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?
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:
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.
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.
So, you’ve decided to seek a mediation for your divorce, and you’re exploring local options. With emotions running high, picking a divorce mediator in Annapolis can seem like a daunting task. The professional you decide to work with needs to hold a level of your trust—after all, they will be helping you and your soon-to-be-ex-spouse navigate the murky waters of divorce.
Choosing a mediator that fits your needs is a careful decision, it’s a good idea to do your homework ahead of time. Thinking about the types of things you might ask a professional mediator before you make the decision to commit to one is a good way to prep for an initial consultation. TruNorth Divorce Solutions has put together a quick list of questions that you might want to ask your prospective mediator.
1. How do you define success? How do you facilitate this during the mediation process?
This is a great question to ask during your initial meeting with a professional divorce mediator because odds are that this is the first time you’ve sought out a divorce mediation and are unsure about how the process works. Mediation is a collaborative effort between you, your ex, and the mediator you choose to work with.
It’s important to outline expectations before the mediation process begins, and this question can really flush out some of those expectations. Ideally, you want to work towards a divorce settlement that both parties are happy with. Your prospective mediator may go into detail about their strengths and what they bring to the negotiation table.
2. What is your success rate?
This is a great follow up question to ask in tandem with how your mediator defines success. The answer to this question can provide some much-needed confidence and really influence your choice.
The mediator will probably touch on the depth of their experience in the industry and how many divorcing couples they have worked with. They might also have some metrics (i.e., that they have successfully mediated XX divorces in the Annapolis area for X years) of success to share with you that reflect their professional expertise. They may even share some relevant anecdotes.
3. How much does mediation cost?
Ah, the price tag. An important question. Make sure to get these details during your initial consultation. Your mediator may bill hourly or have a flat rate mediation fee. While one divorce mediator in Annapolis may charge $1000 an hour for their services another may have a flat rate fee for services of $7000. Don’t make assumptions and ask for rates up front.
Remember, price isn’t always the main consideration behind choosing a mediator and shouldn’t necessarily deter you. While it is important to stay on budget, you should also consider the level of skill and expertise that the mediator has to offer.
4. How long is each mediation session/how long does mediation typically last?
Another great question to ask your divorce mediator is how long each session will last and how long the process takes overall. These questions can be particularly salient if your mediator bills by the hour.
The answer to this question also gives you an idea of how much time you will need to carve out of your schedule for the mediation process. You can also ask about whether your mediator holds private sessions (depending on your circumstances) and other questions surrounding the level of commitment expected of you.
5. What do your services include?
Being unfamiliar with mediation, you probably want to ask about what is included with their services. Is the mediator drafting up divorce settlement documents for you? Will they be filing them on your behalf? Will you have to pay additional court costs or those included? Asking this question up front will help give you a clear picture of what to expect of your mediator.
Any reputable mediator would welcome these questions during your consultation, so you shouldn’t hesitate to ask. Looking for a divorce mediator in the Annapolis area? Contact TruNorth Divorce Solutions for a free divorce strategy session.