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Divorce can be a complicated and challenging process in which details are easily overlooked. Monitoring your financial health during this time is crucial, and no one should enter this process without a valued attorney (specializing in divorce) on his or her side. Equally important is knowing the laws that shape divorce proceedings, and the impact they can have on your assets.
As a general rule, assets and property acquired during the course of a marriage are divided when the spouses divorce. While there may be exceptions for individual inheritances, gifts to an individual spouse, and assets or property acquired before marriage, the big difference among states is what formula might be followed for the division. The state laws on this generally fall into one of two categories.
Most states follow the common law principle. The exceptions are Alaska (community property optional), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Don't try to hide assets from the court, either by neglecting to mention them or transferring them after the proceedings have begun. This can trigger penalties and additional court actions.
Divorce does not eliminate debt, it divides it between the two spouses. But as with assets, practices differ.
One important trap to avoid is maintaining joint accounts after the divorce. Your spouse could continue running up expenses and leave you with the debt. As soon as the divorce is finalized, freeze all joint accounts and have your creditors reclassify them as individual accounts. Most creditors will do this at your request, though they are not legally required to do so. To protect your credit rating, make sure to keep up with monthly payments.
If you and your spouse own a home that has appreciated in value, you may want to sell it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 in realized capital gains for married taxpayers. This amount is cut in half for single filers. Be sure to consult a tax advisor for additional information about these rules.
Money in either spouse's 401(k) or pension plan may legally be divided during a divorce. To claim a share of a spouse's 401(k) or pension plan benefit, you need to obtain a court order called a Qualified Domestic Relations Order (QDRO) and provide it to your spouse's plan sponsor before distributions are completed to your spouse.
If you do receive a share of a spouse's 401(k) assets or pension plan benefit, it may be best to roll over your share immediately into an individual retirement account (IRA) to avoid taxes and maintain tax deferral. You should discuss this with your attorney or a financial advisor familiar with divorce proceedings as soon as you anticipate a divorce.
Be sure to review your will or, if you don't have one, draw one up. You should consult an attorney familiar with your state's estate laws to ensure that your assets are properly distributed. Do not wait until the divorce is final. You should review and amend your estate plan at the same time you decide to commence a divorce proceeding. Also make sure to review beneficiary designations for pensions, 401(k)s, and life insurance policies. Federal law requires a spouse to be the sole beneficiary of pension or 401(k) benefits unless that right is waived in writing by the spouse.
If you find yourself faced with divorce, it is essential to safeguard your financial future. Enlisting the help of an attorney and carefully monitoring the process can ensure that your interests are considered and that you won't need to revisit the proceeding later on.
Atlas Wealth Strategies has the expertise and experience to take the stress out of charting a new independent financial course that will enable you to pursue your financial goals. At Atlas Wealth Strategies we can guide you through:
This information is not intended to be a substitute for individualized tax or legal advice. Please consult your tax or legal advisor regarding your specific situation.
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