When you’re swept away by love and filled with the promise of a life partner, the mere thought of breaking up feels silly. After all, it’s forever and ever, amen, right? Unfortunately, not always. It’s not a rosy statistic to share but 50% of marriages in the United States sadly end in divorce. When faced with healing a broken heart and determining the next chapter of life, dealing with money matters just makes the whole process that much more stressful. In addition to finding your footing as a newly single person, you also have to consider how bills will be paid moving forward. To add to the financial stress of divorce, some revengeful ex-spouses can wreak havoc in the courtroom, costing more than a pretty penny.
Legally Establish The Separation
Once the decision to divorce is made, it’s time to put the separation in writing and in motion as soon as possible. This signals the start of your new life on your own, but it serves a purpose financially. Having this note on your financial files helps protect any money you make after that date. So, if you’re separated from your partners for six months before divorce proceedings begin, all of that income is solely yours. If you don’t make the separation legally binding, then that cash could be subject to being split down the middle. This date also applies to decisions involving child support and alimony.
Get A Copy Of Your Credit Report And Monitor Activity
Regardless of whether you commingled your incomes and shared accounts during the marriage, by being legally bound you were exposed you to your partner’s actions. Even if your spouse was (and is) a trustworthy person, it doesn’t mean mistakes weren’t made. “Anything that they did to hurt their credit score could have damaged yours as well.” This makes it essential to request a copy of your credit reports as soon as possible, and go through them with a fine-toothed comb. “Check your report for errors and continuously monitor to make sure the other person’s actions don’t affect your future.”
Credit card companies do not care about divorce. You’re still liable for any debt your spouse racks up on jointly held accounts. It’s best to leave marriages with no debt, or only the debt that’s yours. If you have the money to pay off your joint credit cards, do so and then close the accounts. “If you don’t have the funds, you can always divide the debt in half and transfer to individually held cards and then cancel the joint ones.” You want to avoid keeping joint cards, even with a verbal agreement to pay, because if your partner ghosts you, you’ll be left to pay the balance.
Move Half Of Joint Bank Balances To A Separate Account
“As soon as possible, to open up a new bank account, and transfer 50 percent of the available funds to your new account” You should also ensure that any income from employment or other applicable direct deposits are amended to be deposited into your new account.
Comb Through Your Assets
When separating assets, some couples become overly nit-picky about who is owed what. Emotions can be heightened even more in situations where a marriage ended due to infidelity or some sort of grave disruption of trust. Though it’s not always the case, men tend to believe they’re going to get all of the assets, whereas women are often scared they won’t receive any. As much as possible, try to set aside any feelings of guilt or retribution. Doing so will help you keep a clear, logical head and allow you to speak up for and defend what is yours. Getting a thorough and accurate understanding of what you’re entitled to require going through all of your assets line by line. “Usually the assets are split down the middle, but there may be assets excluded, such as inheritances or premarital assets.”
Conduct A Cash Flow Analysis
The day-to-day divorce details can be all consuming. But as you’re negotiating who gets what, also look ahead and do some prep work for the solo life. Doing some hands-on budget cash flow analysis will give you a sense of control over your finances. “If there is a shortfall, you can start whittling away at the discretionary items. If there is a surplus, then breathe a big sigh of relief.” Don’t forget to account for recurring expenses that you once split with your partner. The last things you want are any major financial shocks once you’re out on your own. Pay attention to big-ticket expenses like health insurance, car leases, digital media subscriptions and others. Expenses can add up quickly when you’re suddenly responsible for footing the entire bill.
Don’t Relinquish Control Of Assets Or Investments
Divorces never take place overnight. And if our ex-other-half decides to drag his or her feet, it can be delayed by months or even years. That’s why protecting your investments and assets (including real estate, investments, or any other assets that you are entitled to should start as soon as the separation is in motion.
Create A Game Plan For Taxes
It’s important to understand what you’re agreeing to before signing on the dotted line, otherwise, the split of assets could be less equitable than it first appears. “If one spouse were to take the principal residence, and another spouse were to take control over the retirement assets, there will be different tax implications towards the receipt of each asset, and the tax implications could be substantially different resulting in one spouse losing much of that value to a future tax burden. Alimony is no longer tax-deductible for the person paying it, and the payments are not considered taxable income to the recipient. This may seem like a good deal to the person receiving alimony because the alimony they receive is no longer taxable, but it’s very likely that they will receive less money because it’s now being taxed from the payer.”
The Benefits of Forensic Accounting in Divorce Cases
In a divorce scenario, a forensic accountant may be interested in various types of documentation, both business and personal, that can reveal financial information about a spouse. This can include such things as tax returns, accounting records and financial statements, bank statements, cancelled checks, credit card statements, appointment books, sales invoices, business contracts, financial projections, mortgage applications and other documentation.
Easier Budgeting and Greater Control Over Money
The end of a marriage can mean the end of fights over money. There is no more struggle over which categories get priority in the budget; no more evenings spent cajoling or pleading with a spouse to rein in spending. On the other side of divorce, there can be some freedom from these financial disputes. People who previously had spendthrift spouses may find they are now able to build up savings and contribute more to retirement funds. What’s more, they can shift money to their own personal goals, whether that is paying off debt, traveling more or something else.
Early Access to a Retirement Fund, Penalty-Free
A divorce is one of the few times a person can pull money out of a retirement account early and not pay an early withdrawal penalty. When an agreement known as a qualified domestic relations order is reached as part of a divorce, it allows for an early withdrawal from the account. This money is exempt from the typical 10% penalty assessed to those younger than age 59 1/2, although income tax still needs to be paid if the money is not rolled into an IRA. Cashing out part of a retirement account can be a risky move, but it gives the newly divorced some options they may not otherwise have.
