Perhaps unsurprisingly, the number of married couples considering or actively seeking a divorce has skyrocketed during the COVID-19 pandemic. According to data collected by Legal Templates, the number of couples looking at divorce was 34% higher from March to June 2020 than in 2019. Another study from Ipsos shows that nearly one in 10 married or partnered people in the U.S. are very likely to separate from their partners due to pandemic-related reasons. Dealing with finances during a divorce is confusing, especially when you have many assets to split. Here’s how to financially prepare for a divorce in some key areas:
Regardless of the cause, divorce is a deeply personal and emotional experience — but getting divorced during a pandemic significantly increases that turmoil. It’s important to take time to grieve, process, and then enter into the divorce proceedings as calmly as possible. This is not the time to make rash decisions that can have long-term impacts on you and your family’s emotional well-being — and especially on your financial situation.
In our current economic reality — where at least half of those living in America’s four largest cities have reported losing at least some income — separating your finances during divorce takes careful consideration and a solid understanding of your assets, liabilities, expenses, and income. When preparing for divorce financially, you should gather the last few years of tax returns, year-end account statements (for investments like 401(k)s, brokerage accounts, bank accounts, etc.), copies of paystubs, debt statements, and documentation showing any recent losses of income.
Besides getting your finances in order before a divorce and finding a trusted attorney to represent you, the best thing to do when divorcing is to be transparent and communicative. This is a tough time, and you don’t want to make it more difficult by being less than honest about your financial situation. Here’s how to financially prepare for a divorce in some key areas:
1. Financial Accounts
Generally, both spouses are entitled to half of the assets accumulated during a marriage (although assets brought to a marriage by one spouse sometimes can be exempt). Splitting finances during a divorce is a complicated process, which is why professional assistance is key. Without a good understanding of what you have, you won’t know whether you’re getting a fair share of what you’ve earned over the years.
When considering how to financially prepare for your divorce, try to establish your own credit card. If you already have a credit card in your name, get into the habit of pulling your free credit report at least annually to make sure everything is square. Luckily, three major consumer reporting companies (Equifax, Experian, and TransUnion) offer free reports every quarter that you can access through AnnualCreditReport.com.
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2. Kids and Pets
While your loved ones aren’t assets, they are a major consideration when separating your finances during a divorce. And it’s easy to overlook the everyday expenses your children incur, such as schooling costs (e.g., clothing, books, and supplies) and general costs of caring for your kids (e.g., food, healthcare, and recreational activities). Communicate with your partner to determine who will care for the children and how you will allocate the expenses.
Don’t forget costs for special occasions like weddings and bar/bat mitzvahs — deciding how these large one-off expenses will be paid will save you from any awkward back-and-forth down the road. You’ll also need to decide who will get to claim your children as dependents on their tax return. Only one person can do so, and you don’t want to have to go through the trouble of refiling.
An often-overlooked part of getting your finances in order before a divorce involves shared pets. You should plan how you’ll handle ongoing maintenance like grooming and vet visits now, so your fur baby doesn’t get caught in the middle of any issues in the future.
3. The House and Other Material Possessions
Deciding whether to keep the house is a crucial step in understanding your finances during a divorce. There are several ways to go about this, but the best is to determine the home’s value with an independent, third-party appraiser. This could cost anywhere from $300 to $600, but it is so worth it for the peace of mind of having an agreed-upon number approved by both parties.
Remember that while your home may hold sentimental value, it’s not a liquid asset. So if you have an emergency and don’t have liquid assets (e.g., cash in the bank and investments outside of retirement accounts that can be sold with minimal tax consequences) available to cover expenses, owning a home won’t be much help. After all, you can’t quickly sell a home for cash.
Much like with the house, consider the sentimentality of your material possessions when making decisions about your divorce and finances — but don’t consider it too much. You don’t want to be left with all the handmade scrapbooks while your spouse gets the valuable electronics.
Separating your finances during a divorce is a painful process, but you don’t have to do it alone. Don’t be afraid to ask for help. Beyond hiring a divorce attorney, seek assistance from a financial advisor who can help you piece your financial life back together.
A divorce is an emotional, complicated experience. As long as you understand how to financially prepare for divorce, you can make the process far less taxing. With time, you and your family will be able to move confidently into the future with your finances in order.
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Disclaimer: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.