you as a couple.
If separate property is commingled with marital property, however, it becomes marital property. For example, if your spouse received an inheritance and deposited it in a jointly held account, that inheritance would become marital property.
If you and your spouse are unable to agree on the division of marital assets and you turn to the courts for a resolution, how the assets are split will depend on the laws of the state where you live. In the nine community property states, all assets must be divided evenly. In the 41 equitable distribution states, assets are not necessarily divided evenly but rather in a manner that is determined to be fair. Often that means that the more affluent person remains more affluent after the divorce.
Don’t forget that debts are divided up, along with assets. Joint agreements and debts incurred while married are considered shared obligations. If one spouse fails to pay, the other will be held responsible. Since your credit rating and financial security are at stake, you’ll want to be sure to have the repayment responsibilities agreed on and documented in writing.
Apart from a home, retirement assets can be among a couple’s most valuable possessions. If both you and your spouse have your own employer-sponsored retirement plans of roughly equal value, you could each elect to keep your own.
But if you have accumulated a smaller retirement account than your spouse, or if you have no retirement savings of your own, you should take steps to secure your fair share of your spouse's retirement savings. Contributions to these accounts in the years since your marriage are considered marital property, and you are entitled to a portion of the account value. The caution, though, is that you must go about it the required way, claiming a share of your spouse's account value with a court-ordered Qualified Domestic Relation Order (QDRO).
A QDRO formally creates the right for you, as the alternate payee, to receive some or all of the benefits payable to you, who is the retirement plan participant. A state agency or authority, such as a court, can issue a QDRO. However, it must be issued before the divorce papers are final. If the QDRO is not included in your divorce agreement, you will miss out on your portion of your spouse’s retirement funds.
It is essential to have an experienced divorce attorney handle the QDRO process. Also keep in mind that an employer-sponsored retirement plan isn’t the only one you’ll want to share in a divorce. If your spouse made contributions to an individual retirement account (IRA) while you were married, those contributions are also considered marital property, and you are entitled to your share.
Bear in mind, too, that you want to resolve your divorce in a way that is best for your long-term financial security. This means considering the future value of assets as well as their current value. If your spouse’s compensation included stock options, these assets have a very real potential future value. What’s more, the tax status of different assets could cause them to look more valuable on paper than they really are. For example, a traditional 401(k) would be taxed at withdrawal, while a Roth IRA would not.
You may also have to make some extremely difficult decisions about custody arrangements. Joint custody can work for many families. However, it can result in smaller child support payments, which could be a problem if you find yourself shouldering most of the childcare, clothing, extracurricular activities, and other expenses. You may also want to include a cost of living adjustment in your settlement, which could be extremely helpful for maintaining your children’s standard of living. You should also insist on a provision for paying college tuition, which is separate from child support.
Alimony is an increasingly rare benefit in divorce settlements, and today only about 15% of divorces in the United States involve alimony. Whether or not you receive alimony depends on a number of factors, particularly the length of your marriage, your financial situation, your ability to support yourself, and the tax implications of the payments. If you earn more than your spouse, it’s possible that you could be the one paying alimony.
Judges in some states will consider fault when deciding alimony and division of property, even if the court grants a no-fault divorce. For example, some states won’t grant alimony to a spouse who has committed adultery. And although states set guidelines and establish mechanisms to ensure the regular payment of child support, it can be more difficult to collect alimony from a former spouse. For this reason, you may want to consider a one-time alimony payment if you are awarded this benefit.
One thing to keep in mind if your marriage is one of the 33% that ends in divorce, that you and your spouse can save a great deal of money in legal fees by settling the divorce out of court, perhaps by working with a mediator or through your attorneys. Indeed, 95% of all divorces are settled this way. But if you and your former spouse are openly hostile, or if you think that your spouse is concealing assets, you should definitely consider the court option. You only have one chance to secure your share of marital assets, so it pays to be sure your claim is heard.