Divorce Mistakes that affect Financial Health
Written by Denise French, CRPC, CDFA
Divorce is not a single event, it’s a journey that lasts years before and after the divorce decree is signed. However, financial decisions made during the actual divorce are final. Unfortunately, it’s easy to make mistakes as emotions can run high in the negotiating room. Below are 3 common financial mistakes to look for during your divorce before you sign the final papers.
1. NOT UNDERSTANDING THE TAX RAMIFICATIONS OF SPOUSAL SUPPORT VERSUS CHILD SUPPORT WORDING IN YOUR DECREE.
We have a client who sought us out for tax help after her divorce. Her spouse had written all funds he was giving her for a period of 5 years to restart her life (after being a housewife for 30 years) as spousal support. That’s normal. However, he also wrote health coverage reimbursements to her as spousal support, funds for the children’s extracurricular activities as spousal support and funds he was paying her as reimbursement for some marital assets as spousal support in their decree which she signed and the court approved. She did not understand that all payments listed as “spousal support” in her decree were taxable to her (and tax deductible to him). This client did not hire an attorney to review the decree her spouse had created, and her financial advisor did not understand all the ramifications of this wording. As a result, all funds listed as spousal support in her decree will be taxable at her marginal tax rate and tax deductible to her ex-spouse.
2. YOU DON’T KNOW WHERE THE ASSETS ARE, OR YOU LACK AN UNDERSTANDING OF THE HOUSEHOLD FINANCES.
In order to properly divide a marital estate, one must obviously know what is in the marital estate. This seems simple right? Not always. In order to gain a better understanding of what you have to divide, the first step is simply asking your spouse to allow you more involvement in the family finances. It’s also a good idea to look over all the accounts to get a better understanding of your marital assets and debts. If that’s not possible, a forensic analyst may be necessary. A forensic analyst can go through each account – 401k’s, bank accounts, credit card bills, tax records, business records, and all other household accounts to analyze what the marital estate is. The forensic person can also “trace” the assets – looking for marital assets that have been removed from the marital estate and put into extended family names, trust accounts, or large sums that may have been spent on non-marital items (such as a long-term affair). It’s like hiring a detective for your finances.
3. I JUST WANT OUT! LEAVING THE MARRIAGE WITHOUT ASKING FOR ENOUGH ASSETS TO HELP YOU HAVE A STRONG BASE TO START OVER.
We have clients who seek our services post-divorce only to realize they gave up much more than necessary in their divorce. Many people will agree to give up more than is neces- sary for the sake of “not fighting” or not want- ing to hurt the children. Other people feel they cannot handle the emotional strife of the fight so they just leave empty handed. Now that it’s over – unfortunately, those decisions cannot be undone. We have one client who gave up his entire 401k during the marriage to pay for the adoption of 3 children. During divorce proceedings that followed several years later, he refused to ask for any of his spouses 401k – an asset he certainly had a right to. He not only had to pay child support, he lost all retirement assets. As he started over and sought to re- marry in his 40’s – he had very little to bring financially to his new wife. Divorce – especially with children – is not the time to be spiteful and hateful. It is, however, a time to remember that everything you do today has a long-range impact.
It’s important to hire a financial consultant to assist you during divorce. Divorce is not a single event, it’s a journey.
Denise French, CRPC, CDFA, is a 19 year veteran financial services professional and a Certified Divorce Financial Analyst. Mrs. French has also personally gone through the struggles of a divorce and, therefore, is better able to understand the needs and concerns of her clients. Mrs. French focuses on estate planning strategies including blended family estates, pension evaluations, debt elimination strategies, and budget planning and maintenance.
This article originally was posted Divorce Strategies Group and www.i-ammagazine.com. To learn more about Mrs. French and her company, Divorce Strategies Group, LLC visit www.DivorceStrategiesGroup.com.
Disclaimer: All articles, downloadable content, web pages, blog posts, and any other content provided by Smarter Divorce Solutions LLC are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.