Keeping Your Money Smart During Breakup: 11 Critical Financial Mistakes to Avoid in Divorce


Breaking up is hard:

Long after the wedding bells have died down, you may know someone who came to a fork in the road and decided to go in a different direction than their partner.

Building a life with someone involves many things. There are memories, friendships, family relationships and possibly children and pets. Love plants a seed that eventually takes deep root as a family is born and grows. And while love isn’t always about money, divorce certainly can be.

Whether it’s a home and retirement account or something more complex like business ownership, other investments and stock options, unraveling a life of work is difficult and complicated by emotional problems.

Although there is no escaping the emotional burden that a divorce can have, it is not in a person’s long-term interest to make or avoid decisions that will impact his future well-being because of his emotions. To avoid being a financial victim and starting your new life on the wrong track, there are steps you can take before the divorce is final. It is best to make these decisions with as little passion as possible using professional resources whenever possible.

People considering divorce should assemble a team of qualified professionals who can advise them on the legal, tax and financial impact of the various proposed divorce settlements.

Here are some tips to consider:

1.) Don’t become a financial victim. If you suspect a spouse is considering 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 inaccurate monitoring or record keeping, this invariably leads to problems when they find they are struggling to make ends meet with court-approved maintenance within budget. It makes more sense to hire a qualified financial professional at this stage 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 of 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 International Academy of Collaborative Professionals).

4.) Don’t forget the common enemy: the taxman. As the saying goes: the enemy of my enemy is my friend. Both parties will be impacted by taxes. With careful planning ahead, this can be minimized. If assets need to be sold or qualified plans withdrawn prematurely, this can increase the tax bill while reducing assets to live on after the divorce.

A 50/50 split may seem fair. But the main thing is the share of matrimonial assets that each gets net of tax.

5.) Don’t use a divorce attorney 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.) Don’t forget to ensure payment. The premature death or disability of a spouse means the loss of support, maintenance, or help paying for school fees and health insurance.

Make sure the life insurance company names the spousal support recipient 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 deal with the breach.

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 in uprooting children from school, it may not make financial sense to keep the house. After all, real estate is a low-yielding asset (and has actually been negative in recent history) while mortgage, taxes and maintenance costs can strain post-divorce budgets. It usually makes more sense to sell the property while technically remaining a couple to get the maximum capital gains exemption ($500,000 above cost base) and split the proceeds to buy or rent another location.

8.) Don’t forget to change the beneficiaries. Forgetting to remove and change one’s spouse from eligible insurance plans or policies, unless the settlement agreement requires it, could result in the transfer of benefits or assets to someone the divorcing couple does not want receive them.

9.) Remember to Close or Cancel Joint Credit Cards. To avoid problems, it is best to close credit cards to any new charges while waiting for the final divorce. This will avoid the temptation of one of the spouses accumulating charges.

10.) Not accepting a settlement without having a QDRO in place. Whenever a spouse has a qualified plan (ex. 401k or pension), a qualified domestic relations order will inform 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). It is sometimes an afterthought, but it is essential. It’s a good idea to look at the language in these orders. If not worded correctly, it could delay when a spouse becomes eligible to begin receiving benefits or it could result in investment decisions that may be unwise or detrimental to the spouse’s retirement interests.

There are several methods of valuing pension or retirement benefits. This is often overlooked by divorce attorneys or court staff who are short on time. Use a finance professional trained in these techniques to ensure settlement analysis is performed correctly.

And make sure that the attorney who drafts the wording of the QDRO allows the beneficiary of the retirement 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 titular spouse, whom he may choose to delay out of need or spite. Some administrators will separate the portion for the beneficiary spouse, so it’s a good idea to ensure the funds are invested according to the beneficiary’s age and risk tolerance and not simply held in a money market account at low interest rates.

11.) Don’t underestimate the impact of inflation. Without proper help reviewing settlement options or preparing a post-divorce plan, it’s easy to forget that the lump sum received today may seem huge, but may not be enough for inflation. Whether it is for tuition, medical care or housing, inflation can put a heavy strain on the budget and resources.

Source by Steven Stanganelli

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