A few months ago, I wrote a Next Avenue article about financial planning for those going through a divorce: “6 Money Matters Divorcing Spouses Often Overlook.” Now I want to offer some advice to consider once your divorce is finalized.
With your divorce settled, you'll need to close the loop on any outstanding matters resulting from the separation. Below are six areas to address so you can minimize any problems that could arise in the future:
1. Update Beneficiary Designations
After your death, any assets get passed on to beneficiaries who are named on paperwork provided by your bank, brokerage house insurance company and employer-sponsored plans. It is critically important after a divorce that you review the forms that you’ve previously used to designate your beneficiaries of assets that pass outside of your will, including your 401(k), employer-provided life insurance, transfer-on-death (TOD) brokerage accounts, pay-on-death bank (POD) accounts and life insurance policies.
(MORE: The Estate Planning Goof You May Be Making)
While some states have laws that revoke a will upon divorce, failure to make necessary changes to a beneficiary form naming your former spouse could mean that the asset will pass to him or her.
Changing beneficiary designations is an easy process that can be accomplished by completing a new form with your bank, brokerage house, insurance company and employer.
2. Update Estate Documents
You’ll also need to amend your will and any living trusts, as well as any powers of attorney — documents that give someone authority to act on your behalf if it is ever necessary.
You should have two powers of attorney: one for health care (medical decisions) and one for financial matters. If you already have powers of attorney that give your former spouse authority to make decisions on your behalf, revoke them in writing. Sign the document and send it to your ex, as well as any institutions that have a copy of the power of attorney. You should request that your former spouse return the old power of attorney, too. Then, execute new documents.
If you don’t have estate documents, now is the time to adopt them.
(MORE: Divorce Over 50 Calls for Special Money Strategies)
3. Check Your Credit Report
Now that you are divorced, all joint accounts (including credit cards, bank and brokerage accounts, mortgages, car loans and home equity lines) should have been closed. Review your credit report to see if there are any “open” credit cards (even if the balance is zero), mortgages and other debts with both of your names. If so, close them.
If you are unable to, because you have an outstanding balance, instruct the lender to suspend the account to prevent future charges and confirm that the account cannot be reopened or unsuspended.
You’ll want to review your credit report annually to be sure that no credit cards or other liabilities have been established in your name without your knowledge. If you spot any errors or issues in the report, contact the credit bureau. You can receive a free credit report annually at the website Annualcreditreport.com.
(MORE: Don't Let Your Ex Ruin Your Credit)
4. Review Tax Withholdings and Update Projections
Once you’re divorced, you need to consider what changes need to be made to any tax withholding elections you’ve made through your employer. Update your marital status; you may also need to change the number of exemptions you claim. Completing a new IRS Form W-4 and relevant state and local forms will help you determine the number of exemptions to claim.
If you have income beyond W-2 wages, such as from your investment portfolio, alimony, capital gains or rental income, you may need to make quarterly estimated tax payments to avoid a penalty for the underpayment of tax.
For example, take a newly-divorced woman who was not employed during her marriage and has $100,000 in income from her investment portfolio. Assuming that she is now not employed (or is minimally employed), she lacks the ability to have income tax withheld from payroll to cover the income tax due on the investment income. As a result, she’ll need to make quarterly estimated payments to pay the tax; during her marriage, her spouse may have been able to cover this income through his payroll withholdings.
After you’re divorced, work with an accountant to prepare a new tax projection based upon your income and deductions as a single person.
5. Compare Earlier Financial Projections With Reality
During your divorce, you should have determined what your financial life would likely look like after the dust settled. Once you’re divorced, it is important to compare the assumptions you made against reality and check your financial targets at least every six months.
It’s generally the expenses that can vary the most. For those who were not heavily involved with financial decisions during marriage, a fear of spending may guide their daily activities. For others, a sense of freedom may control their spending decisions. Both situations can be damaging.
People guided by fear may avoid activities, which can result in being unjustifiably unfulfilled, angry or resentful. For those whose spending has become a cathartic release, spending may have future negative ramifications on their retirement security.
Hiring an independent financial planner or using free online tools (such as Mint.com) that help set a budget, track activity and monitor results, can help the recently-divorced better navigate their financial future.
6. Review Your Investment Strategy
The splitting of investment assets in a divorce is typically done on an account-by-account basis, with the ultimate goal of an equitable distribution of all marital assets. But the result may be that you end up with an investment portfolio that doesn’t meet your current needs — either because it is too aggressive or too conservative.
You may also find that you are in a new income tax bracket, which may make your current portfolio inappropriate. For example, if you were in a high tax bracket with your ex and owned tax-free municipal bonds, your new tax bracket may be low enough where taxable bonds are more advantageous.
Working with an independent financial planner to create an appropriate asset allocation and to analyze the tax consequences of your portfolio will help align your investment strategy with your planning goals.
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