A Guide to Financial Planning for Divorce

For most people, their wedding day is the first day of a marriage that will last a lifetime. Unfortunately, that isn’t always how marriage plays out, as roughly 30% of couples between people 20 years of age and older end up in divorce. When a marriage ends, it is often at great emotional and financial cost. Although the emotional toll of divorce is to be expected, the financial consequences might be higher and more complicated than some realize.

The cost of obtaining a divorce, for example, can be as much as $20,000 or more. These costs include hiring an attorney and complications involving finances. These complications are often associated with the divorce settlement. Various parts of the settlement can be costly and difficult for both parties to agree on. Although one’s financial responsibility regarding the settlement terms is often court-determined, it is important to understand what they are and what to consider when filing for a divorce.

Spousal Support

Spousal support, which is also known as alimony, is one of the most contentious parts of a divorce settlement. Alimony is the payment of a predetermined amount of money from one spouse to another. Its purpose is to help provide financial support following a divorce. The “breadwinner”, the spouse who earned more in the marriage, makes this payment to the partner who had a significantly lower income or no income. This type of support is separate from child support and can be court-ordered or based on a mutual agreement. There are also different types of spousal support, such as temporary alimony, transitional support, or permanent alimony.

Historically, traditional divorces saw men paying spousal support to wives who most often cared for children and the home and had no personal income. Receiving spousal support insured that she was not impoverished following a divorce. Today, most states award spousal support to either party, regardless of gender or sexual orientation.

The exact rules regarding spousal support depend on state laws, with some more strict than others. When filing for divorce, keep in mind that most states determine eligibility based on whether one has a financial need for spousal support. One’s ability to pay based on their gross income will also likely be taken into consideration.

Ideally, a couple should agree on the amount and length of the support arrangement. If they cannot agree, the judges, in most states, will use their discretion in determining what is a fair amount, although some states use a formula to calculate the amount.

Asset Division

The division of assets is a major part of divorce proceedings, particularly for people who have wealth or who’ve had a long marriage. Because of its financial and emotional importance, both parties should understand what their assets are and their value. Assets are anything that has real value. Cash, homes, cars, art, and furniture are all examples of assets that a couple may have. In order to divide the value of an asset, it has to be marital property. This means a couple will have purchased or earned the asset during the marriage and not before.

If a person purchased or earned an item before the marriage, it is separate property and not eligible for division in most cases. This is also true for gifts, inherited property, and personal injury awards. There are, however, exceptions to this.

When money that is earned during the marriage is used to repair, payoff, or maintain the property, then a part of the value of that item becomes marital property and, thus vulnerable to asset division. In general, commingling separate property during the marriage can turn a percentage of it into marital property.

There are differences in how some states divide assets. Many states apply equitable property division in which a judge divides the property in a way that they believe is fair according to the couple’s specific conditions. Equitable property division does not guarantee an equal division of property, however, as the judge must often consider certain factors outlined in guidelines that are set by the state.

In other states, such as California and Texas, assets are divided according to the community property rule that specifies any marital property is equally owned by each spouse. In these states, assets are divided 50/50.

Whether coming to a mutual or court-ordered agreement, people should hire an attorney to negotiate the division of assets or go through mediation. To prepare, one should create an honest list of their assets, determine what is marital property and what is separate property, and hire an appraiser to value every asset.

Child Support

Child support is more than a financial cost associated with divorce, it is an obligation. When a marriage has produced children, one parent typically receives primary custody. In cases like this, money is regularly paid by the non-custodial parent to help cover the needs of the child or children. This money is called child support. A child’s basic needs are generally defined as health insurance, food, shelter, and clothing. Even in cases of joint custody, in which a child spends an equal amount of time with both parents, one can still have an obligation to pay child support. The amount of child support each parent pays in both situations depends on the child support laws of that state. Courts may, in some instances, rule that neither parent needs to pay child support if custody is equally shared.

Factors that help determine child support in most states include the number of children, the parent’s incomes, and the number of nights that the child or children spend at each parent’s home. Each state also has a method that it uses to determine the percentage that a parent has to pay. These methods of calculation include the Income Shares Model or the Percentage of Income Model. The former assigns a percentage that each parent must pay based on their income and the time that a child is in their physical custody. Percentage of Income determines support by using a flat percentage of the non-custodial parent’s income. In some states, a combination of both methods is used.

Although child support is a necessity for the benefit of one’s children, there are circumstances that can make payment difficult. In the event of job loss or disability, one may ask the court for a modification to the arrangement. The custodial parent may also request a modification of the arrangement if they find themselves in need of more financial help, as children’s needs are constantly changing as they age.

Pension Valuation

With pensions, there are several factors to consider in order to determine if it is marital property and subject to division. The first factor to consider is the state’s law regarding the division of pensions as there are some differences in what the different states consider marital property and how it is valued and divided.

In most cases, pension benefits that are earned while a couple is married are marital property and, therefore, must be valued with a valuation date established. There are two types of pensions: defined contribution plans and defined benefit plans.

  • A defined contribution plan is a retirement plan in which an employee defers a part of their gross income from every paycheck. Most times, an employer will contribute by matching the amount. A 401K is an example of this type of plan.
  • A defined benefit plan is a plan that, based on the employee’s years of service and income, guarantees the employee an income for life. With this type of plan, the employer is responsible for investing and distributing the funds.

Of the two types of retirement, the defined contribution plan is the easiest value to calculate, as its value on any date is the sum market values of the account on that day. If a person’s contributions to the plan began prior to the marriage, that part may be sole or separate property. The appraiser’s job for this type of pension is to determine what part of the balance is considered individual property and what part is marital property.

A defined benefit plan pays an individual monthly following retirement for life. The present value of this plan is determined by an appraisal by an actuary. The present value determines how much of the present worth is set aside or invested so that it can be paid out in the future during retirement.

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