Divorce can be one of the most difficult experiences, emotionally and financially, that New Hampshire married couples might go through in their lifetimes.
In a divorce settlement, it is common for both parties to focus on immediate financial concerns. Yet it is the long-term financial consequences that frequently are more problematic. Here are some of the most common financial concerns that separating couples need to address.
The spouse who will have custody of the children typically wants to keep the family home. While this may be desirable emotionally, it can place a large financial burden on that spouse. A home is an illiquid asset that costs money to obtain and maintain. The parent with the children might not have the income to take care of both the home and the children (even with child support), particularly if they give up other resources in return for the house. It might be better to sell the home, purchase a less expensive residence, and split the balance.
It is not wise to assume that assets valued the same today are actually "equal." The family home is a good example of the "dividing things down the middle." Frequently one person takes the house and the other keeps the pension and retirement account. Say both are valued at $400,000. The home is a cost-burden, while the retirement account is a liquid asset that can continue to grow tax deferred, probably at a faster growth rate than the home.
Like everything else in life, you cannot forget about the tax implications. Say it is proposed that one spouse keeps $150,000 in a taxable individual retirement account, and the other keeps a $150,000 in a taxable investment account. The owners of the IRA will have to pay taxes on the money when it's withdrawn at ordinary income rates, while the other pays at capital gains tax rates on the investment gains as the assets are sold. Most times the owner of the IRA will pay more in tax.
A spouse who will be receiving part of his or her spouse's qualified retirement accounts will need a court order called a Qualified Domestic Relations Order (QDRO). To avoid mistakes here, make certain the attorney is aware of all retirement accounts and examine each plan for their rules regarding QDROs. Have the QDRO pre-approved by the plan before the settlement is final. It is recommended that you start early with the approval process.
Your ability to collect alimony and child support is only as good as your spouse's ability to pay. Discuss with your attorney incorporating in the divorce decree the requirement for your ex-spouse to obtain disability and life insurance policies to insure the value of these financial needs. If you are the person for whom the insurance is obtained, decide if you should be either the owner or irrevocable beneficiary of the policy.
Consider if agreeing to a termination date for spousal support or alimony is appropriate, if the law does not require it. Discuss this matter with your attorney, as well as incorporating wording in your divorce decree that states this issue has to be revisited in court before payments can stop.
Finally, include your financial planner and accountant in the discussions as well as your attorney. That way long-range ramifications can be thoroughly thought through and discussed before the divorce is final. Having a well-crafted divorce decree that is fair to both parties will help with post-divorce financial planning.
Marc A. Hebert, M.S., CFP, is a senior member of the wealth management and financial planning firm The Harbor Group of Bedford and is the firm's president. Email questions to firstname.lastname@example.org. Your question and his response may appear in a future column.
Source: Divorce Money