During your marriage, you and your ex most likely comingled funds and budgeted together. These are sound marital practices, but divorce puts you in a position that requires an in-depth review of the income, expenses, and assets that you and your ex brought to the marriage and forces you to make important decisions with lasting implications. Too often people underestimate just how complex these issues can be and how important it is to make the right choices. Your best plan of action is to be informed, take your time, think practically instead of emotionally, and consider the future when getting your divorce finances all in a line.
That being said, we have compiled a list of the most common financial mistakes people make when divorcing, as well as tips on how you can avoid similar pitfalls. While this list may set your mind at ease some, it does not replace the advice of a qualified professional when it comes to unique circumstances of your case. You may still find it necessary to consult a financial expert to assist with your situation.
Here are some financial mistakes to avoid when it comes to negotiating your divorce settlement.
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 (e.g., checking accounts, charge card statements, tax returns).
If you believe your spouse may liquidate (sell or transfer to cash) assets or retitle marital assets without your consent, notify the holder of the asset or property in writing and get a restraining order from the court. Watch out for any cash held in joint checking and brokerage accounts, and the cash value of life insurance policies. If your spouse uses or moves assets without your knowledge, you may have to hire legal and forensic accounting experts to help you locate and value the assets.
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 couple 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.
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.
Disregarding the Long Term Impact of Inflation
The effects of inflation on the cost of a child’s college education, or on retirement, 15 years in the future can be dramatic. The “Rule of 72” is a simple way to judge the impact of inflation. For example, if the inflation rate is 3%, the “Rule of 72” means that prices will double in 24 years (72/3=24). College costs at 5% inflation will double in 14.4 years (72/5=14.4). Be sure to work inflation into your settlement negotiations so you can cover the true costs of future financial expenses.
Failing to Consider Your Spouse’s Eligibility for Social Security Benefits
If a couple is married for 10 years or longer, a non-working or lower-earning spouse is entitled to derivative social security benefits on the higher earning spouse’s (“worker spouse”) record. These derivative benefits do not impact or lower the worker spouse’s social security payments, which is why it’s so ironic that the average length of marriage for people who get divorced is about nine and a half years. Waiting just another six months may guarantee increased retirement options with no reduction in payments.
Failure to Adequately Insure the Divorce Settlement
Your ex-spouse’s premature death or disability can be devastating and may result in a loss of alimony, child support, college tuition, or property settlement payments. Life and disability insurance policies can guarantee that these payments will continue despite an unexpected loss or injury.
Failure to Develop a Post-Divorce Financial Plan
One indisputable fact of divorce is that two households cost more to operate than one. Many divorcing spouses fail to realize that their divorce settlement must last a significant amount of time: perhaps even the rest of their lives. Financial planning can help people transition from a married to single lifestyle by prioritizing financial goals, developing realistic expectations, and producing sound plans for the assignment and division of financial resources.
Not understanding your responsibility to pay marital debt
In most cases, if a debt was incurred during your marriage, it is a shared liability. Dividing the responsibility for marital debts is part of the divorce process, but debtors often do not abide by the arrangements you and your ex made. Unexpected debts like this could cause complications and unexpected stress in your divorce finances if you are unaware of your liability, or if your ex accepts responsibility yet fails to keep up. Let’s say you agree that your ex will be responsible for the credit card in both of your names but fails to make timely payments. The collection agencies could come after you and won’t simply forgive you because of a divorce settlement agreement.
Tip: If possible, avoid the stress and reduce your risk of being harassed by debtors later by paying off all marital debts before the divorce becomes final.
Not securing enough alimony or child support and failing to insure your alimony
Most people are unaware of just how hard it is to modify an alimony or child support order. You should make sure your alimony and child support terms are comprehensive and clearly stated in your court order or separation agreement, because it won’t be easy to modify later on.
Additionally, if your ex cannot pay for alimony or child support then there will be nothing for you to collect. In the event your ex becomes disabled, deceased, or unemployed, you may be left without any support. You can request that your spouse obtain disability and life insurance policies (or modify an existing policy) to ensure you will continue to receive support in the event of any accident or drastic change in your ex’s circumstances, thus avoiding any impact to your post-divorce finances.
Tip: It may be possible to negotiate the alimony and child support payments to include money to cover the costs of the life insurance policy.
Choosing the wrong attorney
Your divorce is already a stressful and time-consuming process, especially when it comes to your divorce finances. If you can reduce the cost and burden on yourself it will greatly reduce your stress levels and better equip you for a stable future. An aggressive lawyer may frustrate your ex causing negotiations to turn sour or even hostile. Additionally, an attorney that instigates a fight runs the risk of squandering your share of the marital estate in unnecessary litigation costs and fees. Instead, find a lawyer that will advocate for your best interest in a professional way, and try to leave the emotion out of it.
Tip: Mediation may be your best money-saver. If the relationship with your ex is amicable enough, you could save a lot of time and money by avoiding the court room altogether. Mediation usually involves a neutral third-party family law attorney assisting you in reaching an agreement that works for both parties. This process provides flexibility and efficiency over the traditional court route. There is certainly a lot to consider here, and it definitely can seem overwhelming. But if you take your time to become informed, consider all the circumstances with the knowledge of your current situation and an eye towards your future, you can avoid these divorce finance mistakes. Remember, try to act from a place of logic and consider finding trustworthy qualified financial professionals to get the best outcome.
Wanting to keep the family home even when you can’t afford to
A house is more than another asset, it’s an intimate place with priceless emotional value. However, it is necessary to be realistic and protect yourself from future financial trouble when settling a divorce, and that means making tough decisions. If you cannot afford the family home then you may need to let it go. Homes often have a very low return on investment, sometimes even resulting in negative returns. If you ignore the numbers and attempt to hold on, you could find yourself struggling under the weight of the mortgage, maintenance, and property tax costs.
Tip: Most mistakes made during a divorce stem from actions taken from an emotional perspective. It is hard to separate the emotional weight of your situation from the practical and logistical, but it must be done for your own benefit. Consider the financial decisions of your divorce in the same way you would handle business transactions, supported by numbers, facts, and solid calculations.
Not knowing your ex’s work benefits and stock investments
Your ex’s employer-funded pensions and investments are assets of value that you are entitled to a share of, even if payment does not occur until the employee spouse retires. You should familiarize yourself with all of your ex’s assets and any potential rights you may have regarding these benefits and other divorce finances. Defined benefit plans, 401(k) s, and company stock may all be subject to division between the employee spouse and the non-employee spouse. In most cases, you will need to consult an actuary to calculate the present value of these assets.
Tip: Proceed with caution regarding risky investments and expected returns. Your ex may be attempting to convince you that a certain investment will yield a large enticing profit in an attempt to bargain for a different asset they would prefer to take in the division. In reality there may be no evidence to support your ex’s claimed return on investment. Consult a professional on the risks and potential for all investments before reaching a settlement. If it seems an offer is too good to be true, it very well may be.
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