published 28 June 2023
The loss and grief following a divorce or a spouse’s sudden death can feel overwhelming. Uncoupling a marriage does not end a relationship. Decisions about money, the division of assets, and possibly parenting must be shared between the separating spouses for quite some time. The sudden death of a spouse, on the other hand, often puts the surviving spouse in the unenviable position of finding a way forward alone. It can be challenging to manage the daunting financial repercussions that come from these life changes.
You’ve Decided to Uncouple. What Happens Now?
In many marriages, one spouse takes the lead on finances and taxes, while the other relies on that person to make informed decisions on behalf of the partnership. When divorce is on the horizon, the first steps anyone should take is to compile a basic financial affidavit—a document that outlines your income, expenses, assets, and liabilities—and a balance sheet that outlines the marital assets and liabilities.
For some, this task may be daunting, but it is crucial, as it helps you understand your financial standing. In many jurisdictions, the division of assets is final. Understanding your income, expenses, assets, and liabilities will assist you in devising a financial settlement that meets your needs and desires. These are also the basic tools required to create a cash-flow analysis.
Dividing Assets Fairly
When it comes to drafting a settlement, there are several ways to divide assets. For instance, if one party (let’s call her Jane) wishes to retain the marital home for the sake of the children, how should the other party (we’ll call him John) be compensated for his share of the equity in the house?
One solution could be to provide John his equitable share from a brokerage account. Alternatively, John might agree to postpone receiving his share of the equity until the children enter college. In this scenario, John could secure his share with a lien on the property, ensuring repayment upon the sale of the home or at a specified future date.
Understanding your aims and needs, and how they can be met fairly, is vital. It’s equally important to comprehend the tax implications of receiving each asset and how each will function in your financial plan (i.e., income-producing, illiquid asset, retirement asset).
Considering Ongoing Financial Obligations
Furthermore, evaluate whether you will receive child support or maintenance/alimony. It is important to remember that any assets acquired through divorce maintain their original cost basis for tax purposes.
Your Spouse Suddenly Passes Away. Now What?
Unlike divorce, the sudden loss of a spouse often limits your options and compels you to adhere to estate documents or the decisions of the probate court regarding asset distribution. Such a loss frequently reveals how prepared or unprepared a family is.
When a spouse unexpectedly passes away, the first step is to be appointed as the executor or administrator of the estate by the probate court. This appointment allows you to retitle assets, claim life insurance proceeds, and navigate through the estate process. Understanding your income, expenses, assets, and liabilities can help in forming a basic plan during an emotionally taxing period.
Updating Legal and Financial Documents
As life settles, it’s crucial to meet with trusted advisers: your estate attorney, accountant, and financial adviser. You will need to update your estate documents and review your tax filing situation for the year of death and beyond. Access to qualified professionals will make this transition smoother and less stressful, establishing a foundation for your new circumstances.
Key Differences Between Divorce and Spousal Death
| Aspect | Divorce | Death of Spouse |
|---|---|---|
| Assets/Liabilities | Divided by negotiation or trial. Creative solutions are possible. | Distributed following wills, trusts, beneficiary designations, or probate. |
| Income | May include child support or alimony. | Income ceases unless there is a spousal benefit. |
| Income Taxes | File as single in the year of divorce. | File as married in the year of spouse’s death. |
| Estate Tax | N/A | Possible federal and/or state taxes depending on estate size. |
| Insurance | Consider insuring certain payments. | Life insurance pays based on beneficiary designation and may fund an income shortfall. |
In either of the circumstances discussed, it is essential to recognize the importance of building the right advisory team to guide you through the complexities that arise from divorce or the unexpected death of a spouse. A qualified team can help you successfully manage the intricate legal, investment, and accounting needs that are vital to maintaining financial stability during challenging times.
