If you are in the process of going through a divorce or believe that you may soon begin this process, you may want to consider the checklist below which contains some of the key financial items you may need to address. In addition to the emotional stress associated with divorce, you will also need to undo the many financial connections you and your spouse have developed over the years of your marriage. This list may help you begin to frame your thoughts on how to approach the financial aspects of your divorce. Please note, however, that this list is not comprehensive and should not be used in place of qualified legal, tax, or accounting advice that is specific to your unique situation and circumstances.
1. Build your own team of advisors – You may decide to continue working with your current team of tax, legal, and financial professionals or you may decide to work with one or more new professionals. Either way, you should keep them apprised of your current divorce situation.
2. Evaluate the benefits of mediation versus litigation when possible – Often, it is far less expensive to mediate your divorce rather than litigate it. You may want to explore the mediation process and can locate a mediator in your community via the Association for Conflict Resolution at www.acrnet.org.
3. Gather your important tax, investment, and financial documents together – You will need access to a variety of financial documents including tax returns, and bank, investment, and retirement account balances and statements. You will also need to ascertain the cost basis of all your assets. This information can be used to calculate the after-tax value of these assets.
4. Check your credit rating – You can obtain your credit report free of charge from the three major credit reporting agencies. You should review the reports for errors and if you find any have them promptly corrected.
5. Begin building your post-divorce budget and personal net worth statement – In creating your budget, do not forget to add in the small expenses as they tend to add up quickly.
6. Determine how you will handle your healthcare benefits going forward – If you currently receive your healthcare benefits through your spouse’s plan, you will eventually need to arrange for separate healthcare coverage for yourself and possibly for your children. If you will need additional time to tend to this detail, consider extending your current health coverage via COBRA.
7. Review your insurance coverage – You will need to ensure that you and your assets are adequately protected once your divorce is final. For example, you will want to evaluate how you will cover potential disability and/or long term care expenses. Also, if you will be receiving alimony from your ex-spouse, you may want to purchase a policy on his/her life that will cover these payments in the event of his/her death.
8. Understand your retirement benefits – You should know the after-tax value of any traditional retirement accounts versus Roth IRA, Roth 401k, or any other after-tax assets in retirement accounts. If you are younger than age 59 ½ and you will need income from retirement accounts, there may be ways to avoid the 10% premature IRA distribution penalty. For example, a Qualified Domestic Relations Order (QDRO) distribution directly to you from your ex-spouse’s employer-sponsored retirement plan (like a 401k) generally avoids the 10% IRS penalty. Also, annual contributions (but usually not earnings) inside a Roth IRA can also be accessed without triggering tax and IRS penalties.
9. Review and update all your estate planning and related documents – You will probably want to update all your beneficiary designations (IRAs, life insurance, retirement plans through work, long-term care/disability insurance, annuities) as well as your executor/personal representative designations, power of attorney, and successor trustee designations.
As always, we are here to help you through this difficult process. We can also assist you in building a team of professional advisors. Please do not hesitate to contact us at any time if you have any questions about this article or would like to discuss your personal situation.