11 Costly Financial Mistakes in Divorce Settlements


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.

Schedule Your Complimentary Divorce Strategy Session Today!

Checklist for Getting Your Best Divorce Settlement

Knowing that you got your best divorce settlement means you’ve considered a lot of things that aren’t necessarily on an attorney’s radar or within the realm of his capabilities. There are many mistakes that can be made. Here’s a list of items that you should include when putting together your divorce settlement agreement. A CDFA® divorce financial planner or mediator is your best resource for ensuring you and your spouse are agreeing on a settlement that is fair and strategically planned for an optimal outcome.


Proper identification of marital and separate property You split marital assets but keep your own separate property. It’s not always clear about what constitutes marital property. Co-mingling of funds, growth on real estate and owned businesses may have an impact on the amount to be divided. A Certified Divorce Financial Analyst (CDFA) can conduct a separate property tracing to determine what is marital and what is separate.
Assessment of tax implications No all assets are treated the same with respect to taxes. Trading assets of equal value but different tax treatments can have a huge impact on long-term financial health. What are the applicable tax classifications for retirement funds vs. real estate vs. stock options, etc.?
Consideration for both short- and long-term financial implications Alimony, child support, and how you split assets can result in substantial differences in long-term financial health even when the short-term needs are met and the division of assets looks fair. It’s important that you look at the impact of the divorce on near-term as well as future financial health. A CDFA can provide financial projections for both spouses before they agree on a particular settlement.
Provision for allowing spouse to remain in marital home under adverse financial circumstances Sometimes one spouse wants to continue to live in the marital home but can’t re-finance it on their own. Maybe, too, the house is “under water” and can only be sold as a short sale or foreclosed. Additionally, there are capital gains tax exclusions considerations to consider when transferring ownership to one spouse. There are some clever ways of handling the marital home to allow one spouse to continue living in the property for a period of time without the other losing out.
Accurate valuation and division of pensions Many misunderstand what figures to use for division of a pension. Pensions are subject to a coverture fraction, accurate identification of payout amounts, cost-of-living increases, and the appropriate discount rate.
Streamlining of asset division Simplify administrative and legal follow-up Sometimes it’s better to leave a pension, other retirement account, or business owned whole and aligned with just one of the spouses. Other assets or structured notes can be used to avoid selling assets or dealing with Qualified Domestic Relations Orders (QDRO’s).
Treatment of employee bonuses and other non-cash benefits Executives and business owners may receive a large portion of their compensation in the form of bonuses, stock, car allowances, and other benefits that don’t readily show up as income or assets. It’s important to thoroughly review employee agreements for executives and accounting records for business owners.
Proper accounting of stock options and restricted stock units (RSU’s) Employee stock options earned while married are a marital asset whether or not paid before separation or divorce. Determining the marital portion, vesting, and valuation of stock options and RSU’s is complicated and best left to financial specialists.
Option for alimony buyout Nobody likes alimony. Alimony payments are painful to the obligor and uncertain to the obligee. Why not just determine the present value of the future payments and include it in the division of assets?
Accurate identification of separation date The separation date can have substantial impact on valuation of assets. Is it the date the divorce complaint is filed, the spouses started living in separate bedrooms, or something else? What if there is a temporary reconciliation?
Optimizing filing status and deductions The difference between filing single vs. head of household can make a big difference in tax payments. Under shared custody arrangements, child exemptions can be rotated to allow both parents to file as head of household.
Protection of future alimony and child support with life insurance If a buyout isn’t possible, the oblige should have protection is something happens to the obligor. Obtain insurance protection that you know won’t be cancelled.
Inclusion of a detailed parenting plan Even if you and  spouse fundamentally agree on custody and how to raise the children, there may come a time when circumstances change or there is a difference of opinion. Parenting plans that address a wide array of issues should be included in a property settlement agreement to protect the children and both parents.
Impact on future college financial aid for the children Custody decisions and child support can have implications for college financial aid. One should consider how settlement decisions might affect future financial aid to pay for college expenses. 529 plans should be managed so they have minimal impact on financial aid awards.
Assurance that all assets have been accounted for Are there any suspicions that one spouse has been “preparing” for the divorce and diverting assets? Consider the use of a forensics specialist to examine financial records for hidden assets.
Accurate business valuations There are a variety of ways to value businesses in divorce, some more expensive and time-consuming than others. Make sure you have an accurate valuation of businesses owned before settlement options are reviewed.
Timing of divorce on Social Security Timing of divorce can impact future social security payments. You may want to delay your divorce to optimize future social security.
Identify follow-up tasks to ensure compliance It’s not time to rest when the property settlement has been filed and the final divorce decree is received. Follow-up is essential to obtaining and protecting rights to assets. Insurance, QDRO’s, quit-claim deeds, beneficiaries, and more need to be handled after a divorce. Make sure you get a comprehensive list of what still needs to be done once your divorce is final.




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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!



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