Divorce can be a complicated and challenging process in which
details are easily overlooked. Protecting your financial health
during this time is crucial, and no one should enter this process
without a trusted attorney (specializing in divorce) on his or her
side. Equally important is knowing the laws that shape divorce
proceedings, and the impact they can have on your assets.
Dividing the Assets
As a general rule, assets and property acquired during the
course of a marriage are divided when the spouses divorce. While
there may be exceptions for individual inheritances, gifts to an
individual spouse, and assets or property acquired before marriage,
the big difference among states is what formula might be followed
for the division. The state laws on this generally fall into one of
- Common law property states are those where the
judge may consider a wide range of circumstances before ordering a
division. Among the factors are each spouse's earning ability, the
length of the marriage, and how much each spouse contributed to
building household assets.
- Community property states are those in which
assets and property acquired during the marriage are divided more
or less equally.
Most states follow the common law principle. The exceptions are
Alaska (community property optional), Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas, Washington, and
Don't try to hide assets from the court, either by neglecting to
mention them or transferring them after the proceedings have begun.
This can trigger penalties and additional court actions.
Dealing With Debt
Divorce does not eliminate debt, it divides it between the two
spouses. But as with assets, practices differ.
- In a common law property
state, each divorcing partner generally gets
responsibility for the debts he or she incurred in individual
accounts. Debt in joint accounts -- or debt attached to
jointly-owned property -- is generally divided in the same way as
the marital assets.
- In a community property state, debt -- like
your assets -- is typically split down the middle, without regard
to whether the debt had belonged to a joint account or to an
individual account held by either spouse.
One important trap to avoid is maintaining joint accounts after
the divorce. Your spouse could continue running up expenses and
leave you with the debt. As soon as the divorce is finalized,
freeze all joint accounts and have your creditors reclassify them
as individual accounts. Most creditors will do this at your
request, though they are not legally required to do so. To protect
your credit rating, make sure to keep up with monthly payments.
If you and your spouse own a home that has appreciated in value,
you may want to sell it before the divorce is finalized. Federal
tax rules offer an exclusion of up to $500,000 in realized capital
gains for married taxpayers. This amount is cut in half for single
filers. Be sure to consult a tax advisor for additional information
about these rules.
Money in either spouse's 401(k) or pension plan may legally be
divided during a divorce. To claim a share of a spouse's 401(k) or
pension plan benefit, you need to obtain a court order called a
Qualified Domestic Relations Order (QDRO) and provide it to your
spouse's plan sponsor before distributions are completed to your
If you do receive a share of a spouse's 401(k) assets or pension
plan benefit, it may be best to roll over your share immediately
into an individual retirement account (IRA) to avoid taxes and
maintain tax deferral. You should discuss this with your attorney
or a financial advisor familiar with divorce proceedings as soon as
you anticipate a divorce.
Be sure to review your will or, if you don't have one, draw one
up. You should consult an attorney familiar with your state's
estate laws to ensure that your assets are properly distributed. Do
not wait until the divorce is final. You should review and amend
your estate plan at the same time you decide to commence a divorce
proceeding. Also make sure to review beneficiary designations for
pensions, 401(k)s, and life insurance policies. Federal law
requires a spouse to be the sole beneficiary of pension or 401(k)
benefits unless that right is waived in writing by the spouse.
If you find yourself faced with divorce, it is essential to
protect your financial future. Enlisting the help of an attorney
and carefully monitoring the process can ensure that your interests
are considered and that you won't need to revisit the proceeding