Avoiding Financial Troubles during Your Divorce
It is no secret that a divorce can be an expensive venture. During a divorce, individuals are faced with many different decisions, including some choices that may affect their financial future. In many cases, there are some common mistakes that are made that can have a profound effect on someone’s finances. Here we will outline those mistakes and provide ways for you to avoid them. While you can deal with some of these issues on your own, help from a financial professional is always a good idea.
- Assuming Equal Division of Property: One mistake that individuals often make is assuming that the family property will be split right down the middle, each party getting exactly the same amount. It is important to understand that the value of an asset is not always based on or limited by the current value it holds. A good example of this is rental property or bonds – assets that generate income are generally worth more than their actual market value.
Most couple’s come to an agreement that each of them will receive property that is equal in value. While this may seem like the right way to approach the division of property, it does not always mean that each spouse will receive an equal amount of the property over time, especially when income generating assets are involved. Additionally, it is important to pay attention to factors such as:
- Property Present Value
- Tax Basis
- Transaction Costs
- Underestimating Living Expenses: Many people know exactly how much money they earn each month but not many of them have a firm handle on how much money goes out or even why it goes out. During the beginning stages of a divorce, make sure to sit down and catalog all of your monthly expenses to help develop a strong monthly budget, making a point to take into consideration inflation rate – when inflation is not included, you can underestimate how much you need to live.
- Dealing with Financial Items One at a Time: When sorting through financials and assets during a divorce, people usually look at them one at a time instead of looking at the bigger picture. It is important to make sure you take a step back and see how the assets and income sources work together. Some of the items you should be paying attention to include:
- Capital Gains
- Timing Issues
- Investment Losses
- Interaction of Taxes
- Underestimating Liability for Unsecured Debts: To most people, unsecured debt equates to credit card debt. In many situations, should the credit card debt be acquired during the marriage, both parties share equally responsibility to pay off that debt regardless of which spouse held and used the credit card. During a divorce settlement, the responsibility to pay off the unsecured debt will be divided, but keep in mind the credit card companies will come after both parties for payment.
- Believing the Parent with Primary Child Custody Gets the Family Home: Many people believe that, should they be awarded primary custody of the children from the relationship, they are automatically entitled to receive the family home during the divorce settlement. While staying in the family home may be more comfortable for you and the children, it may not be the best financial decision you can make. It is important to be realistic about what you can and cannot afford.
Many people decide to give up all other assets on the table during a divorce in order to keep their home. While it feels good to get what you want and what you believe is best for your family, how terrible would it be to give everything up only to find that you cannot afford to live there on your income alone? When considering fighting for the family home, here is what you need to think about:
- Can you afford the mortgage on your own?
- Have you factored in the cost of property taxes?
- Are you able to afford home maintenance and upkeep as needed?
- Not Securing Child Support and/or Alimony Payments with Insurance: While having child support and alimony is great, this type of financial support is only as good as the other party’s ability to pay it. You may also want to submit a request for your former partner to obtain a life insurance policy or disability to ensure that financial support continues should he or she pass away or become injured and unable to work. Also, be sure to review the policies to ensure he or she made the proper designations.
While having an insurance policy or disability policy in place is a great way to help ensure support will continue when the other party is unable to make his or her payments, it will not help in the event your former partner simply decides to stop paying support obligations without good reason. In the event that your former partner does stop paying, the only way to rectify the situation is to go back to court and make a submission for the other party to make the arranged payments.
- Overlooking a QDRO: A QDRO, or Qualified Domestic Relations Order, is a document that outlines how a couple has predetermined the dividing of a defined contribution plan, such as a pension plan, 401(k), 457, or 403(b). A QDRO will also order the plan administrator to pay the agreed upon or court ordered share to the non-employee spouse. Even when dealing with a pension that will not pay out for several years, it is important to have a QDRO in place as part of your divorce.
- Not Evaluating a DBP Properly: A DBP or Defined Benefit Plan is a true pension plan. These plans are controlled and funded by the employer and will pay a monthly income after retirement. Although an employee must wait until retirement to receive DBP benefits, the plan still has value today and the partner who does not own the pension plan has a right to his or her share of that value. In most cases, you will need to seek the legal and financial advice of a professional to sort it out.
- Looking Unrealistically at Investment Returns: It is important to always get a professional opinion on the different investment options that may be on the table as part of the divorce. Regardless if you spouse pushes you to take the investment because “it will grow by 30 percent per year,” it is important to know that the investment may not grow at all or may even yield a negative result. Cash or other liquid assets will often provide more financial security than risky investments, so make sure to think long and hard before accepting uncertain investments over assets that are safer.
- Not Considering Long-Term Financial Security: You will not be doing yourself any favors by being focused solely on splitting the assets here and now. It is important to make sure you step back and determine how your choices today may affect your financial situation down the line. In order to better understand the long term financial consequences of a proposed settlement agreement, you may want to seek the professional advice of a reputable financial planner.
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