Ashley Asked:
My husband and I make around 80k a year with 2 kids. I am entertaining the idea of getting a paper divorce. Will this financially help us in anyway as far as when filing our taxes or for medical insurance, since it's based on income outside of employer provided benefits.
Additional Background Information:
I make 35k a year
Husband makes 40k a year
2 kids under 18
I solely own our home
Everything is in my name only.
It’s possible, but there are many potential traps
Yes, getting a paper divorce can help you financially but it can also be a financial negative depending on your personal situation. As with most things with Personal Finance, the answer is it will depend on a large number of factors related to your family's finances. Below are a few of the consideration that immediately spring to mind, which you will want to explore. But realize this is not an exhaustive list and many other factors could influence whether a paper divorce is in your interests.
Health Insurance
When you get divorced, you and your spouse will no longer be eligible for healthcare on each others plans. As a result, you will need to determine if you both have access to healthcare at work and consider the costs of each of you having your own plan at your respective jobs. Your children will be able to be covered on either plan.
Affordable Care Act Subsidies
You could benefit by qualifying for a tax subsidy for medical insurance under the Affordable Care Act, but only one of you will likely qualify and this should be weighed against the increased costs of insurance for the other spouse as well as other financial implications of getting divorced on paper.
Taxes
Most likely your tax situation will either be slightly improved or unaffected by the paper divorce, but you will need a tax planning professional to truly take advantage of any benefits. In order to lower your taxes through a paper divorce, you'll need to spend significant time putting together a strategy which includes how you structure the divorce settlement.
Creating Tax Time-Bombs
Additionally, there is a potential to create massive tax time-bombs in your future without proper planning. The sale of your home, the passing of one of you and leaving assets to the survivor, life insurance policies/proceeds, and many other factors will become more complex from a tax perspective and a paper divorce could increase your tax liability if not properly planned for.
Retirement Accounts
As a married couple, you have more flexibility of saving for retirement because each of you has a legal interest in the retirement accounts you are contributing to with marital income. When you get divorced, you'll really need to plan with separate retirement accounts, which could leave one of you with higher fees or worse investment options depending on the retirement plan options at work.
Encouraging Your Employer to Start or Improve a 401(k)
If one of you don’t have retirement plan options at work, or the 401(k) is a poor plan, Purposeful Strategic Partners can help them set up a 401(k) for very little money. And tax credits could lower the cost to nothing to establish the plan.
Dividing Assets
You will need to determine how to divide assets between each other in the paper divorce. This is especially true for your retirement accounts, the home, and any other large assets or liabilities. This division should take into account fairness to each of you, growth potential for each asset, tax implications, associated debt, and other factors. Since you will be dividing assets in a paper divorce, you won't have the legal right to force a redivision should you separate for real in the future.
Estate Planning
Your estate planning will also need to be reconsidered, especially with regard to medical decisions if either of you were incapacitated. As a married couple you automatically can make decisions for each other, but when you get divorced this will no longer be the case.
Social Security, Pensions, Life Insurance, and More
Getting divorced, even just on paper, means the legal nature of your relationship will change. This change will remove some of your rights under Social Security, will limit your options for claiming any pensions, and will impact other benefits you receive as a married couple.
Getting Professional Help
If you do pursue a paper divorce, I suggest getting professional help with structuring the divorce and understanding the consequences of the decision. At the very least you should consult an attorney who specializes in family law and likely a fiduciary and fee-only financial planner. You should also talk with your tax advisor prior to making this decision.
Subsidies for Financial Planning
Another option is to consider working with a financial planner who can help with organizing your finances and improving your situation. Purposeful Finance offers grants to help lower the cost of financial planning for low and moderate-income families and you may qualify.
Joshua Escalante Troesh is a Tenured professor of Business, a CFP financial advisor, and the founder of Purposeful Finance. He is also the owner of Purposeful Strategic Partners, a fiduciary and fee-only financial planning firm and a Registered Investment Advisor.