It is often one of the hardest decisions a person will ever make: whether or not to divorce your spouse.
While it might feel secondary to the issue of why you are debating divorce in the first place, it is crucial to understand the impact a divorce will have on your financial standing, particularly if you are a parent.
There are three financial areas you need a clear understanding of prior to embarking on a divorce:
· Income/debt
· Current monthly expenses
· Anticipated future expenses
You must be fully aware of your and your spouse’s income and current expenses, and be able to look ahead to potential, future plans and expenses for the children. You need to understand the financial position you will be in if you divorce, and also, empower yourself to make certain you get the best financial arrangement possible.
All of this will inform how assets are divided and how child support is handled.
Income: Knowing your and your spouse’s income is very important. This includes wages, anticipated bonuses, legal agreements or arrangements if your spouse is involved in a partnership, for example, and any trust fund/family money that might be relevant, among many other things.
A thorough review of your family’s most recent tax return will be a good place to start if you do not have a clear understanding of your family’s financial picture. Having access to retirement accounts, 529 education savings accounts or other investments is also important, as these will become a part of the settlement process.
If you are not familiar with these documents because your spouse has always “handled the money,” (unless you are in a situation in which you feel yours or your children’s safety might be at risk) it might be prudent to hold on asking for a divorce until you have had a chance to access and then understand the financial documents. After you ask for a divorce your spouse might make it harder for you to access the information.
Debt: This would include the mortgage, any outstanding loans including student loans or car loans, and outstanding credit card debt. One way to get a full accounting of debt is to run a credit report.
Current monthly expenses: Make a list. You ultimately will need a full accounting of your and your children’s monthly expenses. A complete understanding will help inform the payor parent during negotiations of how much child support is affordable and inform the payee parent of how much child support is necessary to support the child(ren) without disrupting their lifestyle.
Don’t forget items such as child care while a parent works, medical/health/therapeutic/dental/orthodontic expenses, educational expenses which can include private schools, tutoring, college expenses, as well as a 529 account, extracurricular activity expenses and health insurance. All should be itemized and considered separately as they may be classified as “add-on” expenses.
It will also be important to start to think about where you will live with your children and whether or not you should be staying in the family home. There may be capital gains ramifications later in a sale and brokers fees that the parent residing in the marital residence will be responsible to pay if that parent decides to buy out the other parent’s interest in the marital residence. There will also be expenses that go along with living in any home that should be considered.
Anticipated future expenses: Make another list. This one should include anticipated educational expenses including private school and college, extracurricular activity expenses including the costs of uniforms, travel to events, concerts, etc., as well as required contributions to any education-related savings accounts and management of trusts that might be set up for the children.
It is also important to know that custody will impact child support. Keep in mind that if both parents have 50/50 access — meaning an equal division of overnights with the children — this may decrease child support paid by the payor and decrease support to be received by the payee. Additionally, with a 50/50 schedule, the parent who earns more will likely be paying support to the parent with the lesser income. If one parent has more than 50% of access, that parent will usually be the payee with respect to child support.
And, unless agreed upon otherwise, child support ends at 21 years of age, even if the child is still in college. It is important to remember to ask for a room and board credit for the college years if you are the payor, as otherwise, you are paying twice—once for room and board, twice when you pay the child support and your child is living at college. Parents must understand if there are 529 accounts to pay for college and calculate how much you need to pay for college for your children. (The Court has the authority to order a parent to pay college expenses.)
Of course, there are so many things to consider when debating a divorce, and your finances might pale in comparison to some of the more emotional issues you are working through. Try to take a breath, and then take your time getting a good sense of your true financial picture before taking the next step.
Get professional guidance from divorce financial analyst and matrimonial attorney if you need it. After all is said and done, you will be happy you did.