Marriage triggers a huge shift in portfolio. But what happens when there is trouble? Divorce is a huge emotional setback. But should it be a financial setback as well? Not necessarily. We give a checklist for couples as they plan a future after divorce:
INCOME AND EXPENSES
In the first few years after divorce, more often than not, the standard of living falls. The reason is that the double income cushion is gone, which means tightening of budgets. Expenses like fuel, grocery and entertainment, earlier shared, have to be paid for singly. Savings fall and so the investment mix may have to be altered.
Divorce should trigger a paring down of risky investments and provision of more funds for emergencies. The borrowing eligibility also falls. So, any purchase of property has to be planned carefully.
All nominations in favour of the spouse have to be changed across investments, insurance policies, Public Provident Fund account, Employer Provident Fund account and bank accounts.
Rightful custody of jewellery has to be determined in a fair and reasonable manner with appropriate intervention by competent professionals.
Also, the will needs to be amended to change the beneficiaries. A clause on divorce excluding the former spouse from any share of the willed assets can be put. Nominations in disability policies should also be revised.
Any joint credit card must be cancelled. If any asset (home/car) bought on loan is retained by one spouse, the other should remove his/her name from the list of borrowers. This is to avoid any liability if the other spouse defaults
. More importantly, this will help avoid any negative impact on the credit score if the spouse defaults on loan payment.INSURANCE
Nominations in life policies in favour of the other spouse need to be changed. Policies where husband is the proposer need to be treated on the basis of the agreement drawn up during divorce proceedings.
The parent who gets the custody of the child needs to take special care to compute his/her life insurance needs to secure the child's financial future. While forecasting the future needs of children, it is safe to assume that the other parent will not pay anything and the child will not have access to education loan.
If a person is covered by the employer health plan of one spouse, the process to delete his/her name must be initiated. Many times, these plans provide a floating cover for the family. So, any claim by the estranged spouse may exhaust the limit. Family medical policies providing cover for self, spouse and children also need to be changed to reflect the new reality.BANK ACCOUNTS
Sharing of money in joint bank accounts will depend on the divorce agreement. It is advisable to close these accounts or to convert them into individual accounts. Special attention needs to be paid to lockers attached with such accounts. It is important to divide money in joint accounts in a fair manner. One way to do this is to freeze the account and not allow the money to be withdrawn without authorisation by both the parties.TAX IMPLICATIONS
Any settlement or alimony paid has to be planned carefully to avoid tax implications. In the past, the Mumbai High Court has held that the monthly alimony, being a periodic return from a definite source, is income under the Income Tax Act, 1961, but any lump sum received under the court order is capital receipt and so not taxable.
Divorce is not easy. However, it should not mean the end of the world, at least financially.
ARVIND A RAO
Chief Planner, Dreamz Infinite Financial Planners