FAMILY - SURVIVING A DIVORCE
 
 

Divorce is never pleasant, but if you have the right information, the split can at least be as amicable and fair as possible under difficult circumstances. While it’s hard to separate the financial and emotional elements of divorce, the more both parties are able to view the financial settlement with cool heads, the better and fairer the final divorce agreement will be.

Current Attitudes Toward Divorce

Attitudes toward divorce – and expectations of settlements – are important factors to consider. Currently, most divorces are negotiated without regard to “fault” or marital conduct. Property settlements are made on the grounds of fairness and need, without reference to moral judgments. The result is that the rationale behind property settlements is changing, which, in turn, means that the types of settlements negotiated are also changing.

Alimony

The original purpose of alimony was to enforce the husband’s obligation to continue to support his wife, for whom employment opportunities were practically nonexistent. The awarding of alimony is within the discretion of the court at a divorce trial, and it is generally awarded only in situations where the divorced spouse cannot support him- or herself or where there are not presently sufficient marital assets to support both spouses.

Divorced spouses who are disabled or caring for dependents are often awarded some form of alimony, but this more and more often takes the form of temporary or rehabilitative support while the spouse acquires job skills. The court expects most divorced spouses who are of working age to find their way to gainful employment.

Distribution of assets

Alimony is being increasingly replaced by distribution of marital assets. The most common form is called equitable distribution, although a few states use community property to determine division. Equitable distribution does not mean equal distribution. The determination of claim to ownership is made by a number of criteria.

Basically, community property attempts to divide all marital property between the divorcing spouses, whereas equitable distribution weighs each partner’s contributions to the marriage, including nonfinancial considerations, to determine a fair claim.

Many divorce settlements achieve some balance between maintenance and asset division. A spouse who receives a large property settlement, even when he or she is over 50 and has never worked outside the house, can expect to have his or her alimony substantially decreased or eliminated from the settlement. In effect, property is traded for income.

Divorce Alternatives

If you are going to divorce, you need to consider the cost of the divorce process itself. Some people do not realize the range of legal fees and related expenses, including such costly minutiae as fees to property appraisers and accountants that may be incurred during divorce proceedings. Depending on the location and size of the firm, legal fees generally range from $100 to $400 an hour. Such fees add up. In New York, for instance, the costs for one affluent party of a contested divorce can easily run to $100,000 or more! Indeed, if separating couples realized the true cost of a contested divorce, they might be more willing to sit down and attempt some sort of negotiated settlement on their own.

Before a final agreement is signed, each party should hire a lawyer who specializes in matrimonial law to review the proposed settlement. Moreover, if your attorney has little tax expertise, you are probably well advised to hire a separate lawyer or accountant to review the divorce’s tax ramifications.

If, after considering the daunting costs, you and your spouse can agree to negotiate a less costly solution – both financially and emotionally – so much the better.

Although lawyers should be hired to review the final agreement, alternative professional help is available to mediate an agreeable settlement at a fraction of the legal eagles’ cost.

Mediation

The most common alternative is a professional divorce mediator. While mediation is not recommended for hostile couples, it can help nonadversarial couples come to realistic and reasonable terms. Often, it helps both sides to understand and accept the finality of the divorce more easily than they might accept an extensively litigated decision imposed on them by the court.

Do-It-Yourself Divorce

Another alternative to litigation is doing it yourselves. Amenable couples with no dependent children can, in many states, negotiate their own settlement and file for divorce themselves. Remember, if you choose this route, consult with a lawyer before filing the final agreement so that nothing egregious will be overlooked.

Update Insurance Coverage

The status of your insurance policies and future coverage will need to be addressed in your final divorce settlement. Notify your insurer of your change in marital status. Where appropriate, you should also transfer title and ownership of property, especially on vehicles and real estate.

Life Insurance

Without further spousal maintenance, you may wish to change the beneficiary designation on your existing insurance policies. In cases where life insurance replaces alimony for the recipient spouse after the payor’s death, the recipient spouse should insist on a clause in the agreement giving him or her authority to obtain information periodically from the insurance company.

