As the end of the year looms and holidays approach, many people find themselves taking stock of their lives – and relationships.
Feelings of disconnect and disappointment that once felt manageable may now feel intolerable in the face of all the forced holiday cheer and long-held expectations. And for couples already experiencing tension, this time of year can highlight just how far they’ve grown apart and make them question whether their relationship should continue into the new year.
If this sounds familiar, being proactive can help you feel more in control of what comes next. At Melone Hatley, P.C., we know how overwhelming this process can feel, especially with the upcoming holiday season. Here, we break down what you should do to financially prepare for a possible separation before the new year approaches.
Why Does Year-End Matter?
For many people, January 1 represents a symbolic reset. When it comes to relationships, this may mean closing the door on a difficult relationship and the emotional relief that comes with that. A separation may mean creating space for new goals and priorities in the new year without carrying old emotional baggage into it.
But ending a relationship before the end of the calendar year also has legal and financial implications. Even if a formal divorce won’t get finalized until later, the steps taken before year-end can have a significant impact, especially when it comes to money.
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Your Tax Status
First and foremost, your marital status as of December 31 determines how you file your taxes.
That means if you’re still legally married at year-end, you will have to file as “married,” even if you are separated from your spouse. This can be a good or bad thing depending on your income, deductions, and liabilities. Some couples decide to file jointly to take advantage of tax breaks, while others prefer to file separately to protect themselves from a spouse’s tax debt or audit risks. Consulting with your accountant or a tax professional can help you decide which route makes the most sense for your situation.
Health Insurance
Year-end is also the time when health insurance open enrollment periods close. If you are on your spouse’s employer-provided plan, you may lose that coverage after a divorce. Exploring your options now, such as COBRA or marketplace plans, can help prevent gaps in your coverage and expensive medical surprises in the new year.
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The Emotional and Financial Toll of the Holidays
And then there’s the emotional and financial toll of the holidays. Between gift-giving, travel, and other family celebrations, expenses (and emotions) can quickly spiral out of control. Having a plan in place for how costs will be shared or separated, and how time with the children will be allocated can help reduce conflict and keep both parties on budget during the holidays.
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Getting a Clear Understanding of Your Financial Picture
One of the first steps if you are considering a separation or divorce is to understand your current financial situation. That means taking stock of everything you own together as well as everything you owe.
Create an Inventory of Joint Assets and Debts
Start with an inventory of your joint assets and debts. This includes your home, joint checking and savings accounts, retirement and investment accounts, other real estate, vehicles, personal property, and any business interests. Equally important is your outstanding joint debt, including mortgages, car loans, personal loans, and credit card debt.
Creating a spreadsheet is a good way to stay organized when creating this inventory. This should include account numbers, balances, and whose name each asset or liability is in. You will also want to run a credit report on both yourself and your spouse, which can help identify accounts you may have forgotten about or red flags, like unusual withdrawals, new credit lines, or hidden debt. If you notice anything suspicious, you will want to consult with an attorney as soon as possible to protect your financial interests.
Carefully Separate Finances
While it may be tempting to separate your finances once you’ve decided to separate, it’s critical to get legal advice before making any major financial moves.
That said, you can begin laying the groundwork for your financial independence by opening individual checking and savings accounts. You will also want to consider getting a credit card in your own name if you don’t already have one. Start using these accounts for personal income and expenses so you can track your financial activity separately.
For joint accounts, consider setting up transaction alerts, or consult with your attorney about freezing accounts to prevent either party from draining them. This isn’t to create conflict but to protect both parties during your transition.
Lastly, avoid opening new loans or making purchases in joint names. Any new debt can become a point of contention if you move on to divorce afterward.
Update Your Legal Documents
It’s easy to overlook legal documents when your focus is on separation, but ignoring this can leave you vulnerable.
Start by reviewing your estate planning documents, including your will, powers of attorney, healthcare directives, and any trusts you may have. If your spouse is currently listed as a beneficiary or decision-maker, this is the time to make changes.
Also, review your beneficiary designations on retirement accounts, pensions, and life insurance policies. These override your will, so even if you have updated your estate plan, your soon-to-be ex-spouse could still receive significant assets if you forget to change these designations separately. Keep in mind that certain states restrict making changes to insurance policies or retirement accounts until a divorce is finalized or there is court approval.
Create a Post-Separation Budget
Separation means considering how your income and expenses will change once you’re no longer living in a shared household. Building a realistic budget now helps you avoid surprises later and gives you more control over your financial future.
Start by estimating any costs of the separation itself – attorney fees, temporary housing, or court-related expenses. You’ll then want to create a post-separation budget considering your expenses based on your own income or financial terms you’ve agreed upon with your spouse. These expenses should include your rent or mortgage payments, utilities, groceries, child-related expenses, insurance, and spousal support, if applicable.
Consider Year-End Financial Moves
If you are separating or divorcing before the end of the year, making intentional financial moves can better position you financially:
- You may reduce your taxable income by contributing the maximum allowed to your 401(k), IRA, or Health Savings Account (HSA).
- If you’ve been paying into a Flexible Spending Account, you may want to go ahead and schedule medical appointments, purchase eligible health products, and use up dependent care funds in order not to lose these benefits.
- If you are currently on your spouse’s health insurance, now is the time to explore your options in case you lose coverage.
While these decisions will typically fall under the domain of your accountant or financial planner, your attorney can also advise you whether you should delay filing for divorce after the new year for tax purposes, to protect your share of a year-end bonus your spouse might be receiving, or whether it is better to finalize a divorce now to start fresh in January with separate finances and a new tax status.
Keep an Eye on Your Credit
Separation and divorce are some of the leading causes of credit issues. Shared accounts, missed payments, and unauthorized charges can all wreak havoc on your credit score if not monitored closely. You can protect your individual credit score by setting up spending alerts or freezing your credit to avoid unauthorized activity. If most of your credit history is tied to your spouse, start now to build your own by applying for a credit card in your own name and using it responsibly or applying for a secured card.
Establishing and protecting your credit now gives you options and security down the road when you need to refinance a mortgage, rent an apartment, or buy a car after your divorce.
Consider a Separation Agreement
Before you make any major financial decisions or changes to your living situation, it’s wise to consult with a family law attorney and consider drafting a formal separation agreement.
A separation agreement is a legally binding document that can outline important terms while you live apart such as who will pay which bills, how your shared assets will be handled, and what custody or visitation will look like. In addition to providing structure and reducing conflict during your separation, a properly drafted separation agreement can also serve as a foundation for an eventual divorce settlement, streamlining the process and minimizing future disputes.
You Shouldn’t Face This Alone
Deciding to separate from a spouse is never easy, but taking control of your finances now, pre-separation, helps create stability and peace of mind if you choose to move forward with a divorce.
At Melone Hatley, P.C., we know how personal these decisions are. Our team is here to listen, guide you through your legal options, and help you build a plan that protects what matters most – your well-being, your children, and your future. Call us today at 800-479-8124 or schedule a free consultation through our website with one of our Client Services Representatives
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