Farewells Are Hard To Do:
Long after the wedding bells have worn off, you may know someone who has come to a crossroads and has decided to go in a different direction than his or her partner.
Building a life with someone involves many things. There are memories, friendships, family relationships and maybe children and pets. Love plants the seeds that eventually grow deep roots as a family is born and grows. And while love isn’t always about money, divorce certainly can.
Whether it’s just a home and retirement account or something more complex like business ownership, other investments, and stock options, uncovering the job of a lifetime is difficult and complicated by emotional issues.
While it is impossible to escape the emotional toll of a divorce, it is not in a person’s best long-term interest to make or avoid decisions that will affect future well-being because of emotions. To avoid becoming a financial victim and starting a new life on the wrong path, there are steps you can take before the divorce becomes final. It is best to make this decision as unfeelingly as possible using professional resources whenever possible.
Individuals considering divorce should form a team of qualified professionals who can advise on the legal, tax, and financial implications of various proposed divorce settlements.
Here are some tips to consider:
1.) Don’t be a financial victim. If you suspect your spouse is planning a divorce, make copies of important records and notify creditors, banks, and investment companies in writing.
2.) Don’t prepare an inaccurate budget. Individuals are usually asked to generate a budget for temporary maintenance (aka Pendente Lite). But through oversight or inaccurate record keeping, this always leads to problems when they find that they are having difficulty making ends meet with court-approved maintenance based on the budget provided. It makes more sense to bring in a qualified financial professional at this stage to help prepare the budget.
3.) Don’t try to use the court to punish your partner. In most states, fair distribution is the basis of settlement. Hiring an aggressive attorney or ignoring other options such as mediation or Collaborative Practice can be expensive and toxic to post-divorce family relationships especially when children are involved. (For a better understanding of these options, look for the Collaborative Divorce or the International Academy of Collaborative Professionals).
4.) Don’t forget the common enemy: the IRS. As the saying goes: the enemy of my enemy is my friend. Both parties will be affected by the tax. With careful planning beforehand, this can be minimized. If assets need to be sold or eligible plans are withdrawn prematurely, this can increase the tax bill while reducing assets for living after the divorce.
A 50/50 split might sound fair. But the point is part of the assets of each marriage gets net from the tax officer.
5.) Do not use divorce attorneys as financial planners, accountants or therapists. At over $300 per hour, it’s easy to collect huge bills and not get the specific advice other professionals can offer.
6.) Don’t forget to insure the settlement. The premature death or disability of a spouse means the loss of support, care or assistance to pay for tuition and health insurance.
Make sure that the life insurance names the spouse receiving support as the owner of the policy. This way if the partner paying the policy stops paying the premium at least the beneficiary/owner will receive a notification and be able to take legal steps to deal with the violation.
7.) Do not keep the marriage house if it is not reachable. Too often couples will fight over who will look after the wedding house. While there may be sentimental value or legitimate concerns about getting kids out of school, it may not make financial sense to keep the house. After all, real estate is a low-return asset (and actually a negative in recent history) while mortgages, taxes, and maintenance costs can drain a post-divorce budget. It usually makes more sense to sell the property while technically still in pairs to get the maximum capital gain exemption ($500,000 on cost basis) and split the proceeds to buy or rent elsewhere.
8.) Don’t forget to change the receiver. Forgetting to remove and replace a spouse from a qualifying plan or insurance policy, unless required by a settlement agreement, could result in benefits or assets passing to someone the divorced spouse does not wish to receive.
9.) Don’t forget to close or cancel the joint credit card. To avoid problems it’s best to cover the credit card for any new expenses pending the final divorce. This will avoid the temptation of either partner running the charge.
10.) Disagree settlement without having QDRO. Whenever a spouse has a qualifying plan (e.g. 401k or retirement), the Qualifying Domestic Relations Order will notify the program administrator who is entitled to the assets and when. (Note that QDRO does not apply to IRAs governed by beneficiary designation). This is sometimes an afterthought but very important. It’s a good idea to pay attention to the language in this order. If not properly spoken, it can delay when a spouse is eligible to begin receiving benefits or may lead to investment decisions that may be reckless or detrimental to the spouse’s retirement interests.
There are several methods for valuing pensions or retirement benefits. This is often overlooked by divorce lawyers or bailiffs who are short on time. Use a financial professional trained in these techniques to ensure settlement analysis is carried out properly.
And make sure that the attorney that drafts the QDRO wording allows the recipient of a qualifying pension or retirement account to start receiving benefits as early as possible under the rules of an eligible plan. Otherwise, the beneficiary spouse may need to wait until the other spouse of the account holder retires which he or she may choose to postpone out of necessity or out of spite. Some administrators will separate portions for pairs of recipients so it is a good idea to ensure that funds are invested according to the recipient’s age and risk tolerance and are not simply deposited in low-interest money market accounts.
11.) Don’t underestimate the impact of inflation. Without proper help in reviewing settlement options or preparing post-divorce plans, it is easy to forget that the amount of money received today may seem like a large sum but may not be sufficient for inflation. Whether for tuition, medical care or housing, inflation can drain a person’s budget and resources.