By: Investor Solutions, Inc.
Let’s Talk Money
In my last article we discussed some initial steps that divorcing couples should do to organize their financial information. We also explored the two ways that married couples own property in community property or common law states. This piece will review divorce issues as they relate children, alimony, and credit.
Divorce and Children
When children are involved in a divorce, it can often be the most difficult and contentious component of the process. As with the rest of the divorce process, there are business and emotional challenges that all parties will face. Once the custody and residential arrangements have been determined for the children (no small feat in some cases), the next step is to determine the appropriate child support. The child support decisions that are made during and after divorce will dictate your children’s future. It is always wise consult an attorney or legal advisor before accepting a final amount.
The fair amount of child support that a parent should pay is determined by individual state guidelines. Child support payments are based on the needs of the child, the number of children who must be supported, and the ability of the parent to pay. Each parent-s income is figured into the equation for determining support and both parents have an obligation to financially support their children. Before granting a divorce, the judge must be satisfied that appropriate financial arrangements have been made.
There is no tax impact with regard to child support payments. The paying party is not entitled to a deduction and the receiving party does not claim it as income on their taxes. However, there are tax considerations, such as which parent gets to claim the child as a dependent on his or her tax return. It is best to seek advice from a qualified accountant to determine how these tax issues are ironed out.
If there are children involved, their well-being should be both parents’ primary concern. Unfortunately many divorcing or divorced couples often use their children as weapons against each other. If child support is part of your divorce agreement, you are legally and morally obligated to pay it. Sadly, only half of all court-ordered child support is paid, and only half of that is paid in full.
Traditionally, spousal support (also called alimony) was awarded to the wife and paid by the husband after a divorce. However, in recent years, as more and more women enter the workforce and provide substantial financial support to the household, the roles are reversed. Today, alimony is awarded to either spouse in an effort to maintain the standard of living that both parties were accustomed to during the marriage.
There are several methods to pay alimony:
- Permanent: alimony is regularly paid (typically weekly or monthly) until either the death of the payer or the remarriage or possibly the cohabitation of the recipient. Because alimony ceases at death, it is a good idea to include a life and disability insurance policies in an amount sufficient to replace the alimony.
- Lump sum: this type of alimony is one payment of alimony instead of periodic payments.
- Temporary: alimony lasts for a specific period of time, typically one to two years. This is usually awarded when the persons are on almost equal ground but due one party may need financial assistance in order to get on their feet.
- Rehabilitative: this type of alimony is the most commonly awarded alimony. It is awarded in a situation where the recipient is younger, or able to eventually enter or return to the workforce and become financially self supporting.
There are a number of criteria for determining the need for alimony and the amount of alimony varies state by state and outlined in their statutes. Some of the key factors usually considered include:
- Length of the marriage. The longer the marriage, the more likely one is to get spousal maintenance, although in shorter term marriages there are still possibilities for a spouse to be awarded spousal maintenance.
- All sources of income available to either party.
- The contribution of each party to the marriage, including, but not limited to, services rendered in homemaking, child care, education, and career building of the other party.
- The age and the physical and emotional condition of each party.
- The standard of living established during the marriage.
Alimony, whether paid in lump some or periodically is taxable to the recipient, while alimony payments may be deductible by the spouse who pays it. It is always advisable to consult a tax professional regarding any tax implications and to reiterate, it is always wise consult a legal advisor before accepting a final settlement.
Credit Related Issues
One of areas that are usually negatively impacted by divorce is the couple-s credit. Oftentimes fighting couples stop paying jointly owned bills during the divorce or separation process. The aftermath of this decision can haunt each spouse for several years in terms of the credit scores. There is a better way to handle this.
Many professionals specializing in divorce would recommend that each couple obtain a copy of their credit report before the divorce begins. This will help the couple assess what debts (mortgages, car notes, credit cards, etc) the couple has jointly and separately. Furthermore, it will allow each couple the ability to compare their score and any erroneous reporting before and after the divorce. There are three major credit reporting agencies: Experian, TransUnion and Equifax all of which have websites where you can access your information for a fee.
Because divorce can be lengthy process, some taking several years, it would behoove both parties to close all joint accounts (both credit and bank accounts). If your spouse will not cooperate, some experts recommend reporting the card lost or stolen to force the closing of the account. By law, a creditor cannot close a joint account because of a change in marital status, but can do so at the request of either spouse. Understand that you will still responsible for paying off the debt of any closed credit accounts.
Some advisors recommend that the couple open a designated account, for example an escrow account to jointly pay any joint debts during the legal process. Finally, each of the parties should consider establishing individual credit, investment and bank account before the divorce is final. Any spouse who has not actively participated in the financial management of the household is encouraged to learn before the divorce.
Post Divorce Task List
Once the divorced is finalized, there are still a number of items that should not be overlooked.
- Be sure to close any unused credit accounts and notify your creditors of your change in marital status.
- Change the names on house deeds, investment accounts, memberships, boat titles and car titles.
- Update the beneficiaries on investments, pensions, retirement plans, life insurance policies, and savings accounts as needed.
- Revise your estate planning, including your wills and trusts (if any)
- Check your credit report to make sure your spouse has not incurred debts in
your name since your divorce or separation.
If you’ve recently been through a divorce – or are contemplating one – you may want to look closely at the aforementioned issues. There is no doubt that divorce can be emotionally and financially devastating to one or both parties. But with the proper education and precaution, you can probably reduce the negative impact on yourself and your kids. The assistance of an objective third party, such as a divorce mediator may also smooth out the process for an amicable ending. Either way, being informed of your rights, obligations and alternatives goes a long way. For more information on divorce check out these neat websites: http://www.divorcenet.com/ and http://www.divorceinteractive.com/divorceresource-library.asp