Divorce can be emotionally and financially devastating. The emotions and stress that accompany a divorce frequently cause individuals to make rash and ill-advised financial decisions that have a far-reaching impact on their financial future. Fortunately, it is relatively easy to avoid many of the common financial mistakes that couples make when they are going through a divorce.
1. Failure to Thoroughly Research and Value Marital Assets.
Prior to reaching a financial settlement, each spouse is required to provide full and complete disclosure of all of their assets and liabilities. It is not uncommon for a spouse to hide assets or understate the value of certain assets to reduce the financial settlement the other spouse receives. For this reason, one of the most important steps in the divorce process is conducting an audit of each spouse’s financial situation, including a review of tax returns, bank statements and investment accounts.
2. Failure to Consider Tax Consequences.
Couples frequently neglect to consider the tax consequences of their financial settlement. Liquidating certain assets, such as homes and investment and retirement accounts, can lead to a significant tax bill in the future. Also, the spouses’ deductions and income will be impacted by the amount of support paid or received.
3. Allowing Emotions to Dictate Settlement Terms.
Divorce is frequently listed as one of the most stressful events in a person’s life, and it can be easy to let emotions rule the day. However, emotional decisions do not necessarily lead to the best financial decisions and also make it very easy for spouses to manipulate each other. An example of this is the family pet. If one spouse is more emotionally attached to the pet, the other spouse may battle over ownership of the pet in an attempt to gain a valuable financial concession.
4. Failure to Establish a Realistic Budget and Financial Plan.
Before agreeing to a financial settlement, the parties need to fully understand what their living expenses will be after the divorce, including the costs of:
- Health care
- Income and property taxes
- Transportation costs
- Grocery costs
- Schooling costs for children
Creating a detailed budget will allow the spouses to decide if keeping the family home is feasible and advisable.
5. Failure to Obtain Insurance on Spouse Paying Spousal or Child Support.
Once spousal and child support awards have been granted, it is important for the receiving party to make sure that there is adequate life insurance on the paying spouse. The receiving spouse should make sure that the beneficiary designations correctly reflect the support agreement and that the premium payments are made. Requesting duplicate premium invoices and notices of cancellation can ensure that the policies do not lapse.
6. Failure to Provide for and Properly Value Retirement Benefits and Savings.
Retirement benefits and savings, including social security payments, are governed by a number of rules and regulations. The handling of certain benefits can have significant tax consequences for the couple. For instance, if one spouse is receiving a portion of the other spouse’s 401(k) as part of the divorce settlement, the amount will need to be transferred directly to another retirement account to avoid a significant tax penalty.
7. Failure to Understand Debt and Credit Issues.
As stated above, some individuals hide assets from their spouses. Similarly, some spouses also hide debt. For this reason, it is important that spouses obtain a copy of their credit report very early in the divorce process. This will allow them to have a full picture of any debt or credit rating issues. The spouse should pay off joint debt before the settlement process to improve their credit rating.
8. Failure to Consider Liquidity of Assets when Evaluating Fairness of Financial Settlement
A fair and realistic settlement involves more than just making sure each spouse leaves the marriage with the same dollar amount of assets and liabilities. It is also important to look at the liquidity of an asset. A spouse with $100,000 in a bank account is going to have more financial flexibility and money on hand than a spouse that received the family home with equity of $100,000.
9. Failure to Ensure Parties Follow Terms of Settlement.
After the settlement has been reached, the parties need to make sure that the terms of the settlement are implemented. This includes paying off all joint debts and closing joint credit card accounts.
10. Failure to Consider Eligibility for Health Insurance.
The ongoing cost for health care coverage is an expensive and frequently overlooked portion of the budget. Prior to agreeing to a divorce settlement, both parties to the divorce need to understand the cost of maintaining or obtaining health insurance. The same analysis should be performed with other insurance vehicles, including long term care and life insurance.