To maintain a healthy lifestyle, it’s important to understand that not all calories are created equal. The type of calorie consumed has an impact on the amount of energy expended by our bodies, making some calories more efficient than others. Similarly, not every dollar is created equal. This notion becomes particularly important to understand when splitting assets in a divorce. Depending on your situation, certain assets may be more valuable than others. Consider the tips below to 'consciously uncouple’ your finances in a divorce and to improve your financial health in the end.
Don’t Take the House If You Can’t Afford It. Especially when you have children, it’s normal to want to minimize disruption to your normal, everyday life. But, don’t ask for the home if you can’t afford to maintain it. Attempting to keep the status quo may not be the best long-term solution.
Consider Taxes. Retirement assets (i.e., certain IRA’s and 401(k)’s) will be taxed as ordinary income when withdrawn and have restrictions as to accessibility. If there are company-sponsored retirement plans to be split (i.e., 401(k) or pension), familiarize yourself with the use of a Qualified Domestic Relations Order (QDRO). You may also pay tax on the sale of property or investments that have increased in value, so understand the after-tax value of the assets before agreeing on the split.
Consider Taxes, More. Understand what you could be giving up if you forgo the dependency exemption for tax filing. Head of Household filers pay income tax at a lower tax rate (compared to Single or Married filers), are eligible to claim a higher standard deduction, and may be able to take advantage of other tax credits, depending on income (i.e., Dependent Care Credit or Earned Income Credit). It’s well worth spending less than $1,000 to have a CPA determine what you would be giving up in real dollars if you concede this status to your soon-to-be ex. This knowledge could save you thousands annually.
Plan for Debts. Consider an indemnity clause in the decree that will allow you to take action if your ex does not pay on a debt. Also, consider a refinancing clause for secured debts (i.e., home or car) to remove your name from any liabilities to be paid by your ex.
Protect Yourself. Just as important as protecting future income in a marriage, have the conversation about protecting child or spousal support payments in the event of death with the use of life insurance.