Divorce and your finances

Quick answer: If you’re facing divorce, take stock of your own finances, find all the important documents you may need, and start planning how to continue your financial life as a single person.

Going through a divorce can be one of life’s most painful experiences. In addition to the emotional stress, you have to make your way through the process of undoing the many financial connections you and your spouse have created over the years.

If you’re facing divorce, you may want to consider these steps and discuss your situation with your financial and legal advisors:

Taking stock of your finances

Instructions: Click each item to learn more.

Decide mediation vs. litigation

Consider mediation versus litigation, if possible. Litigation can be expensive. If you and your spouse want to limit the cost, consider discussing your situation with a mediator. To find one in your community, visit the Association for Conflict Resolution at acrnet.org.

Gather key documents

Gather key tax, investment, and financial documents. Be sure you have your own copies and can easily access all important records. Important documents include:

  • Tax returns
  • Bank, mortgage and investment account statements
  • Pension and retirement account statements, such as 401k or IRA information
  • Insurance and beneficiary information
  • Prenuptial agreement

Know the cost basis of all your assets. As you gather your financial information, it will be important to know the cost bases for all your assets as well as fair market value so you can calculate after-tax values of your assets.

Check your credit report

Request a copy of your credit report, which you can get free of charge at annualcreditreport.com. Review it for accuracy and work to correct any errors.

Estimate post-divorce budget

Create an individual budget (including projected income and expenses) along with a net worth statement (personal balance sheet). Factor in smaller expenses such as extra transportation for shuttling children between parents or extended day care costs. Also, take into consideration any maintenance or cleaning expenses that were normally performed by the soon to be ex-spouse. Your financial advisor can provide you a worksheet to assist in compiling your budget.

Develop a plan for health care benefits

If you are currently covered on your spouse’s health care plan, you’ll need to arrange for your individual coverage. If this will take some time, consider extending current coverage via COBRA to give yourself a time cushion. Don’t overlook dental or vision coverage for children or other dependents, and be sure to incorporate those additional costs in your individual budget.

Review insurance coverage

Be sure you and your assets will be adequately protected after the divorce is completed. If you will receive alimony, consider purchasing a life insurance policy on your ex-spouse in case of his or her death. Specifically, develop a framework to cover potential disability and long-term care expenses you may incur as a single person.

Understand your retirement benefits

Be sure you know the after-tax value of traditional (after-tax) retirement accounts as well as Roth IRA, Roth 401(k) or any other after-tax assets in retirement accounts.

  • If you are younger than age 59½ and need income from retirement accounts, discuss with your tax advisor ways to potentially avoid the 10% premature distribution penalty. For example, a Qualified Domestic Relations Order (QDRO) distribution directly to you from your ex-spouse’s employer-sponsored qualified retirement plan, such as a 401(k) (but not IRA), may avoid the IRS penalty. Annual contributions (but seldom earnings) inside a Roth IRA may be accessed without tax and IRS penalties (and only under certain circumstances).
  • If you want your ex-spouse to remain a beneficiary, some accounts may require you to file a new beneficiary designation form after the divorce, even though he or she may already be named as a beneficiary.

Review and update estate planning documents

  • Remove your ex-spouse as beneficiary, executor, personal representative, successor trustee, or agent under healthcare and property powers of attorney (as appropriate).
  • Update your will. If you have minor children, consider leaving any assets in a trust for the children; you may want to name someone other than your ex-spouse as trustee.
  • Thoroughly review both primary and contingent beneficiary designations; don’t overlook less common items such as:
    • Disability insurance
    • Long-term care insurance
    • Company benefits
  • If you know your ex-spouse’s estate plan, discuss it with your attorney to determine whether it may affect how you want your plan to work.

Watch for stress

If you or your children are having difficulty coping with the divorce, intervene quickly and consider talking with a qualified counselor or spiritual advisor.