Even the most amicable divorce can have a significant impact on your finances. Knowing the laws that govern the division of
assets during a divorce is an important first step in protecting your financial health throughout this difficult period.
The division of assets in a divorce depends on the state where you live. Judges in community property states typically divide
assets equally. Judges in common law property states typically apportion assets based on a variety of factors. The same is true for
Retirement assets are also divisible in a divorce. To avoid tax liabilities on any 401(k) assets you may receive, arrange to have
them rolled over directly into an IRA. Qualified Domestic Relations Orders are used to protect the divorced spouse's interest in
future retirement payments. Above all, you should consult with a divorce attorney before proposing or making any settlement.
Divorce can be a complicated and challenging process in which details are easily overlooked. Protecting
your financial health during this time is crucial, and no one should enter this process without a trusted
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.
Dividing the 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.
- Common law property states are those where the judge may consider a wide range of circumstances
before ordering a division. Among the factors are each spouse's earning ability, the length of the marriage,
and how much each spouse contributed to building household assets.
- Community property states are those in which assets and property acquired during the marriage
are divided more or less equally.
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.
Dealing with Debt:
Divorce does not eliminate debt, it divides it between the two spouses. But as with assets, practices differ.
- In a common law property state, each divorcing partner generally gets responsibility for the debts
he or she incurred in individual accounts. Debt in joint accounts -- or debt attached to jointly-owned
property -- is generally divided in the same way as the marital assets.
- In a community property state, debt -- like your assets -- is typically split down the middle, without
regard to whether the debt had belonged to a joint account or to an individual account held by
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
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 protect 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.
About Happiness Wealth Management:
Mike Duffy is the CEO of Happiness Wealth Management in San Carlos, California. He is the author of 5
books on happiness. He has a TEDx talk. He has guest lectured at Stanford University. He helps people be
happier with their money. If you have over $500,000 in liquid assets and would like to have a free
consultation about investing, please call Mike at 650-413-9435 or email him at firstname.lastname@example.org.
Our website is www.happinesswealthmanagemnet.com. Take control of your wealth and be happier for it!
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