Breaking up is difficult:
Long after the wedding bells have faded, you might know someone who has come to a crossroads and decided to go in a different direction than their partner.
Building a life with someone involves a lot of things. There are memories, friendships, family relationships, and possibly kids and pets. Love plants a seed that eventually takes root deep as a family is born and grown. And while love isn’t always about money, divorce certainly can be.
Whether it’s just a house and a retirement account, or something more complex like business ownership, other investments, and stock options, unraveling a whole working life is difficult and complicated by emotional issues.
While it is not possible to escape the emotional burden that a divorce can have, it is not in a person’s long-term best interests to make or avoid decisions that will impact his future well-being because of the emotion. To avoid being a financial victim and starting your new life on the wrong path, there are steps that can be taken before the divorce is final. It is best to make these decisions as calmly as possible, using professional resources whenever possible.
People considering divorce should build a team of qualified professionals who can advise them on the legal, tax and financial impact of the various divorce settlements on offer.
Here are some tips to consider:
1.) Don’t become a financial victim. If you suspect that a spouse is considering a divorce, make copies of important documents and notify creditors, banks, and investment firms in writing.
2.) Don’t prepare an inaccurate budget. Individuals are generally required to produce a budget for temporary maintenance (aka Pendente Lite). But due to oversight or inaccurate record keeping, it invariably leads to problems when they find they are struggling to make ends meet with the court-approved interview on the basis of budget. . It makes more sense to bring in a qualified financial professional at this point to help prepare the budget.
3.) Don’t try to use the courts to punish a spouse. In most states, equitable distribution is the basis for settlements. Hire a combative lawyer or ignore other options like mediation or Collaborative practice will be costly and toxic to family relationships after divorce, especially when children are involved. (For a better understanding of this option, search for Collaborative Divorce or the International Academy of Collaborative Professionals).
4.) Don’t forget the common enemy: the IRS. As the saying goes: the enemy of my enemy is my friend. Both parties will be impacted by taxes. With careful planning in advance, this can be minimized. If assets have to be sold or qualified plans withdrawn prematurely, it can increase the tax bill while reducing assets to live on after divorce.
A 50/50 split may seem fair. But the main thing is the share of matrimonial assets that each obtains net of the tax authorities.
5.) Don’t use a divorce lawyer as a financial planner, accountant, or therapist. At rates over $ 300 an hour, it’s easy to rack up big bills and not get the expert advice that other professionals can offer.
6.) Remember to ensure settlement. The premature death or disability of a spouse means a loss of support, maintenance or help paying for tuition and health insurance.
Make sure that the life insurance company names the spouse receiving support as the policy owner. This way, if the spouse paying the policies stops paying the premium, at least the beneficiary / owner will receive notice and can take legal action to remedy the violation.
7.) Don’t keep the matrimonial home if it’s not affordable. Too often, couples argue over who keeps the marital home. While there may be sentimental value or legitimate concerns about uprooting children from schools, it may not make financial sense to keep the house. After all, real estate is a low-performing asset (and has actually been negative in recent history) while mortgage, taxes, and maintenance expenses can strain post-divorce budgets. It usually makes more sense to sell the property while still technically a couple to get the maximum capital gains exemption ($ 500,000 above base cost) and share the proceeds to buy or rent another location .
8.) Don’t forget to change the beneficiary. Forgetting to remove and change one’s spouse from qualifying insurance plans or policies, unless the settlement agreement requires it, could result in the transfer of benefits or assets to someone the pending couple of divorce does not wish to receive.
9.) Remember to close or cancel joint credit cards. To avoid problems, it is best to close credit cards at any new charges while awaiting final divorce. This will avoid the temptation of a spouse who accumulates burdens.
10.) Don’t accept a settlement without having a QDRO in place. Whenever a spouse has a qualified plan (eg 401k or pension), a qualified family relations order will notify the plan administrator who is entitled to the asset and when. (Note that a QDRO does not apply to IRAs that are governed by beneficiary designations). Sometimes it’s an afterthought, but it’s essential. It’s a good idea to watch the language in these commands. If not worded correctly, it could delay when a spouse will be eligible to start receiving benefits or it could lead to investment decisions that could be reckless or detrimental to the spouse’s retirement interests.
There are several methods for valuing retirement or retirement benefits. This is often overlooked by time-constrained divorce lawyers or court staff. Use a financial professional trained in these techniques to ensure that the settlement analysis is performed correctly.
And make sure that the lawyer who drafts the wording of the QDRO allows the beneficiary of the pension or retirement account to be eligible to start receiving benefits as soon as possible under the rules of the qualified plan. Otherwise, a beneficiary spouse may have to wait for the retirement of the other spouse with the account, which they may choose to delay out of need or out of spite. Some administrators will separate the part for the beneficiary spouse, so it is a good idea to ensure that the funds are invested according to the age and risk tolerance of the beneficiary and not just held in a low interest money market account. .
11.) Don’t underestimate the impact of inflation. Without the proper help in reviewing settlement options or preparing a post-divorce plan, it’s easy to forget that the lump sum received today may seem like a lot, but may not be enough for inflation. Whether it’s for tuition, medical care or housing, inflation can eat into a person’s budget and resources.