July 9, 2020
How can you achieve a better financial resolution after divorce? Here are five common mistakes to avoid:
Waiting to Consult a Financial Expert
You need to have a comprehensive understanding your assets, including tax consequences, earning power, transaction costs and liquidity challenges. During the divorce process, too many divorcées rely solely on their lawyer to evaluate the long-term impact of various settlement options. Consulting a Wealth Management professional can provide valuable perspective on private equity, stock options, businesses, residential and commercial property, retirement accounts, insurance and collections. Each of which present potential challenges that should be carefully considered in your settlement.
Divorce can be expensive; Other than the importance of paying for your legal fees and other short-term necessities, it’s essential to ensure that the assets you choose to retain have the ability to grow over time.
• Automobiles, boats, and furniture are depreciating assets.
• Retirement accounts carry significant penalties and tax consequences if liquidated.
• Real estate can generate high carrying costs, and on average only appreciates at the pace of real inflation.
Even potentially profitable investments, such as a stake in a business or limited partnership, must be weighed against investible assets (i.e. cash, stocks, bonds, mutual funds), which you can use to establish long-term security.
Coming Home Again
Divorce is an emotional and major process. It’s understandable that you (or maybe your children) might look forward to the stability that comes from staying in your own home. However, this is prime example of where an emotional decision that may not be necessarily a financially wise one.
Married couples are entitled to a $500,000 capital-gains tax exemption on the sale of a primary residence; however, you can only exclude $250,000 as a sole owner. Second, by not selling and splitting the proceeds as part of the settlement, you will absorb the full brunt of transaction costs — including hefty 6% Realtor fees — that could have been shared. Finally, though each circumstance is different, the equity in your home is probably not an ideal vehicle to support your long-term financial goals.
Negotiating the amount of your child support, and in some cases spousal support, is only the first step in ensuring what you’re owed in the future. Securing that income is not always guaranteed. With that in mind, put a wage assignment order in place to ensure child and spousal support gets paid — even in the most amicable situations.
You should also consider using a life insurance policy to insure all support obligations. To get started, consider the following steps:
• Begin by checking whether your existing policies have death benefits large enough to cover the present value of future support.
• Negotiate so that ownership of the policy is transferred to you. If this is not possible, work with the insurance company directly before completing your agreement. In either case, you need to ensure you are notified immediately if premiums are missed.
• If you need to purchase a new policy, attempt to negotiate the premiums into your settlement so that the paying spouse covers the cost. After all, the policy is insuring their liability to you.
If your settlement includes an equalizing payment, whether in a lump sum or series of payments, there are steps you can take to ensure its integrity. For instance, you can work with your attorney to create a support order ensuring that the payment is not dischargeable in bankruptcy. And to protect yourself from nonpayment, you can explore a deed of trust specifying collateral. Incentivize your former spouse to be timely and diligent with payments: Pursuing enforcement through legal channels is expensive and time-consuming but may be necessary given your unique financial situation.
Failure to Adapt
With the marital balance sheet often split in half, plus two lifestyles to fund, change is likely inevitable, regardless of the amount of support you might be receiving or your post-divorce net worth. Failure to adapt to these new circumstances can be dangerous, as overextending yourself in the present can lead to catastrophic financial consequences in the future.
But the biggest mistake is not having a comprehensive understanding around the type of lifestyle you can afford based on your new financial framework post-divorce. It’s wise to work with a financial advisor to create a plan around your spending that won’t sabotage your long-term goals.
Blog Referenced from the Article "Failing to secure your financial future and 4 other common mistakes women make during divorce" from MarketWatch.com