Today more and more households are headed by a divorced or single individual. Because most rules involving retirement, insurance, income taxes, and estate taxes differ because of marital status, there are unique challenges that may arise for these individuals.
There are some strategies that may be useful for divorced and single individuals as they navigate financial planning.
- Retirement. Beneficiary planning is important for divorced and single individuals, particularly in cases where there are minor children and guardianship decisions need to be clear.
- IRAs and most retirement plans have different rules for unmarried individuals. For example, a non-spouse beneficiary cannot treat an IRA as his or her own and defer RMDs.
- Retirement income planning becomes more important for individuals who do not have a spouse that can “make up the difference” in retirement.
- Insurance. A sole provider needs adequate life and disability insurance. It is always good to take an inventory of current policies to identify gaps and review beneficiary designations.
- Life insurance can also be used within an estate planning strategy to provide an equal inheritance among multiple children or heirs.
- Taxes. Understanding income tax implications is important especially for newly divorced individuals. Clients will need to assess the impact of their new filing status and the possible decrease in deductions and exemptions, as well as potential tax liability for alimony.
- Large transactions that may occur in divorce, such as the sale of a house, may also create tax issues for individuals.
- Estate planning. For divorced and single individuals, there are no special deductions. In the case of large estates, careful consideration is needed for planning for liquidity of assets at death.
- If a client plans to remarry, he or she may want to consider planning strategies involving a Qualified Terminable Interest Property Trust (QTIP) to provide for children from an earlier marriage. The QTIP trust allows each partner to ensure his or her own assets go to a specific designated beneficiary — typically children from a previous marriage
- As with unmarried couples, it is important to review legal documents such as durable power of attorney, health-care directives, and guardianship plans for minor children.