Divorce is expensive even without mistakes. Read on to learn of the top eleven most common financial mistakes made in divorce.
1. Mis-Specifying Marital vs. Separate Assets
What’s considered marital property and subject to division? Most will say that any comingling of assets (e.g., depositing the funds in a joint account or using marital funds to pay the mortgage) constitutes an asset as marital. And in some states and counties, even if a portion of an asset that was separate on the date of marriage will, over the years, transition to marital. This can impact considerations of real estate, retirement, inheritances, and more.
2. Dividing Each Asset 50/50
Too often, lawyers, hearing officers, and judges take the easy way out by forcing division of each asset equally. Why? It’s easy and not easily challenged. This approach, though, fails to consider the needs and wants of each spouse, as well as the tax consequences of and administrative effort in dividing each asset.
3. Not Considering an Alimony Buyout
No one likes alimony. Payors hate writing the check and the recipient hates depending on it. Plus, if the payor dies or is disabled, the payments stop (an example of why insurance is important post-divorce). Instead, if there are sufficient assets to cover it, calculate the present value of the stream of anticipated payments at an appropriate discount rate and build it into the division of assets.
4. Errors in Valuing Executive Compensation
If there’s one financial topic that befuddles many, it’s how to treat deferred compensation, including stock options, both qualified and not qualified, as well as restricted stock and restricted stock units. Are they marital or separate? Are they based on past or future performance? Can they be transferred to a spouse/former spouse? What is the correct valuation method: intrinsic value, Black-Scholes, or the binomial method? How are taxes accounted for?
5. Not Considering the Possibility of Hidden Assets
Given the opportunity and motive, many a spouse will start stashing away funds in anticipation of a divorce, whether for financial security, sense of ownership, or vindication. Tax returns, W-2’s, credit card statements, and bank account statements are all sources to identify diverted funds. Even when not suspected by a client spouse, a quick review of these documents may reveal otherwise unidentified assets.
6. Not Looking at Creative Settlement Options to Meet Each Spouse’s Unique Needs
What if a spouse wants to keep the house for and can’t get approval for a mortgage buyout? It’s easy to just say “sell” and move on, but there are ways to facilitate the desire of a spouse who wants to remain in the home for a period without undue legal or financial burden to the co-owner spouse. As another example, maybe retirement funds are of utmost concern and alimony/cash flow not so much? A skilled divorce financial expert will come up with alternative settlement options to address the unique needs of each spouse.
7. Mistakes in Retirement/Pension Valuation and Division Orders
Retirement plans, and especially pensions, are widely misunderstood in divorce. The one who’s name is on the retirement plan thinks they are the rightful owners. Some incorrectly think the “current value” on a pension statement is the value of the pension. Pensions of all kinds, and especially military and federal pensions, require an expert for valuation and drafting of appropriate orders for submission to the custodian.
8. Failing to Consider Tax Consequences
All assets are not alike when it comes to splitting them in divorce. $250,000 in a 401k is not the same as $250,000 of equity in a house. The former is taxed at an ordinary income tax rate upon withdrawal while the latter may be largely excluded from any taxation and otherwise taxed at the capital gains rate.
9. Allowing One Spouse to Keep the House When it’s Not Financially Feasible or Beneficial
The marital home is an asset laden with emotion and sentimentality. It’s common to want to keep the house for emotional stability without consideration of the impact on future financial health. Houses don’t necessarily appreciate significantly over time, maintenance expenses are often overlooked or discounted, and a house is not a liquid asset. An objective evaluation is critical before deciding to keep or sell the marital home.
10. Not Properly Accounting for a Closely Held Business
If a spouse owns a business, is it a source of income, an asset to be valued and divided, or both? If a source of income, do we just look at the tax returns for the business? If to be valued, do you pay a business valuation expert thousands of dollars to get an accurate figure? Get the advice of a divorce financial expert is necessary if one of the spouses owns a business.
11. Not Accurately Budgeting for Your Post-Divorce Life
Do you have a good hold on where your money goes? Have you really assessed how much you will need post-divorce? Your choice in divorce settlement options needs to be balanced between short-term cash flow needs and long-term net worth.
Work with a qualified divorce financial professional, i.e., a Certified Divorce Financial Analyst® (CDFA®) to help you avoid costly mistakes in divorce. You only get one chance to get it right.
Take Control of Your Future
When you consider divorce, or if you know someone who is contemplating divorce, one of the biggest realities for those in the divorce process is the financial settlement and financial analysis post-divorce. Get the assistance of Berni Stevens, a Mediator and Certified Divorce Financial Analyst® (CDFA®.)
