Top Three Divorce Settlement Agreement Mistakes

When it comes to divorce, there are many areas where we feel vulnerable. When it comes to the divorce settlement agreement or property agreement, we rely on the advice and judgment of our trusted advisors. What would you rather hear: “everything will be okay, don’t worry,” or “things will be okay but you’re going to have some tough choices to make?” I feel strongly that there are too few divorce professionals who truly tell it like it is. They either tell you what you want to hear so you’ll continue paying their outrageous hourly fees or they simply don’t know any better. Either way, they’ll lead you to some stupid, easily avoidable mistakes.

Here are a few things that I see repeatedly after settlements are agreed to and the judge has signed off on the divorce. Remember, unlike alimony and child support, property settlement agreements are final—you don’t get to go back again to re-do them!

These divorce settlement mistakes can be very costly and easily avoided by using the right professionals to support you in your divorce.

Mistake #3: The settlement doesn’t consider taxes—at all!

 We all know that Uncle Sam will dive into our pockets at every opportunity. When it comes to divorce settlement agreements, not all assets are alike and tax implications do make a difference! What people often find is that the tax burden on their half of the marital assets is significantly higher than their spouse’s, making their “half” of the assets worth significantly less than they thought. Don’t expect your attorney to know this! Attorneys are not trained as accountants or divorce financial analysts and a lot of them don’t bother to warn you of that. Buyer beware.

Mistake #2: Pension is split “50/50”

Over and over I see divorce decrees that order pensions split 50/50 but no one has any idea what will happen when payout begins or what that means under various circumstances. 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 IDEA what the answers are. These are questions that should be asked during the valuation of the pension and preparation of the divorce settlement agreement. How can you possibly agree to a settlement without understanding something so crucial to your retirement? Again, do not expect attorneys or non-CDFA^® mediators to be of much help here.

Mistake #1: Marital home is kept by one spouse who is unable to afford it

 One of the most common divorce settlement mistakes I see time and time again is one spouse keeping the marital house they really can’t afford. I understand how one can get emotionally tied to the family home and want to stay. Before really considering this option, though, you must do a realistic budget that takes into account upkeep, property taxes, improvements, homeowner’s insurance, replacing the water heater, fixing the roof after the tree falls, etc. I have witnessed where one or two years down the road the spouse who “won the house” has run out of cash and realized that they can’t sell a window to put food on the table, they can’t refinance because now they don’t have enough income to do so, and they have no choice but to sell. The selling costs are about 7% and there’ll be capital gains taxes after the sale – all of which would have been split 50/50 with the ex if they had sold the house as part of the divorce. Ugh, that was not the smartest decision, right?

These are but a few of the financial divorce settlement mistakes that are avoidable but too often made in divorce settlement agreements. Truthfully, you can’t be expected to know all the ins and outs, nor should a lawyer. Just realize you don’t know what you don’t know and that lawyers are in generally the same boat. You can hire a CDFA^® on an hourly basis to supplement your lawyer or mediator’s proposed settlements or use a CDFA-Mediator who can advise you and your spouse on both the short and long-term implications of the decisions you are making. Either way, just make sure you’re fully informed before you sign the papers!