Divorce

Divorce Planning Mistakes: Seven Ways to Make Your Divorce Harder Than It Already Is

By October 12, 2017 December 19th, 2017 No Comments

If you’re going through a divorce, money is probably the last thing you want to think about. Unfortunately, it should be at the top of your mind. Financial mistakes made during the divorce settlement process can haunt you for years. Sometimes they can even haunt you for the rest of your life. It’s worth slowing down and making sure you’re avoiding these all too common pitfalls.

Mistake 1: Moving Money Before You Settle

Even if a divorce is amicable, most people want to get it over with. When applied to finances, though, this impatience can wreak havoc. In the heat of the moment, many people take financial matters into their own hands and start moving money out of shared accounts and into individual accounts.

People believe that moving money in and out of accounts is fine as they are entitled to 50% of the assets. While this may be true, neither you or your soon to be ex should start dividing up the money until the divorce is settled, unless you’ve agreed with your lawyers to make an exception or have to cover living expenses. If you start moving money before you reach settlement, splitting the accounts later becomes an accounting nightmare instead of a nice clean break.

Mistake 2: Not Making an Accurate Budget

Making budgets is definitely not at the top of anyone’s list of fun activities. If your goal is a settlement that will actually work for you, however, you need to do it. Everyone involved with helping you and your spouse craft and reach a settlement needs to know how much money you will need to live on after the divorce is finalized. That way, they know what numbers to shoot for.

Often, people will assume that their budget will be 50% of what it was during their marriage and give that number. They don’t realize that many bills that were split between two people before aren’t anymore. Your cable TV bill, for example, is that same whether there are two of you living in the house or one.

It’s worth your time to sit down and get crystal clear about how much money you’ll need when you’re on your own. At the end of the day, you don’t want to be the person who gets everything they asked for and then realizes it’s not enough.

Mistake 3: Miscalculating Value of Assets

If you’re going to split things fairly, it’s important that you get an accurate idea of what everything is worth. Sometimes this can be a hassle, especially when it comes to real estate and retirement plans. Setting up an appointment to get your house appraised is not only annoying, but can cost a bit of money as well. Likewise, getting a professional opinion on the value of retirement accounts and other investments is not the most exciting thing you’ll ever do.

Miscalculating the true value of retirement accounts is probably the most common miscalculation mistake people make. For example, an IRA valued at $50,000 and a regular bank account valued at $50,000 are not the same. Why? Because the money in the IRA is pre-tax and the money in the bank account is after-tax. In other words, you haven’t paid taxes on the money in the IRA yet. The tax you’ll need to pay on the IRA when you withdraw money will depend on your tax bracket and how old you are, but a $50,000 IRA may actually be worth $35,000 after taxes.

Mistake 4: Not Splitting Retirement Accounts Correctly

If valuing retirement accounts is complicated, splitting them can be even more difficult. Again this is because there are more tax rules attached to retirement accounts than other types of accounts. Depending on your situation, you will want to get some advice from a financial planner or tax advisor on the best way to handle these rules.

You may need something called a Qualified Domestic Relations Order or QDRO. A QDRO is a legal document that lets you move money between you and a spouse’s retirement accounts without triggering taxes. Many who proceed without a QDRO find that their tax bill after settlement takes a surprising chunk of money out of what they were expecting to get.

Mistake 5: Not Considering Taxes In General

Not utilizing a QDRO is only one way that the tax man can take money away during the divorce settlement process. Taxes can also affect the value of property sales and how much money you get or pay in alimony or child support.

Unless you want to be surprised by large tax bills after your divorce, you should seek the advice of a tax professional as part of the settlement process. If you don’t, you might find that there’s far less money coming your way than you thought and by the time you realize this it might be too late to do anything about it.

Mistake 6: Emotional Attachment to Certain Assets

Many people will bleed themselves dry over one asset. The most common scenario is that one person will agree to everything the other wants as long as they get to keep the family house. Once the divorce is finalized, however, they realize they can’t even afford to upkeep the house they fought so hard for.

Most people who reach a fair settlement have to practice a fair amount of detachment when it comes to the property they own with their spouse. It isn’t easy to let go of the house you’ve lived in with your family. After all, it’s the place where you raised your children and celebrated holidays. The bottom line, though, is that even the family home is not worth agreeing to a less than fair settlement.

Mistake 7: Not Insuring Your Settlement

Many divorce settlements include regular alimony or child support payments. Often, the spouse receiving these payments very much relies on this money. What a lot of people don’t think about, unfortunately, is that this money can disappear overnight. It’s plain and simple. If the paying spouse dies, the alimony and child support checks stop coming.

It’s often a good idea to set up a life insurance policy on the paying spouse to protect against potential lost income. If the paying spouse dies, the insurance payment covers the alimony and child support money they used to send.

No matter how you look at it, divorce is a difficult and grueling process. Do yourself a favor and don’t make it harder than it already is. Take the steps you need to make sure that financially at least, the process goes smoothly. That way you have the resources you need to make the divorce the new beginning that you’re hoping for.

The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by Sagepoint Financial. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Registered Representative may only discuss/and or transact securities business with residents of the following state: AR, AZ, CA, CO, DE, FL, GA, HI, ID, IL, LA, MA, MD, MN, MO, MS, NM, NV, NY, OK, OR, PA, SD, TX, WA.

Securities and investment advisory services offered through Sagepoint Financial Inc. (SPF), member FINRA/SIPC. SPF is separately owned and other entities and/or marketing names, products or services referenced here are independent of SPF. Sagepoint Financial does not provide tax or legal advice.

 

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