Financial Planning for Divorce

by Beverly Bird
A lawyer or financial planner can advise you on the tax ramifications of a settlement.

A lawyer or financial planner can advise you on the tax ramifications of a settlement.

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In addition to the emotional upheaval of divorce, parting ways with your spouse is probably going to turn your personal finances upside down. You can control the impact, however, with a little advance planning. Financial planning for divorce involves identifying what areas of your life are likely to change, then taking steps to adjust for them.

Save, Save, Save

Even if you don't hire an attorney to handle your divorce, the costs of professionals can add up. In order to equitably divide your marital property, you'll have to know how much your assets are worth. Setting values often involves hiring appraisers. You may need to hire experts for custody or vocational evaluations, such as if your spouse is making a claim for alimony, but you believe she's qualified to work and support herself. The more money you can save toward these expenses before you begin your divorce proceedings, the more protected you'll be because you can afford qualified advice and help.

Create a Realistic Budget

At some point, you're going to find yourself living alone, funding a household on one income instead of two. Even if you're receiving alimony or child support, you'll probably find that your budget is a lot tighter than it was when you were married. Take a hard look to see if there's anything you can live without. You might be paying for satellite TV service with 350 channels. Ask yourself how many of those channels you honestly watch. If there's nothing in your budget you can comfortably cut, you might have to consider earning more income, but talk with an attorney first. Earning more can increase your support obligation in some states. For example, Georgia includes overtime pay in support calculations, so you might not come out as much ahead as you anticipated.

Consider Income Taxes

Consider consulting with a tax professional. If you'll be receiving alimony, this is income to you, and you'll have to pay taxes on it when April rolls around. You might want to tweak your tax withholding so you don't get hit with a big tax bill; have your employer take out a little extra from each paycheck over the course of the year. If you're paying alimony, it's deductible to you, so you may pay less in taxes. This can warrant adjusting your withholding as well. Child support is tax neutral, so it won't affect you, whether you're paying it or receiving it on behalf of your children. But you'll still have to decide which parent is going to claim the children as dependents. If it's not you, you'll probably take a tax hit in this respect as well, so you might want to adjust for it ahead of time.

Don't Forget Capital Gains

Not all assets are created equal when it comes to capital gains tax. For example, if you retain the marital home, then sell it at a later point in time, a tax exemption applies that can protect much – if not all – of your profit. Other assets don't enjoy this advantage. If you eventually sell them for a profit, you'll have to pay capital gains tax, so the value of what you actually receive in the settlement may be a lot less than the asset's face value at the time of your divorce.

Look at Your Estate Plan

In many states, such as California, if you die before your divorce is final, the law treats your marriage as intact. Your spouse would be entitled to a share of your estate, even if you cut her out of your will in anticipation of your divorce. But you might be able to move certain assets into a trust during this time to safeguard them, assuming you've agreed that you – and not your spouse – will retain them in the divorce. If your spouse holds power of attorney for you, or if she is the beneficiary of certain assets, you may want to change these things as well. Don't simply take matters into your own hands, however. These laws can be tricky, so speak with a lawyer in your state to make sure you're within your rights.