There are a lot of mistakes that can be made throughout a divorce, but there are some that can be felt for years beyond the final divorce decree.
Avoiding the Financial Homework
It is typical that one spouse handles the finances. As you enter negotiations on a divorce settlement the family financial manager will have a leg up. If you believe you are heading into divorce or have recently been served papers and you are not the financial person in your marriage, it is time to become one. You can work with a Certified Divorce Financial Analyst® to help guide you through the items to begin collecting, but you need to go beyond collecting the data. You are embarking on a journey that will require you to begin making big financial decisions and you must start learning what you have and how to manage it. Working with an advisor is a good starting place but don’t expect to pass the responsibility over, they are there to guide and direct you. This may seem daunting, but you are capable, it starts by taking one step at a time.
Hiring a combative attorney
Hiring the right professionals in a divorce case can get very expensive, especially if you end up heading to court. According to Martindale-Nolo Research the average cost of divorce in Texas is just under $16,000 and on average will last a year. If you end up having to go to court to settle your divorce, those figures could nearly double. You will save yourself a significant amount of resources and time by choosing to work together, with some guidance, and mediate your case. Not only will this be less costly, but it will also offer you the most flexibility when negotiating your divorce settlement.
Making emotional decisions
Divorce is emotional, nobody is arguing that fact. When it comes to splitting assets, I would caution you to not get focused on any one asset; the house, paintings, pension, etc. Lean on your Certified Divorce Financial Analyst® to help you get a look at the bigger picture. This is commonly seen with the family home, especially if children are involved. The main caregiver, in most cases the women, may not want to cause more emotional distress on the kids so she fights to keep a house she can’t afford. She becomes house poor and after years of being a stay at home mom, she is now having to go back to work or ultimately sell the house she fought so hard to keep. Making emotional decisions may satisfy a short-term desire but it may have long lasting negative impact on the financial health of the “losing” party.
Not considering taxes
The U.S. tax code is complicated and doesn’t seem to ever simplify. Whenever any financial decision is made about buying, selling, splitting, holding, inheriting, and the list goes on, you must consider the tax impact. Why? The most obvious is the rates alone. Let’s say for example that a couple has a checking account and two IRA accounts. In an effort to make an equitable split one might suggest that one spouse keep the checking account and the other take the two IRA’s that in value equal the same as the checking account. Great, equitable split, right? No! Whenever you take money out of an IRA it is like receiving a paycheck for tax purposes, so depending on the amount you take out you will pay ordinary income tax which today could be as high as 39.6%. Let’s suppose this couple is in their early 50s, now you have to tack on an additional 10% tax penalty for withdrawing the funds from an IRA prior to age 59 ½. Still think this is an even split? I caution you not to make decisions based solely on tax ramifications, but to not consider them at all is a huge mistake.
Not Implementing the divorce
You have a final divorce decree, now what. Now the work begins to unravel marital assets, so you can begin to pick up the pieces and move forward. What does that entail? Changing account titles, getting a Qualified Domestic Relations Order (QDRO) for your ERISA plans that will be split, and then actually following through to process it with the institution. Updating your estate documents; you may not want your ex-spouse being named as your power of attorney or receiving assets through your Will. And don’t forget about those beneficiary designations too! Your financial advisor can help with this process and then work with you to redefine your objectives and goals to rebuild your financial plan.
For guidance on avoiding these mistakes please contact a Certified Divorce Financial Analyst®. This is the post content