Berni provides step-by-step guidance on matters related to divorce. With a wide range of experience and expertise related to divorce issues, Berni will simplify the process and provide much-needed clarity in areas such as long-term tax consequences, asset, and debt analysis, dividing pension plans, continued health care coverage, stock option elections, protecting support with life insurance, and much more.
Which Assets and Liabilities Will You Keep in the Divorce Settlement?
A necessary part of divorce in Pennsylvania is dividing marital property, both assets and debts. Property division is not as straightforward as it might sometimes seem, and the consequences of potential mistakes can be quite costly. What each spouse keeps and how it impacts their future financial health is dependent on
Proper specification of what portion of each asset and debt is marital vs separate
Your choice of divorce process and the extent to which the court gets involved
Proper valuation of each type of asset
The impact of taxes
Whether the division will allow each spouse to meet both short-term cash flow requirements and long-term net worth goals
Separate vs Marital Property
Definitions. It is marital property, not your individual separate property, that is subject to division. Assets are marital property when they have been acquired during the marriage. In Pennsylvania, they also include the increase in value of any asset that was owned individually before marriage. For example, if the value of the home you alone bought and owned was worth $200,000 when you were married and the current value is $500,000, the marital portion is $300,000.
Examples of marital assets include your home, vacation properties, rental properties, furniture, jewelry, bank and brokerage accounts, retirement accounts and pensions, executive compensation, personal property, and autos. Marital debts are handled similarly to marital assets and they include mortgages, auto loans, personal loans, student loans and credit cards.
Exclusions. Typically excluded from marital property in Pennsylvania is what’s been specified as separate in a pre or post-nuptial agreement, gifts, inheritances, medical malpractice or accident settlements, and debt accrued in marital deception (e.g., affairs, gambling). Also excluded from marital property is the growth of an individual’s asset, e.g., an employee retirement plan, which occurs after the date of separation.
Commingling. Commingling refers to mixing funds from separate assets with marital funds. Commingling of property may make what was originally separate property entirely marital. For example, if you inherited $100,000 and then deposited it in a joint bank account, it’s no longer considered separate. In some cases it is still possible to distinguish what portion of a commingled asset remains separate based on “separate property tracing.” If that’s applicable to your case, you will need a divorce financial analyst to help you with this, as it is not straightforward, and most lawyers and courts will take the path of least resistance and rule that the commingled asset is entirely marital.
Passive vs Active Appreciation. In separating marital from separate property the court may consider whether the growth in the value of an asset that was separate at the time of marriage was passively or actively created by the spouse who originally held the separate property. Passive appreciation in an asset (e.g. economic circumstances contributing to a retirement fund’s growth) makes it more likely that it will be treated as marital. Active appreciation (e.g., resulting from active management of a business) will substantiate a claim that it remains separate property.
Transmutation of Assets. In some Pennsylvania counties a court may also reduce the amount of an asset’s separate value over the duration of the marriage (called transmutation of separate assets). Using our prior example, if the value of the home you’d owned before the marriage was worth $200,000 and the current value is $500,000 and you’ve been married for several years, the marital portion may be deemed to have increased to $350,000 as its separate value has converted to marital over time.
Hidden Assets. One may believe that their spouse has been secretly funneling money to a separate account. In such cases, you will need a forensic expert to trace these assets. Fraud is the one thing that can overturn a divorce settlement after the divorce decree has been entered.
How Pennsylvania Approaches Property Division
Pennsylvania is an equitable distribution state, not a community property state. This means the legal system doesn’t necessarily see an equitable distribution as a 50/50 split. Instead, the courts will divide property per factors including the age of the parties and their ability to add to their future retirement, monetary and nonmonetary contributions made by each party to the marriage, the circumstances of the divorce, duration of the marriage, alimony awarded, and any other factor the court considers necessary or appropriate. In other words, a 60/40 or even 80/20 split of property is acceptable in Pennsylvania.
The Role of Your Choice of a Divorce Process
How division of property is achieved can be dependent on how you go about your divorce.
Litigation. If you litigate and allow the court to decide, then the judge or hearing officer will divide your property based on their view of equitable distribution. Because there is a fair amount of subjectivity involved, you will have little control over how the hearing officer or judge will rule. Your attorney may be telling you it will turn out one way and the decision might just be entirely another.
Represented Negotiation. If you and your spouse both hire attorneys and have them negotiate on your behalf, you are still relinquishing control and you’re going to spend a lot of money on lawyer fees before you get to an agreement, money that could remain in your own pockets. In attorney negotiation, your lawyers will talk to you, to your spouse, then to each other, file petitions and motions to posture, talk to you and your spouse again, and on and on—all at an outrageous billable rate.
