Breaking up is hard to do and divorce can be expensive. When you’re going through the pain and emotional battles of a divorce, it’s easy to overlook financial issues which can hurt you years later. Divorce360.com offers advice on the top costly financial mistakes people make when going through a divorce.
- Don’t Be a Financial Victim. If you suspect your spouse is planning a divorce, make copies of all important financial records, including account statements (savings, investment, real estate partnership) and data which relates to your marital lifestyle (checking accounts, charge card statements, tax returns). If you believe your spouse may liquidate or retitle marital assets, notify the holder in writing and get a restraining order from the court. Watch out for cash in joint checking, brokerage accounts or cash value of life insurance. If assets are taken, legal and forensic accounting fees could become excessive.
- Not Considering Mediation. If assets are moderate, joint custody is workable and your spouse is agreeable to a fair settlement, mediation can help save thousands of dollars in legal fees and emotional aggravation, while providing more flexibility then the adversarial legal process. Mediation can be disastrous when one spouse is hiding assets or income, or is unwilling to consider the needs of the other.
- Hiring a Combative Lawyer as Punishment. This is a very bad idea for two reasons. First, except in extremely egregious cases, divorce settlements are determined by equitable distribution laws and courts will not punish your ex-spouse financially for being a bad person. Second, your attorney assumes carte blanche to increase hours spent on your case. High divorce costs mean less money will be leftover for living.
- Failing to Recognize your Enemy…the I.R.S. Work together with a divorce financial planner or tax accountant to minimize the total taxes you and your ex will pay during separation and after divorce and share the money you save. Don’t forget, both you and your spouse are liable for taxes due as a result of audits on joint returns.
- Producing an Accurate Budget. Invariably, clients underestimate or omit expenses when they produce their initial budget for temporary maintenance (Pendente Lite) and, later in the divorce process, they complain about not being able to pay bills. Use a financial professional to help you produce an accurate and complete budget.
- Disregarding the Impact of Taxes in a Divorce Settlement.The bottom line is the share of marital assets you get after Uncle Sam gets his. Say your spouse handles all the investments and offers to split them 50/50. Sounds fair? Look at the value of your assets relative to your spouse on an after-tax basis, then decide if you like the deal.
- Failing to Use Computer Models to Evaluate Settlements. If you are trying to decide whether a divorce settlement is equitable and workable, you certainly want to know how you will be doing financially three, five or 10 years down the road. There are many interactive factors you must consider, including assets, incomes, budgets, maintenance and child support, taxes, retirement plans, investments and educational expenses. Specialized divorce computer models produce comprehensive and realistic analyses of your post-divorce lifestyle.
- Fringing an emotional attachment to assets.The marital residence, the pension you earned, a painting purchased during the marriage – these assets bring an emotionally charged debate to divorce negotiations. The fact is, many can’t afford the house and give a low priority to retirement planning. A house is an asset which has a low return on investment (real estate appreciates at the rate of 2 or 3 percent annually) and is a major cash expense (mortgage payments, taxes, repairs, heat and electricity).
According to Wisconsin-based attorney Mark Krueger, another financial mistake involves Qualified Domestic Relations Orders (QDRO). According to Krueger, the QDRO is one of the most treacherous areas of divorce law and many attorneys who practice family law do not fully understand how to divide a pension, and the various ways to do so through a QDRO. The house and the retirement plans are likely to be the largest assets in your marriage. Did you know you could elect to commence your former spouse’s pension even if they have not yet retired? The ages of each spouse are an important factor in this regard. You need to know the earliest possible retirement age and why you should mark this date on your calendar as the date you must absolutely commence your pension. You also need to find out how often the plan is valued by the administration firm and when the company’s contributions are made to make sure you get your full share.
- Using a lawyer as a financial planner, therapist or messenger. Attorneys generally charge $200 and upwards per hour and are not skilled therapists or certified financial planners. If you need emotional support, career counseling or financial analysis, utilize qualified professionals and save big money in lawyer’s fees.
- Beware of Settlements Which Look Good.Both spouses and children must make compromises in their lifestyles post divorce. A settlement which 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. Secure all payments with assets and insurance.
- Disregarding the Impact of Inflation. The effects of inflation on the cost of a child’s college education 15 years in the future or retirement 20 years hence, can be dramatic. The rule of 72 is a simple way to judge the impact of inflation. If the inflation rate is 3 percent, the rule of 72 states prices will double in 24 years (72/3=24). College costs at 5 percent inflation will double in 14.5 years (72/5=14.5).
- Forgetting to Update Estate Documents. After heavily contested divorces, many people forget to change the beneficiaries on their life insurance policies, IRAs and will. The result is their ex-spouse ends up inheriting their estate which they really wanted to leave to their children, new partner or favorite charity.
- Failure to adequately insure the divorce settlement. Premature death or disability of your ex-spouse can result in loss of maintenance, child support, college tuition, or property settlement. Life and disability insurance can guarantee your payments and your family’s security. Also, don’t ignore the high cost of purchasing individual health insurance.
- Failure to Develop a Financial Plan. One indisputable fact of divorce is two households cost more to operate than one, but income is unchanged. Many people start their post-divorce lives not fully understanding their settlement must last a significant amount of time – sometimes the rest of their lives. Financial planning can help people transition from married to a single lifestyle by prioritizing financial goals, developing realistic expectations, and producing written plans for allocation of financial resources.
Here are some other financial mistakes you should avoid when going through a divorce:
- Be informed. Divorce is an increasingly complicated process, and its complexity is compounded by different laws governing separation and divorce in different states. Even before any legal subtleties come into play, though, there are financial mistakes people make which come from simply not having or not remembering the right information. You can avoid some of these if you know what you own [401ks, stock, insurance, annuities, timeshares, memberships, executive perks, etc.], know the difference between separate and marital property, and know what you are entitled to.
- Keeping joint credit cards and loans. Once you call it quits in the relationship, you need to separate your finances ASAP – and try to save money during your divorce. One reason to close joint credit cards and loans is each of you will be 100 percent financially liable for debts incurred – even if the other person racked up the bills.
- Trying to maintain the exact same lifestyle. Before your divorce, you may have taken regular family vacations, eaten out whenever you wanted and had your kids enrolled in tennis classes and soccer lessons, as well as the after-school band club. In your post-divorce life, however, you’d be wise to accept a simple truth and break it gently to your children: You can’t do everything you previously did. Trying to maintain the status quo will only cause stress to everyone.
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