Health and Medical Insurance

Divorcing couples need to assure that they are adequately and continuously covered by health and medical insurance. The obligation to provide health insurance coverage is often included in the separation agreement. If one ex-spouse is fully insured under Social Security, the other is entitled to Medicare at age 65 as long as the ex-spouse is also age 65 or over (even if he or she is still working) or is dead. An ex-spouse is entitled to full Social Security disability if the other spouse is eligible.

Borrowing and Credit

Credit may be a new and critical issue as a result of your changed marital status. You may have to establish credit on the basis of your changed financial position, but in most instances your rating cannot legally be affected by your marital status. If, however, your credit was based in any way on your ex-spouse’s income, you may not have the borrowing capacity you
once enjoyed. A divorcee applying for credit individually can cite as proof of creditworthiness the credit history of accounts carried in the name of the ex-spouse, if both spouses used them. On the other hand, a divorced person may also have to give reasons why a bad joint credit history does not reflect on personal ability or willingness to pay.

Credit Rights

If you receive alimony, you need not reveal that fact to a creditor unless you wish to use it to demonstrate your creditworthiness. If you do include alimony as part of your income on your credit application, however, the lender is entitled to examine whether your ex-spouse can be depended upon to make regular payments. The creditor might conclude that your ex-spouse is a poor credit risk, in which case alimony could be legally discounted as income, which would be detrimental to your application. Unless the lenders can prove that your ex-spouse is a poor risk, however, they cannot automatically discount alimony.

Notify the Credit Bureau

You should notify the credit bureau of both you’re and your ex-spouse’s new addresses and specify that those accounts should henceforth be reported separately. Otherwise transactions may be reported on the wrong spouse’s account, and the records can get tangled, especially if one of the two remarries. Occasionally, one or both spouses will have credit problems during the separation period preceding the final divorce period, especially if the marital assets are frozen to negotiate the settlement. In this situation, the credit bureau and lenders should be informed of the circumstances. Lenders may be more lenient in restoring the credit ratings of the parties to a divorce once the situation stabilizes.

Tax Consequences

The emphasis in most contemporary divorces on property division, income division, or alimony still exists, especially in cases where there are insufficient assets to support both households. For some couples there are significant tax advantages to using ongoing support in structuring a settlement. For others, a lump sum settlement is more advantageous. While the tax implications of your divorce may be the farthest thing from your mind as you undergo the stressful divorce experience, it is important that you understand the various alternatives available to you and your spouse.

Adjusting to Your Changed Financial Status

Divorce almost always results in at least a temporary decrease in the standard of living for both spouses. The income and assets that once supported one household must now support two. The earlier you plan for this situation, the better you will be able to cope. You should prepare budgets and revise your financial objectives to account for your changed financial status. Careful advance planning will also help make the divorce settlement as fair as possible.

Changes in Estate Planning

Divorcing spouses should each ask an attorney to review and revise basic estate-planning documents to account for the new marital status. Most states will not allow couples who are in the process of divorcing but are still legally married to completely disinherit the spouse. During the period of separation preceding a divorce, you may wish to reduce your spouse’s bequest to the minimum amount required by law. When the divorce is finalized, you will probably need to redraft the will as well as other estate-planning documents to change beneficiaries and trustees, at least. Pay careful attention to guardianship arrangements for children.

A number of estate and gift tax opportunities and pitfalls may arise as a result of a divorce. Certain trusts can protect a former spouse who is financially inexperienced and can protect the children’s inheritance in the event that the former spouse remarries and subsequently divorces. As in all estate-planning matters, expert legal and tax counsel is essential.

Be Reasonable, Be Fair

A reasonable financial settlement takes projected income and assets into account. The division should provide for necessary and foreseeable expenditures, including the costs of medical care. For older couples undergoing divorce, the allocation of pension and retirement-plan benefits, which are considered marital property, is obviously a most important issue. If the value of these retirement vehicles is not divided on an equal basis, you should make sure that you are otherwise compensated in your divorce settlement. Above all, if you are going through a divorce, be reasonable, be fair.