As a divorce financial planner in 2021, I worked side-by-side with many clients who struggled through the emotional and financial trauma of divorce. Once a settlement has been reached, everyone’s mental energy gets pushed higher as the language in the final decree is debated in fine detail. Anyone who has been through this process understands how draining “the end” is. As tempting as it is to toss the final decree in a drawer and walk away, this is not the time to take a break. If you or anyone you know was divorced in 2021, this blog is for you.
- Get your QDRO’s entered: In order to transfer retirement accounts between you and your ex, you will need a Qualified Domestic Relations Order (QDRO for short). Many divorced clients have the misconception that it’s okay to wait to get these important documents prepared. This can be a critical mistake. It’s important to keep in mind that the Judgment of Divorce is only binding on the divorced couple. It’s not binding on third parties, such as retirement account administrators. The only document that will transfer qualified plan assets from one spouse to another is a QDRO. Every day that passes after the divorce without a QDRO puts the client at extreme risk. If the working spouse dies, retires or remarries before a QDRO is entered, that could severely limit or even eliminate the ability for the ex-spouse to receive their money.
- Make sure life insurance is in place to secure support: If your ex-spouse is required to secure child or spousal support with life insurance, confirming this is done needs to be a top priority. Imagine if your spouse unexpectedly died while still paying support? If you’re counting on support to pay your bills or support your children, that could be catastrophic. Just because your Judgment of Divorce requires your ex to get life insurance; that doesn’t mean it will happen. Remember, your Judgment of Divorce is only binding on you and your former spouse. It’s not binding on third parties such as life insurance carriers. If your former spouse dies and isn’t insured (or has removed you as beneficiary), your Judgment of Divorce won’t help. The insurance company isn’t bound by it. Request a copy of the life insurance policy from your former spouse immediately after the Judgment is entered. If the response is lagging, contact your attorney to as soon as possible to remedy this situation.
- Confirm your tax filing status: If your divorce was final prior to or on December 31st, you won’t be filing Married for 2021. However, before you tell your CPA that you’re claiming Head of Household, pull out your Judgment of Divorce to make sure that’s correct. Although your divorce decree likely makes mention of who gets to claim your child or children as dependency exemptions, it may not be as clear about your ability to file as Head of Household. For tax year2021, the value of a dependency exemption is zero. According to IRS rules, in order to claim Head of Household (versus Single), you must be the custodial parent of a child. The IRS defines custodial parent as one that has more than half of the child’s overnights. As always, confirm with a qualified tax preparer what your actual tax status should be and the potential pitfalls of filing Head of Household in error.
- Start taking stock of your financial plan: Now is the time to interview financial advisors and get one on your personal team. You may have had a financial advisor when you were married, but your divorce has caused your financial planning outlook and optimal strategy to change dramatically. Many of my divorced clients in recent years have been lulled into complacency due to unprecedented growth in the investment markets. “If the stock market always goes up, why do I need professional advice?” The answer of course is that what goes up, must come down. It’s easy to “pick a winner” when everything is up. However, not only is that strategy short-lived, it also ignores your new reality. Your circumstances have greatly changed and that calls for a re-assessment of where you are financially and what decisions you need to make. Can you afford to keep your house and if so, for how long? Has your retirement timeline changed? Do you need to ramp up (or down) on short-term savings? What can you safely take out of your investments for living expenses without sacrificing your future stability? If you don’t know the definitive answers to these questions, now is the ideal time to get help.
Although it’s very tempting to wait to handle some of these issues, waiting may put you in a position of not being able to fix a mistake. In my humble opinion, knowledge is power, even when it forces you to take a long hard look at your current financial choices and make some significant changes.
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