- What are the major differences in legal treatment between married and unmarried couples?
- What estate and financial planning steps are particularly important for unmarried couples?
- Do married couples need more insurance?
- If you change your name after marriage, who should be notified?
- Do I need to update my will when I get married?
- What are the tax implications of marriage?
- How can married couples hold property?
- How do I prepare financially for divorce?
- How should we handle credit card accounts during a divorce?
- What do I do if my current or former spouse's poor credit affects me?
- What happens to my credit history after a divorce?
- What are the legal issues that must be faced in most divorces?
- How does property get divided in a divorce?
- What are the tax implications of divorce?
- What happens when retirement plans or IRAs are divided up in a divorce?
- Can I deduct the cost of getting a divorce?
- Who is entitled to deduct the dependency exemption of a child after divorce?
What are the major differences in legal treatment between married and unmarried couples?
There are several differences in legal treatment. Specifically, unmarried couples do not:
- Automatically inherit each other's property. Married couples who do not have a will have the state intestacy laws to back them up; the surviving spouse will inherit at least a fraction of the deceased spouse's property under the law.
- Have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, you may not have the right to do so.
- Have the right to manage each other's finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple.
The following steps are particularly important for unmarried couples:
The purpose of life insurance is to provide a source of income for your children, dependents, or whoever you choose as a beneficiary, in case of your death. Therefore married couples typically need more life insurance than their single counterparts.
Whether you need to buy life insurance depends on whether anyone is depending on your income. If you have a spouse, child, parent, or some other individual who depends on your income, you probably need life insurance. Here are some typical families that need life insurance:
- Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts. If the family cannot afford to insure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap. If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance on the life of the wage earner.
- Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in situation (1). However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse. If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.
- Single adults with no dependents. You will need only enough insurance to cover burial expenses and debts, unless you want to use insurance for estate planning purposes.
- Children. Children generally need only enough life insurance to pay burial expenses and medical debts. In some cases, a life insurance policy might be used as a long-term savings vehicle.
You should notify all organizations with which you previously corresponded with your maiden name. The following is good list to start with:
Do I need to update my will when I get married?
Absolutely. Your will should be updated often, especially when such a significant life event occurs. Otherwise you spouse and other intended beneficiaries may not get what you intended upon your death.
Once you are married you are entitled to file a joint income tax return. While this simplifies the filing process, you may find your tax bill either higher or lower than if each of you had remained single. Where it's higher it's because when you file jointly more of your income is taxed in the higher tax brackets. This is frequently referred to as the "marriage tax penalty." Tax law changes intended to reduce the marriage penalty became effective in 2003, but don't eliminate the penalty for taxpayers in the higher brackets.
You can not avoid the marriage penalty by filing separate returns after you're married. In fact filing as "married filing separately" can actually increase your taxes. You should consult your tax advisor as to the optimal filing status for your situation.
There are several ways of owning property after marriage. These vary from state to state.
Community property - Equal ownership of property acquired during a marriage. Community property states are AZ, CA, ID, LA, NV, NM, TX, WA, and WI.
How do I prepare financially for divorce?
If you are considering divorce, it's vital to plan for the dissolution of the financial partnership in your marriage. This means dividing the financial assets and liabilities you have accumulated during the years of marriage. Further, if children are involved, the future support given to the custodial parent must be planned for.
The time taken to prepare and plan for eventualities will pay off later on. Here are some steps towards that end.
Making an inventory of your financial situation will help you to prepare in two ways:
- It will provide you with preliminary information for an eventual division of the property.
- It will help you to plan how the debts incurred in the marriage are to be paid off. (Although the best way of dealing with joint debt, such as credit card debt, is to get it all paid off before the divorce, often this is not possible. Having a list of your debts will help you to come to some agreement as to how they will be paid off.)
First, make a list of all of your assets, joint or separate, including:
- The current balance in all bank accounts
- The value of any brokerage accounts
- The value of investments, including any IRAs
- Your residence(s)
- Your autos
- Your valuable antiques, jewelry, luxury items, collections, and furnishings
Next, make sure you have copies of the past two or three years' tax returns. These will come in handy later.
Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.