Mediation or Collaborative Divorce. If you want to control how your property is divided and keep more of your own money, you should instead consider mediation or, possibly, a collaborative process that is committed to resolving your divorce outside of the courts. Mediation involves working with a “neutral” who will facilitate your negotiations and help you find a settlement that will work best for the both of you. The goal using a collaborative process is much the same, but it involves two attorneys, a financial specialist, a divorce coach, and, if applicable, a child specialist. In mediation or collaborative, you make the decisions.
If you mediate with a Certified Divorce Financial Analyst (CDFA®), or have the support of one in collaboration, you get assurance you’ve properly identified and valued all your marital assets and guidance on the impact of various settlement options on both the short and long-term horizon, including capital gains and income taxes, liquidity, and asset growth rates. The relative benefit of mediation over collaboration is that is typically far less expensive than Collaborative Law.
The Cost of Mistakes
Mistakes in settlement agreements are too frequently made. You certainly don’t want to discover that you didn’t get or keep what you were entitled to. Keep in mind that property division, once you have your divorce decree, can’t be modified unless there is evidence of fraud on the part of either party.
Conclusion
You only get one chance to get it right and we’re here to help you get an optimal divorce settlement in Pennsylvania. Download our free 29-point divorce financial planning guide and then schedule a short call and we’ll explore your best path forward.
Take Control of Your Future
When you consider divorce, or if you know someone who is contemplating divorce, one of the biggest realities for those in the divorce process is the financial settlement and financial analysis post-divorce. Get the assistance of Berni Stevens, a Mediator and Certified Divorce Financial Analyst® (CDFA®.)
Berni provides step-by-step guidance on matters related to divorce. With a wide range of experience and expertise related to divorce issues, Berni will simplify the process and provide much-needed clarity in areas such as long-term tax consequences, asset, and debt analysis, dividing pension plans, continued health care coverage, stock option elections, protecting support with life insurance, and much more.
In a recent post, I addressed the notion of “winning” at divorce. There are many lawyers who claim they can do just that, and they will be happy to take your hard-earned money while they fight your war for you. The reality is, in the vast majority of cases, you’ll wind up no better off than if you’d negotiated to begin with, and all the while you’re funding your lawyer’s kids’ college education instead of your own.
Winning might instead be viewed as getting through this divorce transition with integrity, keeping more of your own money, and maintaining your and your children’s emotional health throughout. Ideally, you’ll do this without ever stepping foot into a courthouse or even speaking to an attorney.
So, how do you get better outcomes, at a lower cost and without judges, courts, or even lawyers? If you have minor children and marital assets, don’t attempt a do-it-yourself divorce unless you want to risk costly mistakes that cannot later be reversed. If you want an easy, affordable, and legal solution, seek a qualified divorce mediator.
You will want to find a mediator who has the knowledge, skills, and experience to guide you and your spouse to a financially optimized settlement agreement and, if applicable, with a parenting plan that preserves the integrity of your family. A mediator with the divorce financial expertise of a Certified Divorce Financial Analyst (CDFA®) is ideal.
How, though, to address the legal piece of your divorce? You will find that legal agreements and divorce papers are straightforward in a mediated case. These can be easily facilitated by your mediator so that you never even have to work directly with an attorney to process your divorce. (It’s never a bad idea, though, to have an attorney review your agreements before they are finalized, and this can be done at a minimal cost.)
Rationally approaching your divorce, along with a dose of grace, can result in a lower-cost and faster process while addressing your financial needs and preserving your family’s emotional well-being. Now, wouldn’t you agree this would be a “win” at divorce?
Are you thinking about a divorce and wondering how you can achieve a lopsided division of assets and alimony, so you don’t have to work? And maybe sole custody of the children, too? If so, you wouldn’t be alone.
You’ll easily find a divorce attorney who will fight your war with you for years. And you’ll only end up where you would have if you’d negotiated to begin with. And guess what—you’ve funded your lawyer’s kids’ college accounts rather than your own. Is this a “win” at divorce?
Perhaps you should instead consider getting through this overwhelmingly difficult transition with dignity while keeping a lot more of your own money and maintaining your and your children’s emotional health throughout. In most instances, you can do that without ever stepping foot into a courthouse or even speaking to an attorney.
The fact is that ninety percent of divorces don’t belong in the court system. When you involve the court, you give up total control around life-altering decisions regarding your assets, your income, and the custody of your children. Whether within or outside of court, if you involve an attorney for both you and your spouse—the traditional model—it will result in legal expenses that you can’t possibly fathom when you’re 1) just getting started and 2) convinced the “system” will see your side of what’s just. Attorney-driven divorce processes will not provide you with practical guidance and needed emotional support nor correctly value all your assets and considers both the short and long-term impact on each spouse’s financial health.
