Ending a marriage is not cheap. Even the most amicable divorce can sap your finances if you’re not careful—especially if you happen to be female. In divorces among people over 50, women experienced a 45% decline in their standard of living (measured by an income-to-needs ratio), whereas men’s dropped by just 21%.
For accomplished women with significant assets, safeguarding wealth during a divorce can take on added importance. Business interests, investments, real estate, retirement accounts, pensions, and valuable property may all be on the line. With the right knowledge and planning, you can protect your wealth and come out of a divorce financially secure. Avoid these common divorce mistakes to ensure your wealth stays protected.
Before you decide to keep the house (and the memories that come with it), make sure you can afford the mortgage and other costs—like property taxes, insurance, upkeep, and other homeownership expenses. Keep in mind, you’ll have to refinance the mortgage in order to get your ex’s name off of it. In many cases, this will mean larger payments, since interest rates have spiked over the past few years.
One common workaround is to keep the existing mortgage, with an agreement that one partner will handle the payments. Of course, this only works if the split is somewhat harmonious. If you and your ex keep co-owning the property and sell it within 2 years of divorce, you can exclude up to $500,000 in capital gains (instead of the $250,000 limit for single filers).
This could save you thousands in taxes and help you buy a new property—possibly even in the same school district, if you have kids.
From child support and alimony to splitting assets, it can feel like every move comes with a tax hit. Not all assets are created equal, and dividing them without considering the tax implications can leave women with less than they expect.
In nine states, including California, assets acquired during marriage are considered joint or “community property”. This means 401(k) funds earned during the marriage are split evenly, (even if you’re the only one who contributed). Anything in the account before marriage remains yours.
To split retirement accounts like 401(k)s without triggering taxes or penalties, you need a Qualified Domestic Relations Order (QDRO). This grants one spouse a share of the other’s retirement accounts, specifying the amount or percentage and the payment schedule. Another benefit of a QDRO is it waives the 10% penalty for early withdrawals from the qualified retirement plan.
You don’t need a QDRO for IRAs—those are divided as part of the standard divorce settlement.
Alimony isn’t federally taxable for divorces after 2019, but it can still be taxed at the state level (as is the case in California):
You should review your estate plan documents anytime a major life change occurs—and that includes divorce. If you don’t update key documents like wills, life insurance policies, retirement accounts, or trusts, your ex-spouse could potentially still inherit or control your assets.
While many states, including California, automatically revoke certain ex-spouse designations—such as executorship, Power of Attorney, and bequests—this is not always the case. Therefore, you still need to update your estate plan to appoint others for these roles. Additionally, beneficiary designations typically override what’s written in a will. So, failing to update these could result in your ex-spouse inheriting assets if they are still listed as a beneficiary.
If child or spousal support is required, life insurance must list the ex-spouse as beneficiary and can’t be changed without consent. In community property states like California, they may also be entitled to proceeds if premiums were paid with shared funds.
Divorce proceedings can throw your retirement plans for a loop. With legal fees, taxes, and dividing assets, plus covering bills you used to share, it’s a lot to manage. If you don’t plan ahead, you could risk overspending or failing to save enough for future needs.
You need to reassess your retirement strategy to stay on track after a divorce, especially if you’re awarding a portion of retirement accounts to your ex-spouse. Living solo may cost more, but the good news is, you’re in full control of your financial destiny.
Women should consider several key factors:
This is where the help of a Certified Divorce Financial Analyst® (CDFA®) can make or break your financial future. Their expertise is crucial for crunching numbers and navigating complex decisions during divorce.
Your life post-divorce will be different, and so will your financial obligations. If both partners were working and splitting costs, you may need to adjust your budget and spending habits.
Take time to reassess your monthly outflows to figure out how much you will realistically need to live on. Has your rent or mortgage payment changed? Are household grocery and utility expenses now doubled? What other costs might fall away? Will you be receiving (or paying) child support or alimony?
Other factors that can affect your post-divorce budget include:
Divorce negotiations can seem endless, and you may be tempted to defer some decisions until later. But leaving out crucial details can lead to stress and uncertainty when “later” becomes “now.”
For example, private school tuition or college expenses for your children can become major points of conflict. While some states (like Arizona) require parents to cover college costs, others (like California) don’t. If you don’t clearly outline these expenses in the divorce agreement, it could lead to financial disputes down the road.
Imagine discovering your ex-spouse refuses to help with college costs years after your divorce, simply because it wasn’t clearly outlined in your agreement. You’d either have to fund the education entirely yourself, or enter into a costly legal battle to enforce an informal understanding.
One way to avoid this is by setting up an escrow account that both parents contribute to for future college costs. This way, you’ll have a clear plan in place that you can enforce if needed.
Divorce is stressful enough—don’t add the burden of mastering complex legal and financial issues. Rushing or handling it yourself might result in getting less than you deserve, and could lead to overpaying in taxes. Key details might be overlooked, whether due to overwhelm or because you just didn’t know any better.
Investing in the right support team can help you avoid many common (and costly) divorce mistakes and ensure you’re properly represented. A divorce lawyer will guide you through critical legal decisions like division of assets, child custody, child support, and coming to a final agreement. A marriage counselor will work to improve communication and work through issues between the soon-to-be-exes.
A Certified Divorce Financial Analyst® is another valuable asset to your support team. As a financial professional specializing in divorce, they’ll help you understand the short- and long-term impacts of your financial decisions.
A CDFA® helps identify and assess marital assets, create budgets, and set post-divorce financial goals. They run financial projections to show potential outcomes of settlement options. If needed, they can also testify in court and work with other professionals to help you get a fair and equitable settlement.
Divorce is never easy, but with the right knowledge and support, you can protect your wealth and avoid financial blunders. The decisions you make during this process can impact your finances for years to come, so careful planning is key to securing your future success. By understanding key areas like asset division, tax implications, and updating estate plans, you can set yourself up for long-term financial success post-divorce.
Do you want to understand the numbers and make informed financial decisions related to your divorce? Want professional guidance and oversight every step of the way? Our experienced Certified Divorce Financial Analyst ®(CDFA®) is here to help—contact us today to discuss your situation.
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