Going through the divorce process can be one of the most emotionally challenging and financially draining experiences in one’s lifetime. Going it alone or excluding a Financial Divorce Analyst from your divorce team can lead to bad decisions that will have a negative impact on your future financial security.
Here’s a short list of the potentially worst decisions that individuals have made and continue to make as emotions take hold.
1. Trading your share of your spouse’s pension for their share of the Marital Home
Family_Home_Small-2Guaranteed future benefits, especially those provided for Federal and State employees, are becoming a rarity nowadays. So although the present value of the pension may, in fact, be equal dollar-wise to 50% of the home’s equity, you are giving up a Guarantee of future income during retirement. This is something that real estate cannot provide. For the former spouse who is keeping the pension benefit, consideration should be given to the after-tax value of the trade. While I understand that many times keeping the Marital Home has more to do with emotions and the children, I recommend that the decision making process include the financial impact this transaction could have on your future financial security.
2. Relying on Financial Affidavits (Maryland Long-form Financial Statements) for settlement decisions require divorcing spouses to complete Financial Affidavits as part of the litigation process. In Maryland, the Long-form financial statement is used by most attorneys (and some mediators) to gather the initial financial information needed to have initial settlement negotiations inside or outside of the courtroom. Relying solely on the information “reported” on these forms to finalize your divorce can lead to irreparable financial harm.
Skilled financial divorce advisors prepare and use the Affidavits quite differently than attorneys. They consider tax ramifications, possibilities of hidden or underreported income, and the financial realities of budgets. They refine the numbers and use them as a tool to help you not only settle, but to realistically plan for your future. It can make the difference between settling, and “settling well.”
3. Not looking at your financial status post-divorce
Colored_NW_Slide_Lightened-resized-600Most divorcing individuals cannot see past the palm of their hand when they’re in the process of separating. It’s a day-to-day survival that can last months to years. So at this time, it’s critical to examine what your financial situation will look like after an agreement is reached. In Collaborative Divorce, we refer to this process as scenario planning. Once a few settlement options are recognized as being viable for both parties, the Financial Neutral prepares financial projections for both spouses for one, three, five year, or more periods. The analyses can answer these questions and more:
Will I be financially ok after the divorce?
When will I be able to retire?
Will we be able to afford college education for our children?
The difference, you’re not negotiating “in the blind” and concentrating just on the settlement. You are using this as an opportunity to get your ducks in a row and plan for your future financial security.
4. Ignoring tax factors
tax_pie-resized-600Although there are no taxes on property transfers incident to a divorce, income taxes affect most post-divorce financial issues including the sale of the one-time family home, alimony, retirement plan withdrawals, basis of property received, and professional fees incurred to obtain the divorce. More taxes means less money for the spouses and their family moving forward! Many times,the cost to complete these “what if” scenarios will become an investment that yields a far greater gain then that of the stock market or real estate:
How much in taxes can be saved by different allocations of alimony and child support?
How can we convert our rental to a principle residence to take advantage of the Capital Gain Exclusion?
What is the after-tax value of the rental properties that we own?
What happens if we end alimony at a child’s graduation from High School?
What is the tax impact if we are able to deduct some of our professional fees paid in divorce?
How much in taxes do we save by transferring dependency exemptions to one another?
How can retirement funds be used for a cushion or immediate expenses without incurring a penalty or a substantial tax burden?
5. Not covering all bases in the financial settlement
contract_being_magnified-resized-600You’ve heard the sports saying, “it’s not over till it’s over.” Well, no matter what was said in court or in private conferences, the verbiage in the Marital Separation and Divorce Agreement is the proverbial “hammer” when it comes to the logistics of marital property settlement and support. The devil is truly in the details when it comes to the final agreement. Make sure that these “extraneous” issues are addressed, if applicable:
If a retirement plan needs to be split, who will pay for the QDRO preparation
How will the spouses file if they are not divorced by year end
If property with a significant monetary value is to be sold in the future, how will the price be determined, how long will it be listed at the current price before a price adjustment is made, and is there a price that triggers an automatic sale
Agreement by the Custodial Parent to complete the applicable IRS form to transfer child dependency to the non-custodial parent
Making sure that alimony in no way can be associated with a child life event