Please understand that I'm not advocating divorce. God hates divorce (see Malachi 2:16), and so should we. Marriage vows are taken far too lightly today; when couples say "Till death do us part," they often mean "Till we don't feel in love anymore." We need to take more seriously the warning of Deuteronomy 23:23: "Whatever your lips utter you must be sure to do, because you made your vow freely to the Lord your God with your own mouth." The commitment to love in spite of feelings and circumstances is essential to upholding a marriage through thick and thin, and reconciliation should always be our goal if it's at all possible.
I have to acknowledge, however, that couples do divorce — even Christians — and say that if it appears to be a definite possibility in your case, you need to make some appropriate plans. Like a widowed person, a divorced man or woman faces enormous psychological, emotional, and financial adjustments. Therefore, if you go through divorce, you should give yourself some time before making any major investment or financial planning decisions. Obviously, day-to-day concerns have to be taken care of, but choices like when and where to move, estate plans, and investment decisions (if any) should be delayed. You might delay those decisions anywhere from six months to two years.
Financial problems often contribute to divorce. In fact, more than 50 percent of the people who divorce indicate that financial problems fostered the breakup. Those problems may be only symptomatic of others, but they clearly add to the strain the family is under.
As we've already acknowledged, women are often more vulnerable financially in a divorce, so I now want to focus on the steps a woman needs to take to protect herself during a divorce.
Before the Divorce Becomes Final
The first step is to pick a competent and trusted advisor. You may want to choose a personal advisor as opposed to a financial advisor first. A friend, another woman who has gone through a similar situation, or the elders at your church may be able to guide you through the process of selecting an attorney to handle your side of the divorce. Your goal should not be to "get" your husband or take him for all he's worth, but to be sure you and your children are provided for.
The financial cost of divorce may be significant. Even a simple, uncontested divorce can cost from several hundred to several thousand dollars in legal and filing fees, depending on how much property is involved.
It's possible to avoid attorneys entirely by using a do-it-yourself divorce kit found in many bookstores. I don't recommend that approach, however, because you could easily overlook crucial details. Your situation may not be as simple as you think. Any time property or children are involved, the situation is complex. Also, each state's divorce and property laws are different. The divorce can be further complicated if you've lived in more than one state or acquired property in more than one state. For the same reasons, you should never attempt to be your own divorce attorney.
The primary way to reduce the cost of divorce is to avoid contentiousness. The more contentious your split, the more expensive it will be. If your husband agrees, you might want to approach a service such as Christian Conciliation ServiceSee http://www.peacemaker.net. or some other mediating body that could help reduce costs and still provide competent advice.
In addition to choosing trusted advisors and legal counsel, you need to do the following during the divorce process:
- Establish credit in your own name. It's almost impossible to function in our culture without a credit rating. If credit cards, bank accounts, and other accounts are in your husband's name alone, you may have difficulty establishing your own credit. It's therefore advisable to apply for credit in your own name at your bank.
- List all assets you can find, along with how those assets are titled. This includes cars, timeshare units, furniture, bank accounts, valuable jewelry, boats, life insurance policies, savings bonds, retirement plans, and brokerage accounts.
- Notify banks and brokerage firms – wherever you have joint accounts – of your intention to divorce. Ask both the banker and the broker to allow no transactions in your accounts without written approval by both you and your spouse.
- Close out all joint charge accounts. If you don't complete this step – and your husband makes charges – you are jointly as well as individually liable for that debt. Notify the creditors in writing that you're no longer responsible for your spouse's purchases. Creditors may agree to let you keep accounts open in joint names but only be liable for your own purchases.
- Consider setting up a savings account in your own name. This will serve as a place to keep cash if your husband stops contributing to the payment of household bills. You'll probably be liable for all utilities and household expenses if your husband decides to stop making those payments.
