Save thousands of dollars by avoiding these common financial mistakes of divorce
There are many moving parts to manage in divorce, but how well you manage the financial aspects can have significant impact on your long-term quality of life.
Many individuals and couples unknowingly overlook material financial matters when working through a marital settlement agreement. Some of the most common mistakes seen are:
1) Focusing on the assets without considering the liabilities
Unfortunately, marital property includes both assets and liabilities. Part of the process includes identifying any loans or debts incurred after you and your spouse were married. These too need to be considered and divided fairly and equitably within the agreement.
The lowest risk option for divorcing couples with marital debt is to do whatever can be done to pay off and close outstanding credit cards, loans or other debts. While you may have an agreement in place after the divorce that one spouse or the other will handle the debt obligation, a lender doesn’t care and will continue to hold all individuals on the obligation accountable. This means if an ex files for bankruptcy post-divorce, you could be the one holding the bag.
2) Failing to properly value significant assets
Although it comes at a cost, spending the money and utilizing experts necessary to properly value assets that are a significant proportion of the marital property basket is crucial. This often includes the martial home and retirement plans. One of the top inaccurately valued assets are pensions due to the wide variation of assumptions, methodologies and plan rules and regulations that exist between the plan provider and plan member. Failing to properly value these assets can have a significant impact on the total value of marital property and heavily impact the outcome of a settlement agreement. For a home, an appraisal can be done very easily for around $300-$400. For retirement assets, the cost to properly value defined benefit plans (which often runs anywhere between $200-$400 each) is well worth it if they are expected to be a large proportion of the assets under consideration.
3) Neglecting to address retirement accounts properly
When retirement accounts are part of the mix of marital property, the first goal is typically simplicity such that an attempt is made to try to keep retirement plans whole and with their original owners unless the goals and objectives of the couple or the balance of assets require them to be broken or split. The first step to this process is accurately valuing the plans. Once the allocation of retirement plan interest is determined, there is also a good degree of work that needs to be done to ensure that the split is actionable. This entails fully evaluating the member spouse’s plan and details to validate a split is possible, what the requirements are, and any tax or implications to one or both spouses as a result of doing so. Once this is understood, a Qualified Domestic Relations Order (QDRO) is required to execute the split and must be done expeditiously to ensure enforcement. The bottom line is if you have significant retirement assets and there is a high probability they will need to be split, you should have an expert on board to support the process including a Certified Divorce Financial Expert and a legal resource capable of writing up the QDRO(s) required.
4) Failing to insure or protect the settlement
In case you thought you were done once you finally reach agreement with your spouse on a martial settlement, you aren’t. What happens if a spouse paying maintenance or child support dies, becomes disabled or unable to generate income to support the duration of the payments according to the settlement? Considering these risks and additional protections like life insurance are important to ensure that long-term objectives of agreements reached are followed through with should unforeseen circumstances occur.
5) Emotional over-attachment to the home
Rightfully so, the marital home often becomes the star of the show. Especially in divorces where the couple has lived in the home for several years and have children deeply integrated into school this topic arises. It is completely expected that an attachment to the home exists by one or both spouses. The problem with this attachment is that it sometimes doesn’t align to the economics of the post-divorce financial situation. It is a common misconception that the two halves end up making more than the whole did in the first place and as a result, expectation setting is a significant part of a Certified Divorce Financial Analyst’s role in working with couples. In this case it is important to work together with the couple to understand the pre and post financial situation for both spouses and to work creatively with the financial facts and reality to show what is realistic and what may be an impending financial disaster.
While these mistakes can be severely financially detrimental to the outcome of a divorce, the risk and potential cost can be significantly diminished by ensuring that you have the right resources involved to help navigate the issues.