Potentially Better Investment Returns
Divorce could mean better investment returns, at least for women. Men usually take a more aggressive approach to investments and take more risks. It’s possible divorced women who are managing their own portfolio may have weathered the current tumultuous year better than those with husbands calling the investment shots. In a market depressed by a global pandemic, those with a conservative approach and sensible asset allocations may not have had cause for panic or selling investments in a down market.
Becoming a Financial Victim
The biggest mistake divorcing spouses can make is being in the dark about finances. If your spouse has always handled all of the financial decisions in your household and you don’t have any information about you and your spouse’s income and assets, your spouse will have an unfair advantage over you when it comes time to settle the financial issues in your divorce. If you suspect your spouse is planning a divorce, get as much information as you can now. Make copies of important financial records such as account statements (e.g., savings, brokerage, and retirement) and all other data that relates to your marital lifestyle (checking accounts, charge card statements, tax returns). If you believe your spouse may liquidate (sell or transfer to cash) assets or retile marital assets without your consent, notify the holder of the asset or property in writing and get a restraining order from the court.
Not Considering Mediation
If you and your spouse can work together to reach a fair settlement on most or all of the issues in your divorce (e.g., child custody, child support, alimony, and property division), choosing mediation to resolve your divorce case may save thousands of dollars in legal fees and emotional aggravation. The mediation process involves a neutral third-party mediator (an experienced family law attorney trained in mediation) that meets with the divorcing couples and helps them reach an agreement on the issues in their divorce. Mediation is completely voluntary; the mediator will not act as a judge, or insist on any particular outcome or agreement. Mediation also provides divorcing couples a lot of flexibility, in terms of making their own decisions about what works best for their family, compared with the traditional adversarial legal process, which involves a court trial where a judge makes all the decisions. Mediation, however, is not appropriate for all couples. For example, if one spouse is hiding assets or income, and refuses to come clean, you may have to head to court where a judge can order your spouse to comply. Or, if one spouse is unwilling to compromise, mediation probably won’t work.
Hiring a Combative Lawyer to Punish Your Spouse
This is a very bad idea for two reasons. First, except in extremely egregious cases, most courts won’t punish your spouse financially for being a bad person. Second, hiring an attorney to punish your spouse will cost you because your attorney will need to increase the number of hours spent on your case. Increased attorney hours means higher divorce costs, and higher divorce costs means there will be fewer assets and cash left for you and your family. Try to take the emotion out of your divorce, and treat your case as a business arrangement. The best revenge is to live well after the divorce is over.
Failing to Recognize Your Common Enemy; the I.R.S.
Work together with a divorce financial planner or tax accountant to minimize the total taxes you and your spouse will pay during separation and after divorce; you can share the money you save. Don’t forget that both spouses are liable for taxes due as a result of audits on joint returns, so it’s usually in your best interest to work together and minimize possible liabilities. If you’re facing complicated tax issues in your divorce, it’s best to consult with an experienced family law attorney and an accountant.
Not Producing an Accurate Budget
Divorcing spouses usually underestimate living expenses when they produce their initial budget for temporary alimony (also referred to as “maintenance”), and later find that they aren’t able to cover all of their bills. Use a financial professional to help you produce an accurate and complete budget.
Disregarding the Impact of Taxes in a Divorce Settlement
It’s important to remember that after the divorce is final, you may get taxed on the marital assets you received through your settlement. Say your spouse handles all the investments and offers to split them 50/50. Sounds good, right? The only way to know if you’re getting a fair deal is to determine the value of the investments on an after-tax basis, then decide if you like the deal. Again, you should speak with a tax professional about the impact of any proposed property division before you agree to it.
Failure to Evaluate Settlement Proposals
If you’re trying to decide whether your spouse’s proposed divorce settlement is fair and workable, you should try to figure out how the settlement will impact your finances in the years ahead. There are many factors to consider, including assets, incomes, living expenses, inflation, alimony, child support, taxes, retirement plans, investments, medical expenses and health insurance costs, and child-related expenses such as education. There are specialized divorce computer models that produce comprehensive and realistic analyses of your post-divorce lifestyle. You should speak with a local divorce attorney or financial planner that specializes in divorce for help analyzing any proposed financial settlement.
Being Emotionally Attached to Assets in Divorce Negotiations
The marital residence, the pension you earned, a painting purchased during your marriage – these assets often bring an emotionally charged debate to divorce negotiations, which can impair good decision-making. Often, divorcing spouses that are attached to the family home don’t realize that they can’t really afford. Yet, they fight tooth and nail to keep it, sometimes at the expense of retirement planning. However, the real estate market crash has made it abundantly clear that homes have a very low return on investment and, in some cases, have a negative return; many houses today are still underwater, and couples have had to walk away from their homes and the hard-earned money they invested. In addition, a home is a major cash expense (e.g., mortgage payments, property taxes, repairs, and utilities). Let go of any emotional attachments you may have. During your divorce and settlement negotiations, your main focus should always be on how to maximize your finances by making sure you’ll have enough cash for living expenses after your divorce and in retirement.
Beware of Settlement Offers That Look Too Good
Both spouses and children must make compromises in their life styles post-divorce. A settlement that does not give one spouse enough money to live on is likely to go into default in the future. Be fair, but verify the numbers. Get payments up front whenever possible, even if you get less in total. Try to secure all payments with assets and insurance. It may be worth speaking to a family law attorney who can review a settlement offer and make sure your rights are fully protected.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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