Financial planning for divorce and separation: a woman's perspective. (Personal Financial Planning)by DeJesus, Myrna E.
Each year, close to 1.2 million American marriages end in divorce. Most people think about the short- and long-term financial implications only at the time they actually divorce or separate.
Despite the trend toward a more equitable distribution, women everywhere still tend to fare far worse than men after divorce, according to a study by Leonore J. Weitzman, a sociologist at Stanford University and author of "Divorce Revolution." She found that, on average, a woman's standard of living plummeted 73% in the year following divorce, while a man's typically increased by 42%.
Because of this inequity, and the state of flux of divorce laws, anyone thinking of dissolving a marriage is well advised to do some serious financial planning first.
Community Property v. Separate
Historically, there have been two distinct legal systems governing the property of married couples in the U.S. Forty-two states have a separate property system which segregates the assets of the husband and wife into "his" and "hers." Eight states have a community property system which merges the assets of the husband and wife into a "unified community." The eight community property states are California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Today, the two systems are being reappraised.
Traditionally, in the 42 separate property states, each spouse retains all the property he or she earns or inherits during the course of the marriage, since each is the sole owner of his or her earnings. Each spouse has the sole right to contract with regard to those earnings, to obtain credit based on them, and to manage and control them.
In this traditional separate property system, a wife who is a full- or part-time homemaker, who has acquired substantially less income while maintaining a home or raising children, has no right to her husband's earnings. A recent modification in the traditional system of marital property allocation is "equitable distribution." In a community property system, the earnings of each party, together with all other property acquired during the marriage (other than by inheritance or gift), becomes the property of the other.
The community property system assumes that both spouses have contributed equally in partnership to the economic assets of their marriage, whether a spouse was homemaking or earning a salary.
Most states have developed a model statute called the Uniform Marriage and Divorce Act. The Act calls for lump-sum settlements of assets, and when practical, a temporary alimony to assist a dependent spouse enough to help him or her complete an education or get a job.
The states hold that all assets earned during a marriage, no matter by whom, or whose name appears as owner, go into a common pot to be divided however a judge decides is fair. The only exception is a spouse's inheritance or gifts received during the marriage.
Although the model statute has not unified divorce laws, 47 states now aim to divide property either "equally" or "equitably." The two terms have vastly different definitions. Equal means a 50/50 split. Equitably means that if a couple cannot agree who gets what, judges decide what is fair. Very often a couple cannot decide what is equal and it is not unusual for a court to give one spouse 70% of the assets and the other 30%.
The precise definition of marital property varies from state to state. It has traditionally included wage and salary income, interest, dividends, and all other income that a husband or wife earned during marriage, as well as the tangible assets purchased with that income.
Recent Changes in Marital Property
The contrast between community property states and separate property states has blurred in recent years because of two legal developments.
First, many common law states have adopted equal rights amendments, which have been interpreted to give one spouse access to the property the other spouse acquired during the marriage. Second, most common law states have adopted "equitable distribution" rules for dividing property upon divorce.
Nevertheless, there is still a critical difference in the way that the two systems approach the division of property upon divorce. In separate property states, the starting point for an equitable distribution is typically one-third of the property to the wife, and two-thirds to the husband. In the community property states, the starting point for distribution is 50/50 allocation between the wife and the husband.
The Changing Definition of "Assets"
According to Weitzman, the nature of what we call "property" in our society is starting to change. Family wealth now also resides in new forms such as "career assets." That is a term used to include the benefits of employment, such as pensions and health insurance coverage, as well as the capacity to earn future income.
"If courts would include career assets in the marital property to be divided at divorce, then this might well be the pivotal issue in the financial statement," she writes. (Over 60% of divorcing couples have less than $20,000 in total assets.)
