Breaking up is hard:
Long after the wedding bells have faded, you may know someone who has come across a fork in the road and decided to go in a different direction than your partner.
Building a life with someone involves many things. There are memories, friendships, family relationships, and possibly children and pets. Love plants a seed that eventually develops deep roots as a family is born and grows. And while love isn’t always about money, divorce certainly can be.
Whether there is just a home and a retirement account or something more complex like owning a business, other investments, and stock options, unraveling a lifetime of work is difficult and complicated by emotional issues.
Although it is not possible to escape the emotional cost that a divorce can have, it is not in a person’s long-term interests to make or avoid decisions that will affect future well-being because of emotion. To be a financial victim and start a new life the wrong way, there are steps that can be taken before the divorce is final. It is best to make these decisions in the most dispassionate way possible using professional resources whenever possible.
Individuals considering divorce should assemble a team of qualified professionals who can advise on the legal, tax, and financial impact of various proposed divorce settlements.
Here are some tips to keep in mind:
1.) Don’t become a financial victim. If you suspect a spouse is planning a divorce, make copies of important records and notify creditors, banks, and investment companies in writing.
2.) Don’t prepare an inaccurate budget. Usually, people are required to submit a budget for temporary maintenance (also known as Pendente Lite). But through monitoring or keeping inaccurate records, this invariably leads to problems when they discover that they are having trouble making ends meet on court-approved maintenance based on the budget provided. It makes more sense to hire a qualified financial professional at this stage to help prepare the budget.
3.) Don’t try to use the courts to punish your spouse. In most states, equitable distribution is the basis for settlements. Hire a combative attorney or ignore other options such as mediation or Collaborative practice it will be costly and toxic to post-divorce family relationships, especially when children are involved. (To better understand this option, search for Collaborative Divorce or International Collaborative Professionals Academy.)
4.) Don’t Forget Your Common Enemy: The IRS. As the proverb says: the enemy of my enemy is my friend. Both parties will be affected by taxes. With careful planning in advance, this can be minimized. If assets must be sold or qualified plans must be retired prematurely, this can increase the tax bill and reduce assets for living after divorce.
A 50/50 split may seem fair. But the bottom line is the portion of the marital assets that each gets net from the tax collector.
5.) Don’t use a divorce attorney as a financial planner, accountant, or therapist. At rates in excess of $ 300 per hour, it’s easy to rack up big bills and not get the specialized advice that other professionals can offer.
6.) Don’t forget to secure the settlement. The premature death or disability of a spouse means the loss of support, maintenance, or help paying for college tuition and health insurance.
Make sure the life insurance names the spouse receiving the support as the policy owner. In this way, if the spouse paying the policies stops paying the premium, at least the beneficiary / owner will be notified and can take legal action to remedy the default.
7.) Do not keep the marital home if it is not affordable. Too often, couples fight over who gets to keep the marital home. While there may be sentimental value or legitimate concerns about uprooting children from schools, it may not make financial sense to keep the house. After all, real estate is an underperforming asset (and has in fact been negative in recent history) while mortgage, taxes, and living expenses can be a drain on post-divorce budgets. Generally, it makes more sense to sell the property technically as a couple to get the maximum exemption from capital gains ($ 500,000 above cost basis) and split the proceeds to buy or rent another location.
8.) Don’t forget to change beneficiaries. Forgetting to remove and switch your spouse from qualified plans or insurance policies, unless required by the settlement agreement, could result in benefits or assets passing to someone the divorcing couple does not want to receive.
9.) Don’t forget to close or cancel joint credit cards. To avoid problems, it is best to close credit cards to any new charges pending the final divorce. This will avoid the temptation for one spouse to accumulate charges.
10.) Don’t accept a deal without having a QDRO in place. As long as a spouse has a qualified plan (for example, 401k or pension), a Qualified Domestic Relations Order will inform the plan administrator who is entitled to the asset and when. (Note that a QDRO does not apply to IRAs that are governed by beneficiary designations.) This is sometimes an afterthought, but it is critical. It is a good idea to observe the language in these orders. If not worded correctly, it could delay when a spouse will be eligible to start receiving benefits or it could lead to investment decisions that may be unwise or detrimental to the spouse’s retirement interests.
There are several methods for valuing pension or retirement benefits. This is often overlooked by time-starved divorce attorneys or court personnel. Use a financial professional trained in these techniques to ensure that the deal analysis is done correctly.
And make sure the attorney writing the QDRO wording allows the beneficiary of the pension or retirement account to be eligible to begin receiving benefits as soon as possible under the rules of the qualified plan. Otherwise, a beneficiary spouse may have to wait until the other account-holder spouse retires, which he or she may choose to delay out of necessity or out of spite. Some trustees will segregate the portion for the beneficiary’s spouse, so it is a good idea to ensure that funds are invested appropriately for the beneficiary’s age and risk tolerance and are not simply held in a money market account at low interest.
11.) Don’t underestimate the impact of inflation. Without the proper help in reviewing settlement options or preparing a post-divorce plan, it’s easy to forget that the lump sum received today may seem like a huge sum, but it may be inadequate for inflation. Whether it’s for college tuition, health care, or housing, inflation can dramatically reduce one’s budget and resources.
