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.
In our most recent blog post, we looked at whether it is possible to “win” 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 while 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 process 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 firstcourseof action is to understand the different types of divorce processes and then know the right questions to ask as you debate what works best for you and your unique circumstances. In this piece, we go over available options and we’ll address which questions in our next post.
What are My Options for Divorce?
1. DIY Divorce
Most states provide access to free divorce forms online that you can download and fill out on your own. Generally speaking, though, it’s not a good idea unless you have no assets or children. Mistakes can cost thousands of dollars and you only get one chance to do it right. While it may seem like the most simple divorce process, it can end up being the most costly
Mediation includes the use of a mediator, a neutral third party that does not “pick sides” but rather helps both spouses reach a mutually beneficial agreement without the case going to court. You and your spouse ultimately make the decisions but a good mediator isn’t so much a neutral as she is a “dual advocate.” In this role, she will help both spouses identify an optimal financial settlement and make choices that are most beneficial for you both. Other than DIY divorce, mediation is likely to be the least expensive, fastest, and least stressful of the options. It can be the most streamlined process of all.
Often thought of as the de facto divorce process, litigating a divorce involves both parties having attorneys and involving the court to make decisions regarding support, division of assets, and custody. Litigation should only, though, be considered a last resort, as it’s lengthy and expensive, stressful, divisive, and you’re giving up control of the process and outcome. Sometimes, though, it’s unavoidable.
4. Negotiated Representation
An option where both parties are represented by their own lawyers who negotiate an agreement between them and minimize court involvement.. Compared to litigation, a negotiated settlement tends to be less expensive, shorter in duration, and is more confidential than a court-led process, protecting you and your family from public scrutiny.
This out of court process entails the resolution of a dispute through an award of damages to a party, decided upon by a neutral third party called an arbitrator. Decisions are binding, enforceable by law, and have very narrow grounds for appeal. The advantage, relative to litigation, is that you stay out of court and maintain privacy.
6. Collaborative Law Process
Collaborative Law is a branded form of a team-supported divorce. Each spouse must be represented by their own attorney and the team includes a financial neutral and mental health professional. While team-supported divorce can be very beneficial, the Collaborative Law process is rigid and dictates that if it fails to produce an agreement on all aspects of the divorce, the couple must start anew with different attorneys.
Which Divorce Process is for me?
I hope that decrypts some of the complexities of navigating which divorce process is right for you. Our next post addresses the questions you need to consider as you decide. If you’re looking for more divorce guidance, please click over to my free ebook, 7 Things to Do Before You Divorce. Otherwise, message me on our TruNorth Divorce Facebook page.
“Divorce is Not for Sissies” is about the realities of divorce and how it too often leads to painful and long-term emotional, financial, social, and parenting consequences. Unless you’re made of steel, pain in divorce is unavoidable. Long-term trauma can be mitigated if you assume the position of a winner or champion in your divorce. There is, of course, no true winning in divorce but there is surviving, mitigating damage, and putting you and your family on track for a better future.
Whichever end you’re on—initiator or responder—you need to decide that divorce will not define you. At the same time, it’s going to be a dominant force in your life for a bit. That bit of time may be short or quite long depending on your circumstances and how you manage the process.
So, what are the essential steps?
Acknowledge that you can’t do it alone. Build your support team. Initially, it might be your best friend and sister or mother. But don’t stop there! Your best friend can’t fix this for you—they don’t have the skills or knowledge.
Build your divorce team. You need emotional, psychological, financial, and “legal” help. A divorce coach, therapist, divorce financial planner, parenting coach, mediator, real estate and mortgage professional who specializes in divorce and maybe a lawyer
Stop burdening your family, friends, and children. Especially your kids, whether young or adult, don’t want to shoulder your divorce! If they are young or teens, you can create long-term damage for them. Your family and friends will be there for you, ask questions, call to check in, but they can not fix this for you and trashing your soon-to-be-ex is going to grow very old very fast.
Get organized. Gather your financial statements, tax returns, trust documents, will, insurance policies, business documents and financial reports. Put them in a safe place (electronically or physically).
Develop a plan. Do NOT pick up the phone and call a lawyer! You are setting yourself up for an unnecessarily miserable and expensive divorce. Call a divorce coach, a divorce financial analyst, a mediator. Make a plan to champion your divorce. It does not start with an attorney, even if eventually you need the services of a lawyer to deal with a contentious divorce.
You got this. It’s going to be hard but you can do it and you’ll be glad you took charge.