Four Financial Risks You May Not Think About During Your Divorce

Four Financial Risks You May Not Think About During Your Divorce

Few people go into a divorce expecting it to be financially easy. Returning to your legally single status involves a lot of financial changes, whether you’re going from a two-income household or you’re used to having or being a stay-at-home partner. Even if you’re prepared for the shift in your finances, there are some financial risks that you may not expect during your split.

The best thing you can do for your future self is to prepare for every way your finances will change after your divorce. That means looking out for lesser-known financial risks and understanding how they’ll impact your spending and investments. Keep reading to learn about four risks you might not expect from your divorce and how to prepare for them.

Taking On Spousal Debt

California is a community property state. That means that all assets a couple acquires during their marriage are considered their joint property and must be split 50/50 in a divorce. However, this doesn’t just apply to positive assets like retirement accounts and real estate. It also applies to debts like credit cards and mortgages.

When you split up, by default, you’re considered liable for half of the debts you and your spouse accrued during your divorce. This is true whether or not you benefited from what they spent the money on or your relative incomes. It’s even true if you weren’t aware of the debt. If your spouse opened and maxed out credit cards during your marriage without telling you, that debt is still technically your responsibility.

However, you can often change that during your divorce settlement. If you’re genuinely unaware of a debt, you can request that your spouse take responsibility for it during your split. Judges will often assign the debt to the responsible party in a divorce decree if you prove that you weren’t aware. Otherwise, you can negotiate solutions to those risks such as:

  • Granting your partner an asset in exchange for their taking on the debt, such as giving them the family home as long as they take on the mortgage
  • Buying out the debt by granting them an unrelated account, such as a retirement account, in exchange for them taking on the debt
  • Requesting higher alimony payments to cover the debt that you’re forced to take on

Your attorney will help you determine the best solution for your split based on the debts and assets involved.

Paying Tax Burdens

Another unexpected burden you may take on comes in the form of taxes. Your marital status at the end of the day on December 31st determines how you’ll file taxes for the year. The year your divorce is finalized, you’ll file taxes as a single person. For many people, this can lead to unexpected tax bills.

For instance, high-income individuals can quickly find that their taxes increase by thousands of dollars when they lose spousal tax benefits. If you were the primary earner in your marriage and your partner didn’t work, you’re likely to end up in a higher tax bracket after splitting up.

If you earn $200,000 in 2022, you’d have to pay about $42,000 in income taxes when filing jointly. If you’re filing as single, you’ll be responsible for about $52,000. That’s a difference of $10,000 just due to your marital status.

You may also have to pay taxes on your assets, depending on how they’re divided. For instance, if you choose to take half of a 401(k) account as a cash payment, you’ll need to pay an early withdrawal tax on the funds.

The simplest solution is to calculate your taxes when your settlement is finalized. A qualified high-income divorce lawyer will help you understand the risks and how to run the numbers to make sure you’re prepared when it’s time to file your taxes in the spring.

Dividing Digital Assets

On a smaller scale, your digital accounts should also be divided in your split, or you could face financial consequences. These accounts include services like Netflix, PayPal, Amazon, grocery delivery services, and anything else you and your spouse shared digital ownership over.

Decide who will keep each account in advance and adjust the payment methods accordingly. The last thing you want after your split is to get billed for your ex’s Amazon orders. The sooner you figure out how to split these assets, the sooner you can open new accounts unconnected to your ex’s financial decisions.

Changing Beneficiary Information

Looking to the future, you should prepare to change your beneficiaries. If someone is named as your beneficiary on an end-of-life account, the policy provider will honor that regardless of whether your relationship with the beneficiary has changed. That means if your ex is named on an insurance policy or something similar, they will benefit from it if you pass away.

To prevent this, you must update your beneficiaries as soon as possible. Some of the most important places to change beneficiary information are:

  • Life insurance policies
  • Health insurance policies
  • Wills
  • Retirement accounts
  • Pensions
  • Workers’ compensation funds
  • Trusts

You can change this once your split is finalized and the asset division process is complete. Make sure that the beneficiaries of any accounts that remain in your name are updated to your new preferences. This can help you guarantee that your ex doesn’t financially benefit at the expense of your children or new partners should the worse happen.

Protect Your Finances from Lesser-Known Risks

Good financial planning means preparing for all possibilities, not just the well-known ones. When you get divorced, you need to pay attention to finances to ensure you don’t get hurt by an unexpected tax bill or spousal debt. That’s why working with a qualified divorce attorney during your split is essential.

Experienced high-income divorce attorneys understand the potential pitfalls in your split. When you work with experts like the Kaspar & Lugay, LLP team, you’ll receive personalized guidance to ensure you walk away in the best financial positions possible. Learn more about how we can help you handle your finances during your divorce by requesting your complementary consultation.

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Kaspar & Lugay, LLP is a family law firm with offices in Corte Madera, CA; Napa, CA; Walnut Creek, CA; and San Diego, CA. We also represent clients in San Francisco, Oakland, Sacramento, Pismo Beach, Contra Costa County, and Los Angeles.