Two Sides of the Coin is a series of articles written by Ian Steinberg, a matrimonial and family law attorney, in conjunction with an array of other professionals from different industries. The series provides insights into issues from the perspective of each party to a divorce. Each article provides readers with practice tips that are helpful when navigating through the divorce process.
Breaking Down the Basics: The Finances of Divorce
By Ian Steinberg, Esq. and Christopher C. Mannino, CFP®
The divorce process is challenging for many reasons. One challenge often faced by those transitioning into a new, post-divorce life, is the need to handle tasks that were not their responsibility during the marriage. While operating as a marital unit, couples often divide up tasks and settle into their roles. After divorce, however, each spouse will need to handle those responsibilities on his or her own. This can be particularly daunting when it comes to finances.
Typically, one spouse is responsible for handling the finances and the other takes charge of other aspects of the marital partnership. While often it is the “monied spouse” (i.e., the spouse who has traditionally been the breadwinner for the family) who manages the family finances, and the “non-monied spouse” is along for the ride, that is not always the case. Regardless of whether you are the monied or non-monied spouse, finances play a significant role in the divorce process.
Here are a few important concepts to know when navigating the financial aspects of the divorce process.
- Educate Yourself
Educating yourself early on in the process is very important. As discussed above, there is often one spouse who handles the family finances and the other is uninvolved. Even if both spouses are physically present during conversations with the parties’ chosen financial professional, oftentimes only one is interested in taking an active role in handling the family finances. Education will look different for each of the spouses as everyone has their own individual experiences and background.
If you are the one who typically handles the finances, this education may come in the form of learning about how your new lifestyle will look post-divorce. You may need to revisit things like your cash flow and ability to save for a newly revised future. You may now have to cover two households on just your one income, or you may be losing the second income that helped save for the future. Either way, understanding your options and planning for all outcomes is critical.
On the other hand, if you are the spouse that did not typically handle the finances, ensuring that you are well versed in the basics of personal finance is vital. It is never too early to start learning, as you will be forced to absorb a lot quicker once you are no longer operating as a marital unit. Understanding basic concepts like credit vs debt, compound interest and even balancing a checkbook will put you in a far better position to succeed once you are in charge of your own finances.
- Be Aware of Your Social Security Eligibility
While many people understand that social security provides retirement income for those who have worked, often they do not have a firm grasp of the impact of social security on their spouse. In general, the amount a person receives as a monthly social security benefit depends on the amounts her or she earned while working.
However, what if one spouse was a homemaker and did not work throughout the marriage? He or she will have no work history and therefore no income to base a benefit on. If the couple was still married, the non-working spouse would be entitled to claim social security benefits “on the record of their spouse,” once they have reached the age of eligibility. This means that the non-working spouse would be entitled to receive benefits based on the work history of his or her spouse. On the other hand, as the monied spouse, it is likely that your social security benefit will be based on your earnings.
But what happens in the event of a divorce? Can the non-working spouse still claim based on their former spouse’s record? The answer is yes, assuming the couple was married for at least ten (10) years AND the non-working spouse is not remarried.
If the non-working spouse does remarry then her or she would not be able to claim on his or her former spouse’s record. However, if the new spouse has a work history, the non-working spouse could claim on their new spouse’s record. On the other hand, the working spouse may remarry and has no impact on their former spouse’s ability to claim on his or her record.
Larry King, the famous television and radio host, exemplifies this. As the story goes, he had numerous of his ex-spouses all claiming social security benefits based on his work history.
It must be noted that social security benefits are considered “income” pursuant to the Domestic Relations Law. As such, the receipt of social security benefits may have an impact on the determination of child support and/or spousal support obligations of the spouses.
- Be Careful When Dividing Debt
While dividing marital assets is a large part of the divorce process, the division of marital debt is equally as important. The old adage “what is mine is yours” can apply just as much to debt accrued during the marriage as it does to assets earned. In fact, these two go hand-in-hand.
A good place to start is by obtaining a credit report. Any of the major credit reporting agencies (TransUnion, Experian, etc.) can quickly and easily provide you with a report that will show a list of outstanding debts, including credit card debt, mortgages, etc. If you are the spouse that traditionally handled the finances during the marriage, the information on the credit report may not come as a surprise to you. However, if you are the spouse that was not privy to the finances during the marriage, this may be eye-opening. No matter which side of the coin you are on, there may be debts that your spouse did not tell you about, which now will have to be addressed upon divorce.
When drafting a separation agreement, the debt must be addressed. Dividing debt can become challenging because legal issues can arise if one spouse decides he or she is not going to pay. The company holding the debt will most likely file a claim against both spouses. This requires careful drafting to ensure that there is recourse in the event one spouse does not uphold his or her obligation to pay off a marital debt. Regardless of whether or not you are monied or non-monied spouse, the best course of action is to pay of all the debts if there is enough money in the “marital pot” to do so. This allows both parties to start fresh and live separate financial lives without having to worry if the other spouse is keeping his or her end of the deal.
- Dividing Retirement Accounts Requires Attention to Detail
While splitting retirement accounts may seem straightforward, there are a number of different factors to take into consideration. First, many retirement accounts, such as 401k plans, consist of pre-tax money, which means the money goes into the retirement account without income tax being applied. Comparing retirement accounts to other types of assets, such as bank accounts is not apples to apples if other accounts contain post-tax dollars. If you are the spouse that is not typically in charge of the finances, this may be something that is overlooked when deciding how to split up your assets. It is important to remember that $100 in a 401k is not the same as $100 in a bank account.
Additionally, the administrator of certain retirement plans cannot simply split the participant's funds in order to pay the former spouse following a divorce. Instead, a Qualified Domestic Relations Order (“QDRO”) must be used for certain accounts, such as 401k, 403(b)s, and other qualified plans. A QDRO has to be drafted, sent to the plan for “pre-approval,” and then submitted to the court for signature once the judgment of divorce is entered. Thereafter, the signed QDRO is sent to the plan in order for the division to be effectuated. The transfer to your spouse will be a tax-free event. Withdrawals thereafter will be subject to income tax, but a QDRO does allow withdrawals to be “penalty-free” if you are younger than 59 ½.
However, if you are the spouse that was not traditionally the breadwinner and needs access to money quickly, taking your marital share by way of retirement funds may not be the best option. They are relatively illiquid and it often takes a while for accounts to be divided.
While stepping into the financial driver’s seat may seem daunting, if you surround yourself by the right professionals, you can set yourself up for success. Divorce can be an emotionally difficult time. With the proper education, resources, and guidance, you can spend your time focusing on the well-being of you and your family.
Ian Steinberg is a matrimonial and family law attorney with Berkman Bottger Newman & Schein. He can be reached by email at firstname.lastname@example.org or by phone at (212) 466-6015 .
Christopher C. Mannino a Certified Financial Planner®, and Financial Advisor with Merrill Lynch Wealth Management. Christopher can be reached by email at email@example.com or by phone at (908) 789-4337or 201-912-2450.