Navigating divorce is not easy on couples, emotionally or financially. Every year, there are nearly one million divorces in the United States, leaving many spouses financially devastated as a result. Because accepting unfair settlements is a leading cause of these financial challenges, knowing the common settlement blunders that others make can reduce your risk of experiencing the serious costs of divorce. Here, we will address 10 financial errors commonly made when negotiating a divorce settlement.
1. Being a Financial Victim
It's difficult to accurately divide up your assets if you don't know what they are. If your spouse has always made the financial decisions in your household or knows more than you about your income/assets, he/she will have an unfair advantage when settling the financial issues in your divorce. Being in the dark about finances is one of the biggest mistakes divorcing couples can make, and while no one like to spend days digging up and organizing financial documents, account statements, tax returns, etc., having this financial information is essential if you want to settle your divorce fairly.
Moreover, if you feel you're at risk of your spouse liquidating assets, (selling or transferring them to cash) without your consent, be sure to notify the holders of the assets that you're going through a divorce and get a Temporary Order from the court.
2. Failing to Identify Hidden Assets
Building off of point 1, if you're in a situation where you distrust your spouse and are concerned there are hidden assets that should be included in your divorce settlement, it is vital to uncover them before the divorce is initiated. While this list is not exhaustive, here are a few places to locate hidden assets.
- Tax Returns
- Checking Account Statement and Canceled Checks
- Savings Accounts
- Brokerage Statements
- Expense Accounts
- Children's Bank Accounts
- Credit Report(s)
If you suspect that your spouse has hidden assets, it's wise to seek help from a financial professional and contact an experienced family law attorney to ensure your legal rights are fully protected throughout your divorce settlement.
3. Forgetting Mediation
For spouses who are willing (and able) to work together, cooperate, and reach a fair settlement, choosing a divorce mediator to resolve your case can save you from both financial and emotional strain. A mediator serves as a neutral third-party who works with divorcing couples to reach agreement on all settlement issues.
From custody, placement and child support to alimony and property division, mediators ultimately help couples achieve the best result for a family and maintain a supportive, amicable environment, without the cost or inflexibility of the traditional adversarial legal process.
While mediation can save you thousands of dollars in legal fees, it's not for everyone; if your spouse is incompliant in disclosing financial information or unwilling to compromise, it's better to seek the advice of a divorce attorney and take your case to court.
4. Downplaying the I.R.S.
While it's not uncommon for couples to face tax issues during their divorce, few discover or resolve them before the settlement is negotiated. Addressing taxes post-settlement can add substantial costs to your divorce, making it vital to identify and understand potential liability risks beforehand, with the guidance of a divorce financial planner or tax accountant.
Remember: even after you're legally separated or divorce, you and your spouse are still equally responsible for any federal income tax liabilities incurred during your marriage. Financial risk comes into play when the IRS finds a reason to audit you both for a prior year of marriage. To mitigate financial risk and minimize possible liabilities, it's best to consult with an experienced family law attorney and certified accountant before negotiating your settlement. Here are six other common tax issues to consider when negotiating your divorce settlement:
- How to File Your Tax Return for the Year of Divorce
- Negotiating Child Related Deductions, Exemptions, and Claiming Head of Household Status
- IRS Rules and Regulations Associated With Child Support and Alimony ("Spousal Maintenance")
- Addressing the Options and Benefits of Tax Loss Carry-Forwards
- Tax Consequences of Liquidating Retirement Accounts
- Tax Treatment of Retirement Accounts
- Capital Gains
5. Not Evaluating Settlement Proposals
Don't forget to look ahead; make sure to carefully evaluate the settlement proposal and understand how the finalized agreement will impact your future finances. Take into account your assets, income, living expenses, taxes, child support, investments, retirement plans, and the like to ensure that the settlement you're working towards will not jeoporadize your present and future financial status.
What if you don't like your spouse's settlement proposal? Don't sign. Because it's just a proposal, refusing to negotiate in good faith, regardless of deadlines, could result in a better deal on your behalf. Even if you agree with their proposal, it's wise to review it with your lawyer before signing.
6. Being Attached to Assets
From your marital residence and pension to the painting you and your spouse purchased years ago, it's understandable why many couples feel emotionally-attached to different assets they accumulated during the marriage. Unfortunately, such assets can impair decision-making and result in emotionally-driven debates during the negotiation process, sometimes at the expense of a divorcing couple's financial security.
For example, if a couple is fighting tooth and nail to keep a house, they may not realize that neither can singularly afford to keep it. Homes are not only illiquid assets, they are also are a significant cash expense. If a spouse's main asset cannot be easily converted to cash, and they become responsible for mortgage payments, property taxes, repairs, and utilities, will they still be able to handle necessary living expenses in the years to come?
That spouse might have to sell the home they were so adamant to keep, purchase something smaller, and use the remaining equity or profits from the sale for living expenses. However, the ever-changing real estate market has made it abundantly clear that initially, high-priced homes can have a meager, even negative return. Ultimately, it's wise to let go of any emotional attachments during your divorce and settlement negotiations and focus primarily on how to maximize your finances and secure your stability after divorce.
7. Ignoring The Impact of Long-Term Inflation
The effects of inflation permeate every area of life, from college to retirement. Follow the "Rule of 72" to calculate future costs; divide 72 by the rate of inflation to see how many years it will take for costs to double.
For example, college costs at 5% inflation will double in 14.4 years (72/5=14.4).
When negotiating your settlement, don't disregard the long-term impact of inflation; doing so will help you better cover the true costs of future financial expenses.
8. Not Considering Your Spouse's Eligibility for Social Security Benefits
If you've been married for at least 10 years, the lower-earning (or unemployed) spouse is eligible for derivative Social Security benefits on the higher-earning spouse's record. If your marriage has hit the 10-year mark, make sure you discuss Social Security benefits and take them into account during settlement negotiations.
9. Not Updating Estate Documents
Consult a family law attorney to make sure you change your estate documents - everything from life insurance policies to wills. Forgetting to update these documents may lead to assets going to your ex-husband or wife when you intended to leave them to your children or another family member.
10. Lack of a Post-divorce Financial Plan
After divorce, you're shifting to an entirely different lifestyle, changing the amount of your income, the location where you live, and the costs associated with your children or general living expenses. Life can become expensive after a divorce. Be sure to plan for the future throughout the process of your divorce and that your settlement endures for a significant amount of time, perhaps the rest of your respective lives.
Going through a divorce can be difficult, but understanding common financial challenges throughout the settlement process can drastically benefit your financial status following separation. Make sure to take cautious steps and consider these issues when going through a divorce settlement as a way to ensure you can achieve the best outcome possible. For more information on the divorce settlement process, contact the attorneys of Gagne, McChrystal, De Lorenzo and Burghardt Family Law.