Common Divorce Pitfalls

Emotions

Divorce is an emotional process, and unfortunately, emotions usually lead to poor financial decisions. We suggest you rely upon your divorce team (Attorney, CDFA®, C.P.A.) to guide you to the best possible outcome. Additionally, keep your focus on the big issues, such as asset division, child custody and spousal support. Try not to let the small issues, such as, who receives a specific crystal vase, hinder your ability to reach a fair and equitable settlement.

Contested Divorce

The vast majority of divorce cases are settled out of court. Of the cases that go in front of a judge, only a small percent do so for good reason. A trial can be very expensive, and therefore, reduce the amount of assets that each party will receive after the divorce. Additionally, a team approach to the divorce settlement can oftentimes deliver a better solution for both parties than a decision received in court.

Organize your Assets

It is very important to know what assets you own, the value of those assets, and were they are held. This should cover everything from retirement, investment and bank accounts, as well as future pensions and Social Security. Make copies of your and your spouse’s tax returns. These returns can help explain to a financial adviser a lot more than your income and taxes paid. They can help find assets, capital gains and losses, depreciation, and business expenses. The tax returns are also helpful in uncovering assets that a spouse might have hidden.

Inquire about Financial Information

Contact the human resources department at your spouse’s employer and ask about any and all benefits. As a spouse, you are entitled to know about current and future benefits. Be sure to ask if there is a pension plan in place. Review your last two or three tax returns, which will list any interest earnings, dividends, or capital gains that were reported. By comparing the financial affidavit to the tax return, you can reconcile assets and look for omissions.

Pension vs. House

Trading their share of a spouse’s pension for the marital home is one of the most common mistakes divorcing people make. The marital home and the retirement plans are likely to be the largest assets in your marriage. Even though the value of the house might be equal to the value of the pension at the time of divorce, they are apples and oranges. A house requires income to pay for repairs, maintenance, improvements, property taxes and assessments, while a pension, however, produces income without costing income. A 50/50 division of assets may sound equal, and it may in fact be equal in value as of the date of divorce, but it may not meet your long-term needs.

Plan for Children’s Actual Expenses

We suggest you plan for your children’s contingencies today to avoid returning to court annually. For instance, who will be paying for college? How much? What happens when the children are old enough to drive? Who will buy the car, pay for insurance? Who will pay for her prom dress or his tuxedo rental? Some of these items may seem trivial, but they can all lead to continuing litigation. Finally, make sure you and your children are covered by health insurance, and agree as to payment for the short and the long-term.

Surviving Divorce

There are four basic things that you will need to survive divorce: a place to live, little or no debt, retirement assets and liquid money. You should strive for a balance of each of these. You need a mix of each of these categories—not an abundance of one category and none in the others. There are three different, general phases of the divorce process: the beginning, the middle and after the divorce. In each of these stages, your budget may be different, so you should make sure that you have liquid money available at all times. In the beginning, you will need liquid money for the retainer to hire a lawyer. You should consider putting this liquid money in a money market account rather than a savings or checking account. This is a vehicle where you are able to earn more interest on your money. Make sure you understand what a money market account is and what it can do for you before making any decisions.

Understanding Disposable Income

After divorce, you may be receiving different types of income—employment earnings, spousal, or perhaps child support—some of which will probably be taxable. In the midst of support negotiations, you need to know how much you will actually be left with each month to understand the impact of a proposed settlement. To figure this out, you first need to separate the taxable and tax-free income amounts you will be receiving. Total all your taxable income, estimate and subtract the tax liability, and then add the tax-free income amount to the after-tax figure. Be aware that additional taxable income may move you to a different tax bracket, so be mindful of the tax rate you use. Compare your after-tax income to your expenses to create your new budget. If you are not sure how to do this, get help from a financial professional. Calculating your net disposal income is critical to helping you budget and to understand your new financial reality after divorce.

If you have questions, please contact our Henssler Financial at 770-429-9166 or experts@henssler.com to discuss your situation with a Certified Divorce Financial Analyst™.