I set out years ago to find a better way to divorce, creating and refining a process to deliver just that. At TruNorth Divorce, we provide a legally-sound, one-stop solution for divorcing couples who want a financially optimized settlement that helps both spouses achieve their long-term goals. When children are involved, we also provide effective and durable parenting plans. Yes, there is indeed a better way that will be less expensive, faster, less stressful, minimize the negative impact on your children, and launch you towards a new and promising future.
The complexities of a divorce case depend on a variety of factors, including how long you were married, the residency requirement laws in your state, whether you have children together, own a home together, have significant differences in your income, are self-employed, unemployed, or have debt or joint assets.
If that sounds like a lot, it’s because it is! Don’t worry, TruNorth Divorce is here to help you decode divorce. Your first major decision in divorce is choosing the right divorce process and team of professionals for your divorce. In our previous post we outlined six alternative processes:
DIY
Mediation
Negotiated representation
Litigation
Arbitration
Collaborative divorce
This article addresses the criteria/questions you need to ask in order to choose one of these processes.
What are the Decision Criteria for Choosing a Divorce Process?
Presence or history of physical or significant emotional abuse.
If this is an issue, hire an attorney.
The complexity of marital assets; do you share property, retirement accounts, or other financial assets together?
If you share assets, rule out a DIY divorce. The mistakes you are likely to make will cost you far more than the expense associated with professional assistance. Settlement agreements are a one-shot deal and can’t be revisited after the divorce.
Presence of minor children; the process of divorce can be more complex when separating with children.
Here again, a DIY divorce should be off the table. Unless you are in full agreement on parenting time, responsibility for important decisions affecting your children, expenses, relocation, etc., you need help developing a comprehensive parenting plan. This can be accomplished in mediation or an attorney-lead process.
Whether one spouse will actively or passively resist or stall the divorce beyond an acceptable waiting period.
You’ll need an attorney to establish a firm date of separation or get the divorce process started. Don’t, though, get sucked into litigating your divorce in court. Ask the attorneys you’re considering what percentage of their cases are settled out of court. If attorneys are required, negotiated representation is going to be less expensive than litigation. Also, you may still be able to mediate specific issues around custody, support, and division of marital assets and limit the attorney’s role to handling the legal process and those issues you aren’t going to be able to compromise on.
Do you already know your spouse and you will not agree to a settlement of financial issues and/or custody?
Being amicable with your spouse is not necessarily a requirement for mediation but negotiation is. It takes two to negotiate a settlement, and the ability and willingness to do so is the number one requirement for whether mediation can be successful. If you or your spouse will resist the divorce or have demands that can’t be met in compromise, you’ll need the assistance of an attorney.
Amount of money and time you’re willing to spend on the divorce; Know your full financial picture before you begin, as the cost of divorce, as well as scheduling time off work for meetings, can far exceed your original expectations.
Attorney-lead processes and, especially litigation, can get expensive fast. How much is it worth to you to avoid a contentious battle that may cost tens of thousands or more? Is what you aren’t willing to compromise on worth the extra attorney fees and emotional cost?
Your court’s backlog of cases; due to the pandemic your local court may be bogged down by cases and take much longer than typical divorce litigations.
Even if you think your case might need to be litigated, you may want to consider arbitration and avoid the cost, time, and lack of confidentiality issues that come with a court-driven process.
Your need for privacy: do you want to keep the details of your divorce and finances away from public access?
If you want privacy, you need to keep your divorce outside of the court process, i.e., don’t litigate
The intensity of and ability to manage anger or grief; divorce causes varying emotional states to arise that range from anger to lowered self-esteem, to resentment and depression. How able are you to handle a contentious process–are you prepared to handle the toll of stress that arises from confrontation with your former spouse?
Consider your emotional health and the impact it might have on your well-being, job, parenting, and more. It is another cost that needs to be factored into your decision on the divorce process. Attorney-lead processes are almost always contentious. You might consider a collaborative divorce (not necessarily Collaborative Law), that provides the assistance of mental health or other professionals on the team.
Ability to express your needs to one another and be heard; this is a key skill in making the divorce cost as little time and money as possible.
Being able to negotiate and compromise requires good communication skills. A good mediator can assist you with this but if it’s a “my way or the highway” situation, seek an attorney.
I hope that decrypts some of the confusion over what you should consider as you decide which divorce process works best for you. If you’re looking for more divorce guidance, please click over to my free eBook, 7 Things to Do Before You Divorce. Otherwise, schedule your TruNorth Divorce complimentary strategy session today.
