Financial Surprises Facing Women in Divorce
Divorce is one of the most detrimental impacts to your financial well-being besides being emotionally, mentally, and physically draining. At a time when you are least capable of making life-changing financial decisions, you are required to make not just short-term decisions but decisions that have long-term consequences.
All those going through divorce face these challenges. Unfortunately, many women are most unprepared in relation to men and have higher rates of financial instability in retirement as a result. Women suffer from unanticipated financial consequences post-divorce and many of these could have and should have been resolved or eliminated through long-term planning, negotiations, and agreements.
In a recent study, almost 2,000 women who were going through or had just completed divorce said they had experienced one of the following financial surprises as a result of their divorce:
Underestimating the Cost of Home Ownership
Typically, in most situations, the marital home will either have to be sold or bought out by one spouse. While there are some arrangements that delay the sale and the mortgage payment can be applied toward support, home buyouts are more complex than they initially appear.
While it appears on the surface that being able to afford the mortgage and taxes qualifies one to afford the marital home, there are many unintended consequences of home ownership exacerbating the costs involved.
Continued and preventative repairs and maintenance, replacement appliances, major repairs, lawncare, dealing with pests, replacement windows, roof and hot water heaters, and a bevy of other concerns could significantly increase the costs in both the short and long-term. When you are spending too great a percentage of the budget on the marital home, you may not have enough to put aside for an emergency fund, children’s college tuition, or your own retirement needs. Sociologists call this scenario being house poor.
Finally, upon the future sale of the home, there may be taxes on the realized capital gains both federal and state along with commissions and closing costs that average 5-7 percent of the sales price. This reduces the ultimate proceeds that you will receive from the house and further impacts future financial security.
In addition to the expenses related to the home itself, the division of assets typically requires a buyout or trading of one asset for another to buy the other spouse out of the shared equity in the home. This can result in giving up invaluable retirement assets for an illiquid home and cause further concerns in the future.
Not being Aware of the Household Debt
Oftentimes, the woman cedes responsibility for the family’s finances to her husband because there is division of tasks and responsibilities.
Sometimes, only in divorce does she realize the amount of debt that they have accrued. Debt comes in many forms from the mortgage and HELOCs against the equity in the home, car loans and leases, overdue IRS tax payments, credit card debts, student loans, private loans, loans taken against the 401K/403B plans, and other loans.
It is important to understand that marital debt is typically shared by the community in most states and creditors may be able to try to secure payment from you if they cannot get satisfaction from your ex-spouse.
During divorce, it is highly recommended for many circumstances, that, if feasible, to pay down the debt before the divorce is finalized to avoid further complexities with unwinding the debt and incurring risks to your credit rating if one spouse does not or cannot follow through on the stipulations for payment of debt outlined in the marital settlement agreement post-divorce. This may also mean that you will need to expend money to enforce the agreement post-divorce further contributing to expenses and possibly more debt.
There will also be debt incurred for costs incurred during the divorce process and this amount is often underestimated even in the least complex divorces. These expenses run the gamut of mediators, attorneys, but court psychologists, vocational evaluators, medical examiners, mental health professionals, co-parenting coaches, financial analysists, etc.
In the end, preservation of the marital assets is key, but debt incurred during the marriage needs to be identified and managed prior to the final judgment.
The cost of health insurance
Because many employees receive health insurance from their employers, there is usually sticker shock when the spouse without insurance needs to secure individual coverage from the Healthcare Marketplace. The cost usually far exceeds most employer charges for group insurance plans regardless of the type of plans. This makes healthcare insurance a prime topic of discussion when deciding upon division of assets and support before signing any agreements.
While there are PPOs and HMOs, there are also many plans in each of those categories from which to choose. Wisely choosing a plan that covers as much as might be needed and is affordable takes time and analysis.
Also, your current providers may not be affiliated with certain types of plans so if you would prefer to stay with the same providers, you need to confirm that they participate in the plans you are considering.
Tax and Other Implications of Investments
Not all securities and investment assets are comparable. They may be less liquid, riskier, have stronger growth prospects, have different levels of taxation, or provide more stable income. It is critical to understand the type of investments that there are and the nature of their characteristics before agreeing to any division, offsets, or trades.
When assessing the tax status two important categories of investments are retirement accounts and non-retirement accounts. Certain types of retirement accounts will be taxed upon withdrawal and therefore, that taxation should be considered when trading a retirement account for another asset such as using it to offset something else desired in the division of assets or divorce negotiation.
Unless divided in half, according to number of units or shares, if assets are divided by valuation the unrealized tax impact of the valuation should be considered. Some assets will be taxed at ordinary income tax rates and others at the capital gains tax rate (plus potentially the net investment income tax). The tax rate that will be applied may significantly impact the net value of the security or asset. You must take into consideration the tax rate, holding period, and cost basis if not dividing by shares/units equally.
Even real properties, not just securities, are fraught with hidden tax implications. For example, investment rental properties have typically incurred accumulated depreciation which is recaptured upon future sale.
Moreover, your own individual risk tolerance, financial needs, cash flow and prospects for future financial security should be considered when deciding on the division of assets during the settlement process.
During and Post-Divorce Budget
Divorce costs are high and your budget will be stretched during the process. But afterwards, too, you will need to readjust your spending to align with the reality of a different income whether you are paying support, receiving support or neither since you will no longer be in the same income situation as before the divorce.
Divorce usually entails higher costs such as property and casualty insurances, as described above, and healthcare insurance. Similarly, where there may have been two incomes supporting housing costs, there will only be one in most cases, necessitating a re-evaluation of your housing situation. And your tax rate is higher for single filers than married, compounded by the fact that certain deductions may no longer be applicable on your taxes. Depending upon child custody and the related tax credits, this may be a lost deduction if not negotiated during your settlement process.
It is important to create a new household budget. Start by creating a monthly spending plan that takes into consideration all of the non-discretionary expenditures such as housing, utilities, internet, cell phone, support to be paid out, etc. Then assess the discretionary expenses and pare back where possible.
Evaluate your income and make a plan for supplementing the income if applicable and possible, or acquiring skills to secure a higher paying job to meet any expenses not covered by the current cash inflow into the household through wages and/or child and spousal support.
Hopefully, you will be better prepared and not surprised during your divorce process as you are now armed with information and tools to ensure your financial security and well-being post-divorce.
This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.
