Couples fight about finances when they are married, so it makes perfect sense that finances are a major focal point of most divorce problems. In some cases, a spouse will simply give in to avoid more confrontation, but this can affect their finances negatively in the future. While give and take is important to get the divorce finalized, you need to be careful not to risk your financial future simply to get the divorce over with quicker.
The family home – it is perfectly understandable for parents to want to keep their children in the family home. However, as a single parent, this may not be possible. You have to look at your finances realistically to see if paying for the mortgage, utilities, and insurance is doable on only one income and spousal or child support, if there is any. The best decision here may be to sell the home, split the proceeds, and find something more affordable.
Evaluating expenses – it is not uncommon for one spouse to run the family finances. While you know what you clear every month, you may not actually have a clear idea of what it takes to run a household. Underestimating your expenses can put you into a deep hole soon after the divorce. Take the time to sit down and create a new and realistic budget for your “single” life.
Spousal support and/or child support – what good does having a huge award do you if your ex cannot afford the payment? Sure, he or she may end up in jail over non-payment, but if he or she cannot actually afford the payment, you are going to get nothing. Work together to find out what is actually affordable to ensure payments are actually made.
Property division – when looking at the division of property, make sure you are getting your fair share, which may actually be more or less of the actual property. For instance, if you are going after a family home that is valued at $200,000 and your spouse gets two rental properties with a value of $100,000 each, your spouse is actually coming out ahead because these properties also create monthly income over and above the actual value of the homes.
Big picture – if you look at your finances one item at a time, you are going to miss the “big picture” of how these finances are going to affect you together. For instance, taking a settlement of an IRA may seem like a good idea, but what are the tax ramifications of taking the payout? Is this a good decision based on the rate of inflation and current tax rates? You need to look at each area and how it can possibly affect other areas of your finances.
Investments – are you considering taking investments based on future expectations? Have you consulted with a financial expert or are you taking the word of your spouse as to the future value of these investments? If there was ever a time to secure financial services, this would be it. Otherwise, you could find yourself accepting an asset in the divorce agreement that has no chance of reaching the financial value you are expecting, leading to your spouse getting the lion’s share of the settlement.
Defined Benefit Plan – while you contribute to your 401(k), a defined benefit plan (DRB) is completely controlled and financed by the employer. Your spouse cannot receive the funds until a specific age, but this plan does have a current value that must be decided so you get the share of the plan to which you are entitled. Obviously, figuring out the value of this plan can be quite difficult, which is why your attorney will probably recommend bringing in an actuary if he or she does not already have one on staff.
Qualified Domestic Relations Order (QDRO) – what happens to the 401(k)? A QDRO dictates how the plan administrator will divide this asset when the funds are eligible to be distributed. Without this document in place, you may lose your rights to this income.
Joint unsecured debt – credit card debt…often overlooked and something that can come back to haunt you if the other party does not honor the debt. For instance, as part of the settlement, your spouse says he or she will pay XYZ credit card. That sounds great, but what happens when he or she begins to have financial problems and defaults on the card. If your name is still on it, you are still liable for that debt. If possible, have all joint debt settled out of the estate prior to dividing assets. You may walk away from the divorce with a little less “liquid” cash, but you will not have to worry about a credit card company coming after you in the future for a debt your spouse agreed to pay.
Emotional attachments – you may have an asset that you want simply because it means something to you personally. How much are you willing to give up to get that item or asset? In all likelihood, your spouse knows your attachment to this asset and can manipulate division of property in his or her favor. Sure, you walk away with the coveted item, but you take a significant loss in the process. It is okay to demand this item, but do not associate a higher financial value to the item than it deserves.
Lawyers are not financial planners – we have made reference several times concerning the opinion of a financial expert. Realize your attorney is an expert at divorce, not finances. While he or she may have financial experts on staff, he or she is not the actual “go to” source for this information. If your attorney does not have access to this type of staff, seek out this advice on your own before putting your signature on the final divorce agreement.
Social Security benefits – did you know that once the marriage is in existence for ten years, you might be eligible to receive half of your spouse’s benefit amount. Would you believe the average term of a divorce marriage is just over 9.5 years? By simply putting off the divorce another six months, the spouse can significantly increase his or her Social Security benefits upon eligibility.
Your Future – what are the long-term consequences of your divorce settlement? Are you taking something that almost seems too good to be true now that could really hurt you financially a decade from now? If you do not have the financial expertise to figure this out on your own, it would be wise to have a financial planning expert to look over the terms of your settlement and make recommendations.
Insure your agreement – what happens when the spouse required to pay alimony and/or child support dies or becomes disabled? Those payment stop, period. In order to prevent this from happening to you, require life insurance and disability insurance on that spouse as part of the final agreement. Doing so secures your financial security regardless of what happens to your ex spouse in the future.
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