Common Financial Mistakes of Divorce
Divorce is usually such a tedious and cumbersome process. By the time the final decree is signed, so much of the spouses’ emotional and financial stability seem to be exhausted. Unfortunately, most of the financial problems will not even occur until after the divorce! This is the result of poor financial planning. A divorcing spouse will often take an unfair settlement, because either he/she didn’t know any better and thought it was a fair settlement, was too emotionally drained and just wanted the divorce to be over with, was pressured to accept the settlement and/or did not know how to demand for something more fair.
The list below briefly explains just 10 of the most common financial mistakes of divorce, that could have been prevented had the spouse sought divorce financial planning.
| MISTAKE 1: |
Not understanding the tax implications of the settlement.
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| CONSEQUENCE: |
Everything will be, or has been, taxed. You cannot escape it. It is only a matter of when. Different assets will be taxed with a different set of rules. Not understanding these rules can have a serious impact on the true value of your settlement. For example, Jane gets a 50/50 split which includes her home. She thinks she has gotten a decent settlement, because real estate seems to be appreciating greater than her husband’s investments. However, when she needs to sell the home 3 years later for additional income, she will be taxed on all the gain since the date of purchase. In addition, she will only be able to defer half as much of the capital gains because she is now single. This can easily eat up a third of her settlement!
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| MISTAKE 2: | Not understanding the value of retirement accounts.
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| CONSEQUENCE: | As I mentioned above, different assets play with different rules. Retirement accounts are interesting because they typically defer taxation until distribution. However, you also cannot touch them until age 59.5. Often, the divorcing husband will keep the retirement accounts intact for him, and give the wife a different asset because she needs the income today. However, a divorce financial analyst can show you how retirement accounts can be more valuable than other assets because of the tax-free compounding!
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| MISTAKE 3: | Not demanding for a portion of the spouse’s 401(k) account.
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| CONSEQUENCE: | 401(k)s are most often the most valuable asset. They are tax-deferred, and often the company will match contributions with company dollars! Free Money! Like other retirement accounts, a 401(k) may not be touched until age 59.5. However, most people do not know the exceptions to the rules. One of which includes divorce! A divorce financial analyst will explain to you how your spouse’s company 401(k) may be split as a result of divorce, and can also show you exactly how much this will impact your retirement dollars years down the road!
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| MISTAKE 4: | Not reviewing your spouse’s previous financial statements.
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| CONSEQUENCE: | Believe it or not, it is possible your spouse has been hiding assets from you all this time. How can you know for sure? A divorce financial analyst can review your spouse’s tax-returns, bank statements, brokerage statements, etc, from the previous 5 years to find certain patters of behavior. Rental income, unexplained company expenses, even certain charitable gifts, may lead to hidden assets! Has your spouse’s income changed at all in the past 5 years? Is your spouse due for a raise or bonus at work? It may be possible, especially in smaller companies, the boss may sympathetically defer the raise or bonus until after the divorce!
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| MISTAKE 5: |
Not taking ownership of the Life Insurance Policy.
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| CONSEQUENCE: |
It is often recommended for the higher income earner to buy life insurance, with the other spouse as the beneficiary. Obviously, this insures that if something were to happen to the alimony/child support paying spouse, the family would be taken care of. However, because the paying spouse is the owner of the policy, he/she can change beneficiaries at any time after the divorce. Even worse, he/she can decide to stop payment and cash out the policy! A divorce financial analyst will make certain that accurate and fair measures are taken on all investments and other financial decisions, and will demonstrate how these minor changes can make a large impact on your future.
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| MISTAKE 6: |
Taking the market value of the house as an even settlement.
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| CONSEQUENCE: |
John and Jane have a combined net worth of $1 million dollars, which includes a home that has a market value of $500,000. Just because you take the house, does not mean you are getting a 50/50 settlement. Many financial issues must be uncovered. What was the cost basis of the home? This will impact your taxable gains. When it comes time to sell this home years after the divorce, you alone will be responsible for all the taxable gains.
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| MISTAKE 7: |
Paying the wrong amount of alimony.
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| CONSEQUENCE: |
Unfortunately, you may need to pay alimony to your spouse. It’s a good thing that alimony is tax-deductible to the payor. However, if improperly planned, if too much is paid within too short of a time, the IRS may come after you for recapture of all the alimony you deducted! A divorce financial analyst will show you how you can structure your alimony payments to prevent tax-recapture, and how it can benefit both you and your ex-spouse. Yes, paying alimony may even work in your favor! To see how, review the case study section on this website.
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| MISTAKE 8: |
Not having your business professionally appraised.
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| CONSEQUENCE: |
Now more than ever, more families are becoming sole-proprietors and business owners. It could be an established company with employees, or a small shop across town, or even just a startup business in your basement office. When it comes to divorce, everything needs to be assigned a value. How do you value that business? Your spouse may tell you that the basement startup business is not worth a dime, since it hasn’t even produced significant cash flow. However, until it is professionally appraised, you cannot be sure of the fair value. There are certified business appraisers that will consider all variables to give you an accurate present value.
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| MISTAKE 9: |
Not taking into consideration the value of intangible assets.
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| CONSEQUENCE: |
When we think of assets, we automatically think of the house, cars, savings, investments, etc. We first think of the tangible assets. One of the biggest mistakes made by a divorcing spouse is not to take into consideration the value of intangible assets, such as career assets. These are the assets tied to you and your spouse’s career. Insurance, stock options, vacation pay, sick pay, pension plan, social security, professional contacts, job experience! It goes on and on the more you think about it. Depending on the situation and the company, you have a right to these career assets. This is invaluable for the spouse who neglected his/her own career for the health of the marriage.
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| MISTAKE 10: |
Not understanding how marital debt can hurt you.
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| CONSEQUENCE: |
Just because your spouse agreed to pay off your joint credit cards, does not mean that you are in the clear! Keep in mind, that debt was under your name as well. Your spouse can choose to default on the payments, and not only will it reflect on your credit, but creditors can come after you for the remainder of the payments! A smart option is to clear the marital debt before the divorce, regardless of who put those charges on there.
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