Find the papers relating to insurance-life, health, auto, and homeowner's-and pension or other retirement benefits.
Next, list all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.
Tip: If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. This will help you to establish credit after the divorce.
How should we handle credit card accounts during a divorce?
First, it is important to cancel all joint accounts immediately once you know you are going to obtain a divorce.
Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.
Your divorce agreement may specify which one of you pays the bills. As far as the creditor is concerned, however, both you and your spouse remain responsible if the joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay, and at the same time report the late payments to the credit bureaus under both names. Your credit history could be damaged because of the co-signer's irresponsibility.
Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.
What do I do if my current or former spouse's poor credit affects me?
If your spouse's poor credit hurts your credit record, you may be able to separate yourself from your spouse's information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage, and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse's credit record, not yours.
In practice, it is difficult to prove that the credit history under consideration doesn't reflect your own, and you may have to be persistent.
What happens to my credit history after a divorce?
If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply. (The account remains open.)
Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency, it will be available.
Do not use only your husband's name-e.g., Mrs. John Wilson--for credit purposes.
Tip: Check your credit report if you haven't done so recently. Make sure the accounts you share are being reported in your name as well as your spouse's. If not, and you want to use your spouse's credit history to build your own, write to the creditor and request the account be reported in both names.
Also, determine if there is any inaccurate or incomplete information in your file. If so, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.
If you have been sharing your husband's accounts, building your own credit history in your name should be fairly easy. Call a major credit bureau and request a copy of your file. Contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.
What are the legal issues that must be faced in most divorces?
The best way to plan for the legal issues that must be faced in a divorce-child custody, division of property, and alimony or support payments-is to come to an agreement with your spouse. If you can do this, the time and money you will have to expend in coming up with a legal solution-either one worked out between the two attorneys or one worked out by a court-will be drastically reduced.
Here are some generally tips for handling the legal aspects of a divorce:
- Get your own attorney if there are significant issues dealing with assets, child custody, or alimony.
- Some ways of finding a good matrimonial attorney include referrals from another professional, referrals from trusted friends, or lists obtained from the American Academy of Matrimonial Lawyers. (The address of the latter organization is listed in the last section of this Guide.)
- Make sure the divorce decree or agreement covers all types of insurance coverage-life, health, and auto.
- Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.
- Don't forget to update your will.
Tip: Those who have trouble arriving at an equitable agreement-and who do not require the services of an attorney--might consider the use of a divorce mediator. This type of professional advertises in the section of the classifieds titled "Divorce Assistance," or "Lawyer Alternatives.
How does property get divided in a divorce?
The laws governing division of property between ex-spouses vary from state to state. Further, matrimonial judges have a great deal of latitude in applying those laws.
Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney.
- Gain an understanding of how your state's laws on property division work.
- If you owned property separately during the marriage, be sure you have the papers to prove that it's been kept separate.
- Be ready to document any non-financial contributions to the marriage, e.g., your support of a spouse while he or she attended school, or your non-financial contributions to his or her financial success.
- If you need alimony or child support, be ready to document your need for it.
If you have not worked outside the home during the marriage, consider having the divorce decree provide for money for you to be trained or educated.
What are the tax implications of divorce?
After divorce each individual will file their own tax return. However, there are several areas where transactions between former spouses can result in tax consequences. The most common areas are:
Child support is not deductible by the payer and is not taxable to the recipient. A payment is considered to be child support if it is specifically designated as such in a divorce or separation agreement or if it is reduced by the occurrence of a contingency related to the child (such as attaining a certain age).
Alimony is deductible by the payer and is taxable to the recipient. Alimony is a payment made pursuant to a divorce decree other than child support or designated as something in the instrument as other than alimony. Similar treated is accorded separate maintenance payments made pursuant to a separation agreement. In order to qualify, payments must also cease upon the death of the recipient and must not be front-loaded.
Property settlements are not taxable events when pursuant to divorce or separation. Transfers of assets between spouses in this event do not result in taxable income, deductions, gains or losses. The cost basis of the property carries over to the recipient spouse. Be careful in a divorce, your spouse may give you an equal share of property based upon fair market value, but with the lower basis. This can result in a higher taxable gain upon a sale of the asset.