How to financially plan for divorce: 6 tips for protecting yourself financially in a divorce

Here are the key financial considerations and actions to take if you’re going through a divorce.

In this article:

• Pre-divorce financial checklist
• During and post-divorce financial checklist
• Review your insurance policies and beneficiaries
• Housing after divorce
• Spousal or child support payments
• Tax considerations

Pre-divorce financial checklist

Before you officially file for divorce, be prepared for the process. Consider the following:

• Compile monthly bank statements. You should also make copies for your attorney.
• Locate all tax returns. Be sure to locate and make copies of returns, whether they were filed jointly or separately.
• Check tax payments. Make sure all taxes have been paid to date.
• Visit safe-deposit boxes. Determine if any shared contents should be separated.
• Avoid large purchases. These may cause financial complications during the divorce process.
• Don't move out of your home (yet). Consult your attorney prior to changing locations.
• Share documents with your attorney. Don’t sign anything prior to divorce. 
• Obtain a full credit report. Request a credit report to ensure there a no surprises or errors. The three reporting agencies — Equifax, Experian and TransUnion — provide a free report every 12 months. 
• Protect your credit score. Keep your credit score strong in case you need to rent or buy a new home, a new car or take out any loans.
• Update your budget. Review and update your budget — or create a new one — to account for changes in income, lifestyle and new or additional financial obligations.

During and post-divorce financial checklist

Debts and financial accounts

• Divide shared debt. While different states have different rules for couples dividing their shared debts after a divorce, your debt will usually fall into one of two categories: individual or joint debt.
  • Joint debt refers to debt you’ve taken on together during your marriage, like a mortgage on a house, and will often be divided between both spouses.
  • Individual debt refers to debt you’ve accrued on your own, like a credit card debt.
  • If needed, an attorney can recommend how any debts should be divided.
• Joint bank and investment accounts. If you only have joint bank or investment accounts with your spouse, you’ll want to set up your own individual account(s). If you have automatic payments set up with your joint banking accounts, remember to make the necessary adjustments to avoid missed or late payments.
• Retirement accounts. If the divorce decree allocates assets from an IRA or 401(k), it’s important to understand your options and how the assets will be taxed based on what you do with the funds. Before you access these funds, consult with your financial advisor and tax professional to understand your options and the tax implications.
  • If you receive assets from a 401(k) under the terms of a Qualified Domestic Relations Order (QDRO), the distribution will not be subject to a premature penalty tax of 10% even if you are under 59 1/2. The distribution will likely be subject to income tax unless you rollover to a qualified retirement account. 
  • IRA assets are addressed in the divorce decree rather than a QDRO, so the exception to the 10% penalty for a premature distribution doesn’t apply. You’ll also likely be subject to income tax on the withdrawal amount unless you roll over the funds into a qualified retirement account. 

Review your insurance policies, wills and beneficiaries

• Health insurance. In many cases, one spouse will participate in a group health insurance plan through their job that provides coverage for both spouses and their children. 
  
  In the event of a divorce, coverage for the nonemployee spouse will typically end, unless the divorce decree requires continuation of coverage. If your current health insurance plan does not have this coverage available, you or your spouse may be eligible to receive temporary protection from the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA is typically a more expensive option, but it enables the recipient to extend their previous health insurance coverage for up to 36 months.
  
  If COBRA is not feasible and you or your former spouse cannot get health insurance coverage through an employer, it is possible to obtain private insurance coverage through the Affordable Care Act. 
• Disability income insurance policy. Planning for disability insurance should be completed before the divorce is final. Unlike life insurance, you can't own a disability policy on someone else. So, the divorce decree may require that your ex-spouse pay the premiums on a policy and that you regularly receive proof that the policy is in force. If your ex-spouse is disabled and cannot work, they will receive monthly benefits that may enable them to pay the same amount of alimony and child support.
• Homeowners insurance or auto insurance. If you and your spouse have homeowners or auto insurance policies in both of your names, your policies must be updated to reflect the proper owner as the insured. This would likely be whoever is staying in the home or keeping the car. If you move into an apartment after your divorce, consider purchasing a renter’s insurance policy to protect your belongings in the event they are damaged or stolen while you live there.
• Wills and life insurance beneficiaries. Updating your will and life insurance beneficiaries should be among the first steps you take when going through a divorce. In most circumstances, you can select whoever you want as a beneficiary. However, there are some exceptions:
  • When choosing a new beneficiary for your life insurance policies, some states require that the beneficiary be someone to whom you have a financial obligation, such as a child or other relative. Check with your attorney regarding specific requirements where you live. 
  • If a court orders that you must continue an existing policy with your former spouse as beneficiary, you cannot change it. 

Housing after divorce

One of the biggest questions that arises around divorce and finances is what to do about housing arrangements — and there are several routes you may take.

If you are a renter

If you and your former spouse rent an apartment or home together, your landlord may be willing to let you break the lease so that one or both of you can move out. Or you may choose to continue paying until the lease ends. Here are additional factors to think about:

• Who is going to stay in the rental, and who will move out?
• Will the person who moves out continue to contribute to the rent?
• Do you have children together? Where will they stay?

If you are a homeowner

If you and your former spouse own a home, it can be a bit more complicated. Weigh your options carefully and consider the cost of each of these decisions. Here are options to consider:

• You could sell your home and split the earnings.
• One spouse could stay in the home and refinance the mortgage in their own name.
• You could continue to pay the mortgage as usual until the need for a change arises. 

Other financial considerations for homeowners include:

• Attorney fees.
• Any losses when you split proceeds of the sale with your spouse.
• Expenses related to refinancing or taking out a new loan.

Spousal or child support payments

Alimony. If you earn significantly more income than your partner does, you may be required to make alimony payments to your former spouse to help them maintain their economic lifestyle after the divorce is final.

The amount you may be required to pay in alimony depends on factors, such as your former spouse’s financial situation, how long you were married, how long it would take your former spouse to be able to support themselves, and your lifestyle during your marriage.

Child support. While alimony payments exist to help alleviate the needs of your former spouse, child support payments are made by the non-custodial parent to help the custodial parent pay for the costs of supporting their children on a decreased budget. Child support is intended to help cover the costs of food, housing, clothing, medical bills, education, transportation, childcare and extracurricular activities. Typically, these payments will last until a child turns 18 or graduates from high school — but in some states, they may last until a child turns 21.

Even in cases where parents have shared custody of their children, one parent may still be required to pay child support. The courts may consider custody arrangements, parental income, total number of dependents and the expected costs.

Tax considerations 

Going through a divorce requires you to examine your entire financial life — and taxes are no exception. Your attorney, tax professional and financial advisor will help you work through various financial questions that may come up. Some tax-related questions to consider: 

• Depending on the timing of your divorce, should you file as married, single or head of household?
• What are the tax consequences of support you may provide or receive, such as spousal or child support?

How Ameriprise will help with managing finances in a divorce

Our approach adapts to your evolving needs. Prepare yourself financially in a divorce with an Ameriprise financial advisor. They will help you with the complex financial decisions related to a divorce and help you plan for your future goals.