Divorcing Your Spouse and Your Financial Adviser
When you file for divorce in Chicago, it is likely that you will have many questions and concerns about finances. To be sure, dealing with property division during the divorce process can feel personal, unfair, and frustrating. Whenever finances are involved, we know that there is significant tension between spouses. Considering the complications of finances in a marriage and after divorce, a recent article from MarketWatch emphasized the need to hire your own financial adviser; do not stick with the financial adviser that you and your spouse shared during the marriage. Why do you need to find a new financial advocate? In short, you need as many advocates on your side as possible.
As soon as you begin considering divorce in Illinois, it is essential to hire an experienced Chicago area divorce lawyer. At the same time, you should begin thinking about who usually handles your marital finances. When you have been in a marriage for a long time or if you are part of a high net worth household, thinking about the financial consequences of divorce is particularly important. And you need to start considering the economic impact of a marriage dissolution sooner rather than later. For instance, seeking financial advice early on can help to ensure that you are dealing with your immediate needs, such as those involving short-term care, insurance, or child support.
The first step in thinking about your finances is, as we mentioned above, to work with a new financial adviser. To be sure, “at least one spouse should not rely on the financial planner or adviser the couple used during the marriage.” In the most basic terms, using the financial adviser from your marriage is essentially a conflict of interest. You do not want to be in a position where your financial planner is also providing advice to your ex-spouse. And you will need to be sure to take this step on your own, as financial advisers and financial planners “are not bound by any hard and fast rules” on advising both spouses who are in the process of divorce.
While it might sound like a good financial decision in the short-term to stick with the same financial adviser, that decision could end up costing you a lot more in the long run.
Why do you need your own financial adviser at all? As the article points out, financial advisers and planners can help you think about the immediate economic repercussions of your divorce, as well as the financial issues with which you may need to deal in the long run. Examples of matters for which you will likely want a financial adviser include but are not limited to:
Not necessarily. In states like Illinois and Oregon, the legal principle of equitable distribution is applied, which means that assets are divided in a manner deemed fair, but not always equally. Courts take into account various factors, including each spouse’s financial contributions to the marriage, their earning capacity, and their future financial needs as they move forward.
Marital property generally encompasses any assets acquired or income earned during the marriage. This includes tangible items like real estate, vehicles, and household items, as well as financial assets such as retirement accounts and cash balances. Even debts incurred during the union are considered marital property. It’s important to note that separate property—assets owned prior to the marriage or those received as gifts or inheritances—are typically excluded from division unless they have been blended with marital assets.
The issue of hidden assets can significantly complicate divorce proceedings. If one spouse suspects that the other is attempting to conceal income or property, they may resort to the expertise of forensic accountants. These professionals can meticulously analyze financial records and trace any irregularities, ensuring that all assets are accounted for and fairly divided.
Absolutely. Retirement accounts, such as 401(k)s and pensions, can often be divided between spouses through a Qualified Domestic Relations Order (QDRO). This legal document facilitates the tax-free transfer of funds from one spouse’s account to the other’s without incurring penalties, allowing for a fair distribution of retirement savings built during the marriage.
No, a QDRO is not necessary for Individual Retirement Accounts (IRAs), but it’s crucial to divide them according to the divorce decree. Care must be taken during this process, as mishandling can result in tax implications or unexpected early withdrawal penalties.
Whether alimony is taxable depends on the timing of the divorce. For divorces finalized prior to January 1, 2019, alimony payments are considered taxable income for the recipient and deductible for the paying spouse. However, for divorces finalized after that date, spousal support is neither taxable for the recipient nor deductible for the payor, thus affecting the financial landscape for both parties.
Different states utilize different formulas for calculating spousal support, but common considerations include the length of the marriage, both spouses’ incomes, and their individual ability to support themselves. In some instances, temporary spousal support is awarded during the divorce proceedings to help the lower-earning spouse manage expenses until a final agreement is reached. In Illinois, spousal support is generally calculated by taking 33.3% of the paying spouse’s (payor’s) net annual income and then subtracting 25% of the receiving spouse’s (recipient’s) net annual income. The resulting figure is the annual amount of maintenance to be paid, which cannot exceed 40% of the combined net income of both parties.
Child support is not considered taxable income for the recipient, nor does the paying spouse receive any tax deduction for these payments. This means that child support payments are treated differently than spousal support when it comes to tax obligations.
Child support typically continues until the child reaches the age of 18 or graduates from high school, depending on which milestone occurs later. Some states may provide for extensions to cover college expenses or support for children with special needs, highlighting the varying nature of child support regulations. In Illinois, child support generally lasts until a child turns 18, or graduates from high school and is under 19, whichever comes first. However, support can continue longer if the child has a disability, is attending college, or if parents agree to extend it for college expenses. Child support also terminates if the child is emancipated before 18, but this requires proving financial independence and involves a court order.
In most cases, the parent with primary custody of the children claims them on tax returns. However, this arrangement can be negotiated during the divorce settlement. To facilitate this transfer, the noncustodial parent may use IRS Form 8332 to claim the exemption.
Understanding how capital gains taxes and cost basis affect your financial situation is crucial when dividing investment accounts. It’s essential to ascertain the cost basis of assets, as receiving appreciated assets may lead to capital gains taxes upon their sale. Therefore, equal market value doesn’t always equate to equal tax implications.
If you remain legally married on December 31, you may choose to file taxes jointly or separately. Once the divorce is finalized, your filing status will change, allowing you to file as single or as head of household, depending on the custody arrangement and other financial responsibilities related to child support.
Deciding whether to keep the family home is a complex decision that requires careful consideration. While the emotional attachment to the house may be strong, maintaining it can place a significant financial strain on an individual. Consider the ongoing costs, including mortgage payments, property taxes, insurance, and maintenance expenses. In some cases, selling the home and splitting the proceeds with your ex-spouse may be a more practical solution, allowing both parties to start fresh with a more manageable financial situation.
Of course, your divorce lawyer can provide much-needed legal advice about each of these categories, too. If you have questions or concerns about the financial impact of divorce, you should reach out to a dedicated divorce attorney in Chicago. Do not hesitate to contact Gordon & Perlut, LLC to learn more about how we can assist with your divorce.