Top 3 Divorce Settlement Mistakes
When you decide to divorce, you and your spouse are making a life changing decision. I have identified roughly **EIGHTY** or so decisions a couple needs to make during their divorce proceedings. Depending upon the direction their divorce takes, the number of decisions could be even more! The majority or around 75% of these decisions are financial in nature! Are you prepared to make these decisions alone while you are swimming through the maze of divorce? Your attorney cannot answers these questions for you as it is outside of the scope of their role with you.
I believe in being up front and honest, no sugar coating. Knowing the facts will help you to avoid costly mistakes. I will ensure that you understand what the reality of divorce looks like. Your household income as a couple will now be supporting two households, so of course, things will be different. I can help guide you through these changes. The following are the top three mistakes I see repeatedly when it comes to divorce. Settlements are agreed upon, and are sometimes court ordered, then the couple comes to me after-the-fact confused. Don’t make these mistakes! Let me help you from the beginning!
#3 – The settlement doesn’t take taxes into consideration – AT ALL! -
Taxes are not avoidable. Please do not agree to a settlement before you know the tax implications! Many times, people discover that the tax burden on their half of the marital assets is significantly higher than their spouse’s. This means that their “half” of the assets are worth significantly less than they thought! More specifically, don’t expect your attorney to figure this out for you. Attorneys are typically well versed in settlement options, but they are not accountants or financial advisors. A Certified Divorce Financial Analyst ®can help you with the financial piece of divorce.
#2 – Pensions are split 50/50 but no one knows what that really means -
Over and over I see divorce decrees that order pensions to be split 50/50, but no one has any idea what will actually happen. When do you start collecting? Is there an option to take a lump sum? Will there be a cost of living increase each year? What if you or your spouse dies? Will it keep paying? Will it double? When I ask these questions, no one has any clue what the answers are. How can you agree to a settlement without understanding something so important to your retirement? Again, do not expect attorneys or mediators to be of much help here. They hire someone like me to be on their team. Believe me, you cannot afford to not know these answers. Get the financial expert on your team that can get these answers for you.
#1 – Finally… the biggest mistake - keeping a house you can’t afford -
I know you are emotionally tied to the family home and really want to stay. I understand. Before you even consider this option, you must create a budget. I have witnessed where one or two years down the road the spouse who kept the house has run out of cash. Refinancing is not an option now because they don’t have enough income, and they left with no choice except to sell. The selling costs are about 8% of the sale – all of which would have been split evenly with their ex-spouse if they had sold the home as part of the divorce. Selling with the ex-spouse before divorce also gives you another $250,000 in excludable capital gains on the proceeds of the sale of your home; you loose this if you take the home in the settlement and sell later!
These mistakes are avoidable. Please, realize you don’t know what you don’t know, right? Bring in the appropriate professionals for your divorce to make sure that you are smart, you are informed, and you make the best decisions you can with all the information! Don’t try to go through this process alone. Let The Financial Knot help you get your settlement right the first time around!