FIFTEEN CRITICAL FINANCIAL MISTAKES IN DIVORCE
Lee Slater, MBA, CFP®, CDFA™
Becoming a Financial Victim
If you suspect that your spouse is planning a divorce, make copies of all important financial records such as account statements (savings, stockbroker, real estate partnership) and data that relates to your marital life style (checking accounts, charge card statements, tax returns). If you believe that 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 or Collaborative Divorce
If assets are moderate, joint custody is workable and your spouse is agreeable to a fair settlement, mediation or collaborative divorce can save thousands of dollars in legal fees, emotional aggravation and provide more flexibility then the adversarial legal process.
Hiring a Combative Lawyer to Punish Your Spouse
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. Treat divorce as a business arrangement and get your revenge by living well post-divorce.
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 ex will pay during separation and after divorce and share the money you save. Don't forget that both parties are liable for taxes due as a result of audits on joint returns. Don't count on the innocent spouse rule to protect you!!
Not Producing an Accurate Budget
Invariably, clients underestimate or omit expenses when they produce their initial budget for temporary maintenance (Pendente Lite) and later on in the divorce process they complain about not being unable to pay bills. Use a financial professional to help you produce an accurate and complete budget.
Disregarding the Impact of Taxes on Assets in a Divorce Settlement
The bottom line is the share of marital assets you get after the tax man gets his. Say your spouse handles all the investments and offers to split them 50/50. Sounds fair? I suggest you look at the value of your assets relative to your spouse on an after tax basis. Then decide if you like the deal.
Failure to Use Computer Models to Evaluate Settlement Proposals
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 3, 5 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.
Bringing an Emotional Attachment to Assets to Divorce Negotiations
The marital residence, the pension your earned, a painting purchased during your marriage- these assets bring an emotionally charged debate to divorce negotiations. The fact is many woman can't afford the house and give a low priority to retirement planning. A house is an asset that has a low return on investment (real estate appreciates at the rate of 2 or 3 % annually) and is a major cash expense (mortgage payments, taxes, repairs, heat and electricity).
Using Your Divorce Lawyer as a Financial Planner, Therapist or Messenger
One woman I spoke with ran up $35,000 in legal fees in just 2 months. Arrangements for her husband's parental visitations were made through their matrimonial lawyers. Attorneys generally charge $200 to $300 per hour ($450 for partners in well known New York City and Los Angeles matrimonial firms) 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 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. Secure all payments with assets and insurance.
Disregarding the Long Term 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%, the rule of 72 states that prices will double in 24 years (72/3=24). College costs at 5% inflation will double in 14.5 years (72/5=14.5).
Not Waiting Until the Wife Is Eligible for Her Husband's Social Security
If a couple is married for 10 years or longer, a wife is entitled to receive half of her husband's social security at retirement. Her ex-husband's social security payments are unaffected. It's ironic that the average length of marriage for people who get divorced is 9.6 years. Waiting just 6 months longer will increase a wife's retirement options with no reduction in her husband's payments.
Forgetting to Update Estate Documents
After heavily contested divorces, many people forget to change the beneficiaries on their life insurance policies, IRA's and Will. The result is that 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 Post-Divorce Financial Plan
One indisputable fact of divorce is that two households cost more to operate than one, but income is unchanged. Many people start their post-divorce lives not fully understanding that their settlement must last a significant amount of time...perhaps the rest of their lives. Financial planning can help people transition from married to single lifestyle by prioritizing financial goals, developing realistic expectations and producing written plans for allocation of financial resources.
CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered flame logo are certification marks owned by Certified Financial Planner Board of Standards Inc. These marks are awarded to individuals who successfully complete CFP Board's initial and ongoing certification requirements.