There are two key things that divorcing couples should do prior to meeting with their insurance or financial advisor:
List assets and liabilities: This should include real estate and personal property; checking, savings and investment accounts; retirement and pension plans; and life insurance. On the liability side, there are the mortgage, car and school loans; and home equity and credit card balances.
Develop a budget: Income will be stretched to the limit because there are going to be two households instead of one. The budget should include normal living and household expenses; anticipated educational and business expenses; tax obligations; car and home mortgage payments; medical and dental costs; childcare and insurance premiums. There needs to be a firm understanding as to what is required of each spouse.
A trust may be appropriate to meet the educational needs of any children. This may include a written agreement regarding future contributions to this account to properly prepare for the increasing costs of tuition.
Divorced couples also need to look into the cash flow and tax implications for splitting assets. At first glance, a $100,000 savings account and a $100,000 traditional IRA may appear to have the same value. However, a spouse with custody of the children might have more everyday expenses and need greater access to cash than the non-custodial spouse. Generally, the IRA can’t be tapped until age 59 ½ without penalty. In the meantime, unlike a savings or investment account, proceeds are tax deferred. The vested portion of existing retirement plans should also be considered.
Military spouses who divorce should be aware of the Uniformed Services Former Spouse Protection Act, which recognizes the contributions that former spouses made to support the service member’s career and entitles the former spouse to a portion of the retirement pay. More information can be accessed at www.dfas.mil.