Five Often-Forgotten Financial Consequences of Divorce

These are only five often-forgotten financial consequences of divorce.  There are many more, all dependent upon the facts of each individual case. Discuss the potential financial consequences of your divorce with a family law attorney.

1. Loss of Health Insurance. Upon the finalization of a divorce, a spouse is no longer legally a dependent of the other spouse and therefore cannot legally be covered as a dependent on a spouse’s health insurance policy. As a result, the cost of obtaining new insurance must be considered in spousal support awards – this impacts both parties. While the cost is often manageable, a tougher problem is if the spouse who loses health insurance coverage cannot obtain new insurance as an individual due to a pre-existing condition. This is devastating and requires the non-covered spouse to consider such options as pursuing a legal separation instead of a divorce, obtaining employment where a group plan is offered,or seeking COBRA or other subsidized coverage options under the covered spouse’s insurance.

2. Derivative (Spousal) Social Security Benefits.  A ”non-breadwinner” former spouse who had been married for 10 years or longer to a ”breadwinner” spouse who paid into the Social Security system may be entitled to receive derivative Social Security benefits based upon the breadwinner spouse’s contributions into the Social Security system.  These derivative benefits do not affect the amount of benefits the breadwinner spouse receives.  For the non-breadwinner former spouse to be eligible, the basic requirements are:

  • The spouses must have been married for at least 10 years, measured from the date of marriage to the date marital status is terminated;
  • The breadwinner spouse is entitled to Social Security retirement or disability benefits;
  • The non-breadwinner former spouse has filed an application for Social Security benefits;
  • The non-breadwinner former spouse is unmarried and is 62 years old or older at the time of filing for derivative benefits;
  • The non-breadwinner former spouse is not entitled to Social Security benefits, or is entitled to Social Security benefits from a Primary Insurance amount which is less than one-half of the breadwinner spouse’s Primary Insurance amount.

3. Self-Support Expectations.  The law places a burden on both parties in divorce, even if they have minor children, to make reasonable efforts at self-support.  Failure of either party to make such reasonable efforts can result in reduced or terminated support.

4. Spousal Support Taxation.  It is critical that a party who receives spousal support should pay quarterly estimated taxes on this money or save adequate money to pay taxes on it at the end of the year.  Be sure to review with a CPA how receiving spousal support will impact tax deductions and the total annual tax bill.

5. The House’s Tax Liability.  A spouse who is awarded the family residence as part of the divorce settlement is responsible for all property taxes on the house and for all capital gain taxes on the residence if it is sold in the future.  Capital gain taxes associated with the house include the costs of sale and will be borne entirely by the spouse who was awarded the house in the property settlement.