People facing divorce sometimes don’t get what they deserve because they are anxious to get it over with, or they hope to reconcile and don’t want to alienate their spouse, or they want to get back at their spouse for real or imagined wrongs.
Divorce can have more of a financial impact on your future than buying a house or planning for retirement. Don’t willingly give up what you have a right to, especially if you have custody of children, since your financial situation directly impacts them as well. A well-meaning attorney is perfectly capable of legal representation, but don’t assume he or she is a financial expert. In many cases it’s worthwhile to spend the money to consult with a Certified Divorce Financial Analyst to assess the real value of your assets, taking tax consequences into consideration, and to seek financial planning advice prior to a divorce settlement.
During the course of your marriage, you accumulated both assets and liabilities. Although there are regional differences when it comes to who gets what, basically, everything purchased, received, or saved during your marriage must be divided when you divorce. So now you’re about to sit down and negotiate a financial settlement with your soon-to-be-ex, and as with any negotiation, the key to your success is preparation and assistance from professionals to ensure your interests are being protected. Be prepared to be prepared during your negotiations!
The financial issues inherent to every divorce case are oftentimes the ones that are the most overlooked. However, once a divorce settlement has been signed, it’s too late to change it. For many of my divorcing clients, this is the first time they’ve ever been asked to map out their financial lives, and it can be an emotional experience. Furthermore, the number of people I see walk into my office with literally no idea of what it costs to run their households is astonishing.
Questions that need clarity include: Who should keep the house? How much will it cost to live post-divorce? How much alimony should be granted and for how long? How can the retirement accounts be split and accessed? How can a business be offset? And most importantly, will both parties be able to survive financially with the settlement post-divorce?
Undoubtedly, the two biggest blunders divorcing couples make both involve residential real estate. For example: Most often, the husband wants the retirement plan and the wife wants the house. The wife usually wants the house for the sake of continuity. When there are children involved, a wife will often argue for custody of the children and the house, so that the children’s lives will not be further disrupted by a move. But what many spouses fail to consider is whether they will be able to still afford to live in that house after the marriage is dissolved. A wife may have interrupted her education or career to have children. After the divorce, this woman may have to return to school, or start on a lower rung of the corporate ladder than where she would otherwise be. Because real estate is very often the biggest portion of a couple’s net worth, the spouse with the lower-paying job will often argue the hardest to keep it – but in reality it’s an illiquid asset that carries a very hefty price tag to maintain. In many instances, it makes the most sense to sell the home and split the proceeds, though that adds to the emotional aspects of the divorce. Logic aside, the choice to keep the home is usually driven by emotion. And as we all know, maintenance, taxes, and general upkeep can be very costly.
The second biggest mistake is not considering the cost basis in the property. Assume a husband and wife purchased a home for $25,000 thirty years ago and the property is now worth $425,000. Whoever keeps the house will pay capital gains tax in excess of the $250,000 exclusion that he or she is allowed as an individual. But, had the couple sold the house before they divorced, their combined $500,000 exclusion means they would have paid zero in taxes. So, it’s important to remember that cost basis – not just the current market value of the asset – needs to be taken into consideration prior to the divorce settlement.
When deciding whether to include a retirement savings account in your demands, it’s important to consider what’s known as the tax-effecting of assets. Basically, all that means is that $100,000 in cash sitting in an IRA isn’t the same as $100,000 cash in a savings account. If each account holds $100,000, depending on the couple’s tax bracket, they might be paying 15% to 39.6% tax on that money once it’s distributed at age 59½. And remember, the funds in the IRA cannot be accessed before 59½ without paying a 10% penalty for early withdrawal.
The fact is that divorce is a terribly traumatic disruption for families all across our country. Who can expect to be rational, reasonable, and financially on-your-toes during this time of distress? Consider utilizing non-legal disciplines that will provide information assisting the court in arriving at a fair, equitable, and just resolution – not just at the moment of trial, but down the road as well.
