Preventing many financial problems during legal separation
Most states allow married couples who just aren’t ready for divorce to file for a legal separation. The reasons for wanting this separation can be numerous, such as because of health care coverage, religious readings, Social Security benefits or family benefits among other things.
Legal separations, however, can have a dramatic effect on your finances. Normally, couples will still have to divide assets, such as bank accounts and non-retirement accounts.
When it comes to individual retirement accounts, they cannot be divided during legal separation unless the couple has intent to divorce and the marital settlement agreement is incident to the decree of arrest. You don’t want to run the risk that an early IRA distribution will take place if you are younger than 59 1/2. You could be hit with a severe penalty of 10 percent and still have to pay income tax, too.
When you’re legally separated, you could be liable for your spouse’s legal issues and debts. Creditors are more likely to come after one spouse if the other spouse is still using the card to run it to its max. A separation agreement should specifically address marital debt, such as how is paying for it, who is liable for it and when it will be paid. Any new debt acquired during the separation should also be included. Close joint credit cards if the creditors will let you. If the balance has to be zero, make arrangements for who is going to pay the bill. When it’s paid, call the credit card company and have the status of the card charged.
Finally, you can’t completely disinherit your spouse. In other words, if you were to pass away before your divorce was final, then you will get the estate. If the legal separation has been filed with the court, then you’ll need to know what to do if your spouse passes away.
Legal separation is the right for some couples, as they work to determine if divorce is the step they need to take. If you have questions about legal separation and divorce, an attorney can provide the answers you need.
Source: The Wall Street Journal, “The Financial Pitfalls of a Legal Marital Separation,” Stacy Francis, Nov. 08, 2016