Can You Protect Your Assets in a Divorce?
How Will My Social Security Be Impacted?
Common questions about your finances after splitting
By Mark Yatros
No matter your life stage, divorce brings about considerable changes in your financial life. You’ve undergone the process of splitting one household into two, which leads to many needed adjustments. Our last blog covered one of the most significant post-divorce necessities: a budget. Check out our eight tips for budgeting after divorce here.
We often receive other questions about how divorce impacts finances. The following are some of the most frequent.
I’m considering divorce. How do I protect my assets?
If protecting your assets means you want to keep all your money, property, and possessions out of your soon-to-be ex-spouse's hands, you're probably out of luck. Any assets acquired during the marriage are considered marital property and must be divided according to state law.
In Michigan, assets must be divided equitably (fairly) rather than equally. Your best protection is to make sure that your interests are represented. Hire an experienced attorney who will help you negotiate a fair settlement.
Don't shortchange yourself by overlooking hidden assets. For instance, you may know your joint savings account balance and what possessions you must divide, but do you know the balance of your spouse's pension plan? Does your spouse own a prepaid life insurance plan? Does your spouse have retirement funds (e.g., 401(k), IRAs) in their name? These things will be considered marital assets as well.
Finally, don't forget about your debt. In general, you'll be responsible for any debt acquired during the marriage, even if you didn't run up the debt yourself. Make sure that the divorce settlement states who will be responsible for paying off all debts and that you close all joint accounts.
My spouse and I are divorcing. Whose health insurance policy will cover the children?
As parents, both of you will want to keep the best interests of your children in mind. That means you should compare your health plan with your spouse's and determine which offers the most comprehensive health coverage and flexibility in choosing healthcare providers.
Your ultimate decision will also involve other considerations, such as job security. If you and your spouse are eligible to participate in employer-sponsored group health insurance plans, which of you is more likely to remain employed?
Expense is probably another issue you'll face. If your employer pays a more significant portion of the premiums than your spouse's employer, your spouse may argue that you should cover the children under your health plan. If you have custody of the children, you may find the extra expense too burdensome.
The issues of child support and child custody are quite relevant when discussing children’s health insurance coverage. For example, if you have custody of the children, receive child support, and need your spouse to provide health insurance coverage for the children, you may be able to obtain a court order (if necessary) to ensure their compliance. This is known as a qualified medical child support order.
You'll resolve the issue of health coverage – and many other issues – during your divorce settlement negotiations. Because state divorce laws may vary, you should seek advice from a divorce attorney before making any decisions.
How does divorce affect Social Security retirement benefits?
After you divorce, you can claim retirement benefits based on your own earnings record, or you can claim benefits based on your ex-spouse's earnings record if you meet these requirements:
Your ex-spouse is currently entitled to receive Social Security retirement or disability benefits
You and your ex-spouse were married for at least 10 years before the divorce became final
You are not currently married
You are age 62 or older, and
You aren't entitled to collect a retirement or disability benefit based on your own earnings record that equals (or exceeds) one-half of your ex-spouse's primary insurance amount (PIA)
If you are age 62 or older and you've been divorced for at least two years, you can receive Social Security benefits based on your former spouse's earnings regardless of whether that spouse is already receiving benefits. This, of course, assumes that the other four abovementioned requirements have been satisfied.
If you begin receiving benefits at your full retirement age (66 to 67, depending on your year of birth), your spousal benefit is equal to 50% of your ex-spouse's full retirement benefit (or disability benefit). For example, if your ex-spouse's benefit at full retirement age is $1,500, then your spousal benefit is $750. However, several factors may affect how much you ultimately receive.
For example, if you're eligible for benefits based on your earnings record, then the Social Security Administration (SSA) will pay that amount first. But if you can receive a higher benefit based on your ex-spouse's record, you'll receive a combination of benefits that equals the higher amount.
When you begin receiving benefits will also affect the amount you receive. You can receive benefits as early as age 62, but your monthly benefit will be reduced (the reduction applies whether the benefit is based on your own earnings record or your ex-spouse's.) This reduction is permanent. In other words, if you receive reduced benefits at age 62, you will not be entitled to collect full benefits when you reach your full retirement age.
On the other hand, if you decide to receive benefits later than your full retirement age, your benefit will increase by 8% for each year you wait past your full retirement age, up until age 70 (the increase applies only if the benefit is based on your own earnings record). In addition, if you work after you begin receiving benefits (before you reach your full retirement age) and your earnings exceed the annual earnings limit that applies, your Social Security benefit may be reduced. Receiving a pension based on work not covered by Social Security may also result in a benefit reduction.
You may also qualify for Social Security survivors’ benefits based on your ex-spouse's earnings record if your former spouse has died. You may qualify if:
Your ex-spouse was entitled to Social Security benefits
You and your ex-spouse had been married to each other for at least 10 years before the divorce was finalized
You are age 60 or over (or are between ages 50 and 60 and are disabled)
You aren't currently married, and
You aren't entitled to a retirement benefit that is equal to or greater than 100 percent of your deceased spouse's benefit
If you meet these conditions, you will be entitled to full survivors’ benefits; that is, you will collect an amount equal to 100 percent of your former spouse's PIA, not merely one-half. However, if you're under full retirement age, your benefits will be reduced for each month you receive benefits under your full retirement age. Benefits at age 60 will be 71.5 percent of your former spouse's PIA.
It's also important to note that a divorced spouse may be entitled to a mother's or father's benefit if caring for the dependent child (under age 16 or disabled) of their deceased former spouse. Typically, the amount of a mother or father's benefit is equal to 75 percent of the deceased spouse's PIA. Unlike a spousal benefit, the marriage doesn't need to have lasted 10 years.
For more information on how divorce may affect your Social Security benefits, contact the SSA at (800) 772-1213 or visit socialsecurity.gov.
What are some tax issues related to divorce?
If you're legally separated or divorced, it's important to become familiar with the applicable tax rules regarding several topics, including filing status, dependency exemptions, child support, alimony, and property settlement. Also, if either spouse has a pension, it's wise to understand what a qualified domestic relations order is and how it impacts the division of your retirement plan assets.
Allegiant Wealth Strategies’ experienced financial advisors would be happy to schedule a free, no-obligation consultation to discuss your specific situation. Click here to schedule.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.