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Divorce can have a profound impact on various facets of your life, particularly your financial circumstances. Once your marriage ends, you will no longer have two incomes to rely on and you will find yourself solely responsible for your financial future. When you are going through the divorce process, it’s important to collaborate with your legal counsel to structure a plan that will help ensure you are financially secure as you start your new beginning. Here are some essential tips for financial planning after divorce:
During your marriage, you and your spouse are equally responsible for any debts incurred — regardless of which spouse’s name they are in. If you haven’t already closed your joint credit cards and bank accounts, it’s best to do so as soon as possible to avoid incurring liability for your spouse’s debts. Open new accounts for your own future personal expenses and deposits, including a savings account, individual checking account, and a credit card for emergencies.
If you named your spouse as a beneficiary on your retirement account, bank account, life insurance policy, or any other accounts, you should change the designation as soon as your divorce is finalized. Just make sure that you don’t change insurance while the divorce is pending since there are laws against doing that. Failure to change beneficiaries after divorce can result in the asset having to go through the probate process, rather than directly to a new desired beneficiary. Changing a beneficiary designation is typically an easy process and can usually be done by filling out a new form.
Since you will only have one income following your divorce, rather than two, your budget might look very different from the one you had while you were married. To create a new budget as part of your financial planning after divorce, evaluate your income and list your expenses. First, consider your necessities, such as rent, food, car payments, childcare costs, utilities, and other bills — then factor in your extra wants. Once you can see how much money is coming in and going out, you can adjust your budget to help ensure you are financially prepared for life after divorce.
Taxes can be much more complex following a divorce. While you may have filed jointly with your spouse during your marriage, you can no longer claim marital tax benefits on your return upon your divorce — you must file as an individual. In addition, as you will no longer be able to withhold at the married level, you may need to adjust your W-4. Retirement asset and property division during divorce may also impact your tax situation and it’s a good idea to consult with your accountant to know what tax changes you can expect so you can plan accordingly.
As part of your financial planning after divorce, you should set up an emergency reserve. It’s crucial to have at least six months of living expenses set aside in the event the unexpected should occur, such as illness or job loss. Consider putting these funds into a high-yield savings account which can allow you to benefit from a higher interest rate than a traditional savings account.
Take a close look at your credit report after divorce. Although getting a divorce doesn’t directly harm your credit score, the changes to your financial situation might impact it. Additionally, if your spouse was responsible for making payments on joint debt during the marriage but failed to do so, you might notice that your credit score has decreased. Other factors that can affect your credit score after divorce can include closing joint credit cards, being removed as an authorized user on your spouse’s card, or an increase in your credit utilization rate.
Financial planning after divorce can also mean making changes to your estate plan. During your marriage, you likely named your spouse as a beneficiary in your last will and testament. Following your divorce, you should review your estate planning documents and revise them to ensure they reflect your current wishes. Although a divorce automatically revokes any provision in your will that leaves assets to your ex-spouse, failure to make changes to these documents can often result in unintended consequences. You should also update your healthcare directive and any powers of attorney to ensure the person who you wish to make decisions on your behalf has the authority to do so.
If you shared account passwords or credentials with your spouse, it’s critical to change them after divorce to protect your privacy — even if your divorce was amicable. You should also change your security questions to ensure your ex-spouse does not have access to your information. Be sure to choose a unique password for each account that isn’t easy to guess.
Financial planning after divorce can be a challenge. But having the guidance of skillful divorce and estate planning attorneys to help you formulate a comprehensive strategy can make all the difference in your financial stability moving forward. Located in Maple Grove, Mundahl Law, PLLC provides committed counsel and reliable representation to clients in Minnesota for their divorce and estate planning matters. Contact Mundahl Law at 763-575-7930 or click schedule a consultation.