How assets are divided in a divorce
Dividing up your assets in a divorce settlement can be a real challenge. But it can be a little less complex if you have a solid understanding of the processes involved, and how to protect yourself financially during such a difficult time.
How can a divorce affect your finances?
Pensions. Savings. Property. Your 401(k). More than 600,000 Americans get divorced each year, and there are all sorts of ways that their finances can be impacted during the process. Your state of residency will be an important factor in the way your accounts are settled, but you can expect to be splitting at least some of your assets with your partner.
But as well as your assets, let’s not forget that legal representation costs money, too. According to Forbes, the average cost of a divorce in the US is between $15,000 and $20,000. But this can vary massively depending on how complex the proceedings are; if it is contested, the final cost will likely be far higher than one that is uncontested. The most common legal fees for a divorce attorney working on a contested divorce are charged at an hourly rate, while one that is uncontested is more commonly paid for at a flat rate.
Either way though, a divorce is likely to cost you. But if you understand how best to look after your assets — and not rack up a huge legal bill — then it’s more likely that you’ll be able to get a divorce done at a low cost.
Do divorce rights differ by state?
Getting a divorce in the US can look different depending on which state you live in. One state’s requirements may be entirely different from another, so it’s crucial that you brush up on the legalities involved in the state that you live in.
The variations can come in the form of different filing fees, child custody laws, cooling-off periods and even the actual process of filing for a divorce. For example, the cost of filing for divorce in Florida is $421, while in Pennsylvania it costs around $100 less, at $316.98. Meanwhile, in community property states like Arizona, California, and Texas (among others), assets acquired by either spouse throughout the marital period are considered to be jointly owned no matter who buys it. But in other states, which follow ‘equitable distribution’ rules, the courts will share out marital property in a way that is deemed fair, but not necessarily equal.
There are so many variables from state to state that getting the right information can feel like a daunting prospect. But whether you want to look it up yourself on your state’s official website, or get professional help from a financial advisor at Unbiased, having the correct information is key to protecting your finances during the divorce process.
What are the biggest financial pitfalls of a divorce?
Everyone getting a divorce will want to ensure they are getting a fair share of the divided assets. Assuming you haven’t entered into a prenuptial or premarital agreement that waives your rights to your partner’s assets, anything that is earned, purchased or acquired in the course of a marriage is considered ‘marital property’. This property is what is divided between a couple in their divorce; it is only the portion of the assets that were earned during the marriage period that would be available to the other. But if you’ve been married for some time, this can end up being a significant chunk of your assets.
There are multiple risks and pitfalls that you’ll want to avoid during divorce proceedings if you want to protect your own assets. For one thing, it’s not a process you’ll want to rush just to get it over with. With emotions running high, you may be willing — in the heat of moment — to forego some of your share simply to conclude the process, but this may see another party take advantage, and leave with more than they are entitled to.
It’s also important to ensure your marital assets are valued correctly. The alternative may create an imbalance in the distribution process. But the valuation can be complicated, since assets like property can change in value after a marriage, and they can also require ongoing maintenance. Involving a mediator or judge is a good way of making sure there is a fair valuation, and therefore a fair division.
Other pitfalls, like forgetting to incorporate child support costs into the settlement or taking on a disproportionate share of marital debts, can also be avoided if you get the right advice and the right representation. A DIY approach to your own divorce is, unsurprisingly, not a good idea; even if the split is amicable, it’s always worth having a professional review the split of assets to ensure you’re getting a fair share.
Will a divorce impact your 401(k) or IRA?
What about your retirement accounts? Legally, 401(k)s and individual retirement accounts (IRAs) have just one account holder. But it’s not always that simple, since the money that enters that account during a marriage period belongs to both parties. So, during a divorce settlement, the partner with the higher balance may have to transfer some of their funds to their spouse — who may not even have one at all.
A 401(k) account would generally be split through a Qualified Domestic Relations Order (QDRO), with the exact division outlined by a state-level domestic relations court. While a QDRO doesn’t apply to an IRA account, traditionally half of the funds in the account accrued during the marital period will be transferred to the spouse. But a split may not always be best for both parties, and may well be contested.
Each divorce looks different, so how your 401(k) or IRA is affected will be unique to your situation. But it’s important to consider the tax implications that may exist in your state before agreeing on how the accounts are split.
How can you protect your pension and assets?
Both your retirement plan and your pension will be crucial assets during a divorce settlement. They can also be the most complex. Once you have worked out how your state deals with the split during a divorce, you’ll be better prepared for what to expect when entering into a settlement. To truly protect your financial future though, finding a well-matched financial advisor can be a real lifeline.
Protect your savings and you’ll protect your future. Unbiased can help you find your perfect financial advisor today, so you can feel confident that you’re in safe hands.
Charlie Barton is a writer at Unbiased. He has been writing about personal finance and investing since 2017, with extensive knowledge of platforms and products. Charlie has a first-class degree from the London School of Economics.