It is generally recognized that retirement benefits are marital assets subject to division upon divorce and separation. Under the Retirement Equity Act of 1984, former spouses of participants in tax-qualified retirement plans won valuable rights. The amounts, forms and timing of retirement benefits to the divorced spouses of plan participants are covered in court orders to retirement plans. REA codifies the rights of non-participant spouses to receive a portion of the participants' retirement income.
The Act permits a plan to make payments to a non-employee divorced spouse under the terms of a Qualified Domestic Order (known as QDRO) as soon as the participant would be entitled to retire and receive pension benefits.
In the event of the death of the participant, the Act states that the divorced spouse may be named as the beneficiary to the portion of the total accrued pension that is payable to that former spouse.
In planning for a division of retirement assets, the recipient spouse should be alert to the fact that he or she will be taxed on these funds upon receipt. If the payments are made to a dependent child or other dependent, the participant spouse will be taxed on the funds.
Under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) a company cannot refuse to offer continuing health coverage to an employee's former spouse or their dependents. A spouse can insist on group health insurance coverage from the company of a spouse for up to three years after divorce.
COBRA allows companies to charge 102% of the premiums to those who elect to continue this coverage. There are some exceptions and exemptions in COBRA.
Judges are increasingly asked to decide whether a divorced person who worked while his or her spouse went to medical or business school is entitled to a sizable share of future earnings or whether a person who lived with a rich spouse is entitled to a substantial part of his or her wealth. Without any prior agreement between the parties, it becomes a matter of the presiding judge's opinion.
Nationally, 14% of married women still receive alimony, and the percentage is declining. Courts, generally, reserve long-term payments for women who are over 50, disabled, or in poor health.
One type of arrangement, called "rehabilitative" alimony, has resisted the trend. The general idea is for the former spouse to help pay for the further education or training that the disadvantaged spouse needs to get a job. The former spouse then scales down his or her support as the earning power of the other grows.
In 1985 and 1986, Congress put a stop to rehabilitative alimony by taking away the payer's tax deduction on payments of more than $10,000 a year unless they continued for at least six consecutive years. But the 1986 tax law went back to the older definition.
The Child Support Enforcement Act, which took effect in 1985, required states to establish a standardized method for both setting child support awards and the means for enforcement of collection by the deadline of October 1, 1988.
Methods of collection of mandatory child support include mandatory wage withholdings, withholdings from state income tax refunds, and the imposition of liens against real and personal property. These techniques may be used separately by the individual states or in conjunction with the collection procedures under the federal tax laws whereby tax refunds can be intercepted. Child support is not regarded as income to the payee spouse if he or she receives custody, nor is it deductible to the payor spouse. If alimony payments are reduced due to a contingency involving a child, a part of that payment is considered a type of child support and will not qualify as alimony.
There are special rules for choosing the exemption for a dependent child whose parents are divorced or separated. The parent having custody for the greater part of the year is entitled to the exemption, unless the parent waives his or her right to claim the exemption in a written declaration and the non-custodial parent attaches the declaration to his or her return.
For medical expense deductions, a child is treated as a dependent of both parents regardless of which parent is entitled to the dependency exemption.
The Need for Financial Planning
Without proper planning, women and men seeking divorce are left to the vagaries of confusing, changing, sometimes biased judicial determinations. Couples do not know what will happen to them and their children in a divorce and they are forced to fight for many of their rights in expensive, emotionally draining, and time consuming court cases.
One solution is to draw and sign a prenuptial agreement, a document that spells out the rights and obligations that the couple will honor in the event of divorce. Prenuptial contracts are popular enough to have spawned the Uniform Premarital Agreement Act by the American Bar Association. Although premarital agreements are recognized in most states, this Act attempts to make the law uniform. Courts generally uphold such agreements provided they are signed voluntarily and finances were fully disclosed at inception.
At current divorce rates, roughly half of all marriages made in the '80s will end in divorce. In the absence of a prenuptial agreement at the time of divorce, each spouse should consult a financial advisor to help him or her get the best possible agreement.
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