- Make sure you understand the true costs of operating the household. The budget worksheets can help you identify many of the costs. Go through the check registers from the past two or three years and list your expenses by major category. This will help you negotiate the terms of divorce, such as child support and alimony payments. And it will be far less expensive for you to gather the information than to hire an accountant or your attorney to do it.
In addition, you can review prior years' tax returns to get some indication of money spent, investments made, and sources of income you may not have known about. The more information you have, the more you're able to assist your attorney in negotiating a fair and reasonable settlement.
The Negotiation Process
The last financial step in divorce, one that could take a long time, is the negotiation process. In that process, all assets will be divided; the responsibility for debts will be determined; child support amounts will be set; alimony amount and duration will be decided; and last and very important, visitation rights will be established. How well the negotiation is done will depend not only on the information you provide your attorney, but also on his or her skill as an advocate for you.
How well the settlement is negotiated will largely determine the tax consequences of the divorce too. What appears valuable before taxes may be far less valuable after taxes. For example, any alimony paid to you will be deductible to your husband on his tax return and taxable to you as income. On the other hand, child support payments are neither taxable as income to you nor deductible by him.
To illustrate, suppose your ex-husband pays you alimony of $35,000 the first year, $20,000 the second year, and $5,000 the third year. He will be able to deduct $60,000 from his tax returns over those three years, and you'll have to report taxable income of $60,000. Thus, your attorney should attempt to increase the amount of alimony paid to take into account the tax benefit your former husband is getting and the tax liability you are assuming. If you were to receive $60,000 of child support over a period of years, you would pay no income tax. Child support is better for you than alimony from a tax perspective, but is less attractive to him financially.
Another issue relative to child support is who gets to claim exemptions for the children on tax returns. Generally, the parent who has custody of the child for more than one-half of the year gets the exemption unless the other spouse signs a waiver. (Refer to IRS Publication 504 for more information on this topic.)
If your spouse is extremely well paid, he should be especially amenable to signing a waiver, because dependent exemptions are phased out anyway for single taxpayers with higher incomes. If your former husband fits that category, he'll get no benefit from the exemption, so it should be used by you if you're in a lower tax bracket.
This is all a moot issue, of course, if you provide more than half the support of your child, which can be determined by the family budget you've already prepared. In that case, you can just take the exemption on your return and reduce your tax liability accordingly.
Property settlements can also have tax consequences. Generally, property transferred as part of a divorce settlement is treated as a gift between spouses, so no taxes are paid on the transfer. But certain assets, such as an IRA or 401(k), will have future tax consequences. Many women recognize too late that $20,000 in a savings account (not taxable) is much more desirable than $20,000 of their husband's 401(k) (taxable upon withdrawal and not accessible until age 59½).
Although the transfer of most property without taxation sounds good, keep the following in mind. If property (stock, real estate, etc.) that originally cost $1,000 but is now worth $50,000 is transferred, you don't have $50,000 available to you. When the property is sold, you will have a taxable gain of $49,000. The income tax on the gain will reduce substantially the amount of money available to you. If, on the other hand, property that cost $50,000 is transferred to you and you sell it for $50,000, you have no tax on that gain, so you really do have $50,000. Thus, the specific property transferred in the divorce settlement can change your cash flow significantly.
Another issue in the property settlement is the family home. If that's transferred to you, you get the tax benefit of avoiding most or all of the income tax on the gain from a sale. Current tax laws allow you to exclude from income any gain up to $250,000 ($500,000 for a married couple) from the sale of your principal residence.
Finally, while the divorce is being negotiated, you need to review the medical insurance coverage you and your children will have.
After the Divorce is Final
By the time the divorce becomes final and all property transactions are completed, you should have your own bank and brokerage accounts and credit cards. Now, besides living in accordance with a financial plan, you need to rewrite your will, change the beneficiary for life insurance policies on your life, and review your children's medical insurance coverage, which may have been provided by your spouse.
Those protections become more critical now than ever because you may be your kids' sole support. These steps are too important to delay beyond the first few weeks after the divorce is final.