As we’ve discussed often in our blogs on divorce and financial planning, it’s so important to make sure that you’re thinking about and getting advice related to financial issues, in order to avoid critical financial mistakes in divorce.
Today I will share 15 common critical financial mistakes in divorce, and a bit about how you can avoid them.
The Most Critical Financial Mistakes in Divorce
1. Assuming you must hire an attorney and not considering mediation.
A lot of people assume that if they’re getting divorced, they must hire an attorney because that’s what they see on tv or what their friends are telling them and don’t think about their alternatives. It’s important to consider all your options and especially to think about how mediation can save you and your spouse a lot of money. Wouldn’t you rather figure out ways to divide the assets you do have and keep that money for you and your kids then give that all away to divorce attorneys?
2. Failing to think about the tax ramifications from the divorce.
Different assets have different tax ramifications and it’s important to consider how that’s going to play out. For instance, if you choose to keep the house and sell it later you can now only exclude $250k in capital gains, instead of the $500k that you and your spouse could claim together. This may not matter for some people, but for others who bought their house a lot lower than it’s worth now that’s an important item to consider when negotiating the division of assets.
3. Hiring a mediator or attorney who does not have financial training/education.
Now I’m probably biased but the best is to hire a mediator who is also a CDFA® (Certified Divorce Financial Analyst) because that means that they have additional education and training the financial issues associate with the divorce. All of the mediators at West Coast Family Mediation also have their CDFA® because we believe it is that important to be informed. But since there aren’t that many mediators and attorneys with their CDFA® just be sure that your mediator or attorney has some sort of financial training or education so they can understand your assets. And is comfortable working with a CDFA® when necessary.
4. Assuming all retirement assets are created equally.
Unfortunately, people often believe that all retirement assets are the same and they’re not. Your 401k or traditional IRA are pre-tax accounts meaning that when you take the money out down the road for retirement you will be taxed on them as if it’s ordinary income. Roth IRAs on the other hand are post-tax accounts, meaning you pay tax on it when you put the money in and can take it out tax free. So if your spouse offers to keep his Roth IRA and give you his 401k that have the same value, just know those are not actually worth the same amount and should both be split equally instead.
5. Not getting accurate valuations on assets.
There are many assets that you need to make sure you’re getting an accurate valuation on and that often means using an outside valuator. This is especially true for businesses and often for real estate as well.
6. Using your divorce lawyer (or mediator) as a financial planner or therapist.
Your lawyer or mediator’s hourly rate is usually going to be much higher than a financial planner or therapist would be. Use your lawyer or mediator for what you hire them for and then build a team of other professionals, such as a financial plan, therapist, and divorce coach to help with the parts they’re good at (at a much lower cost)
7. Not asking the right questions.
Now certainly it’s important to remember that you don’t know what you don’t know so having a good advisor to help you is important but make sure that you are asking the right questions to get the necessary information about your marital estate.
8. Not making sure that your spouse has done a full financial disclosure.
Now in California it is legally required for both parties going through a divorce to complete their Preliminary Declarations of Disclosure (PDOD) and sign under penalty of perjury that they’ve been complete accurately, but you also want to go through them and make sure that you don’t think anything is missing or you need additional statements.
9. Fighting to keep the house at all costs without considering how you can afford that.
Far too often clients will fight to keep the house and will give up other assets, including retirement accounts, cash etc. to be able to stay in it. The problem there is that they often don’t consider what it will cost for them to stay in it and don’t consider all the costs that go into home ownership, such as ongoing maintenance and big-ticket items.
10. Disregarding the long-term effects of inflation
It’s important to think about inflation when it comes to agreeing to certain things down the road and when considering spousal support and not thinking about how the same amount, you’re agreeing to today is going to be worth less down the road.
11. Forgetting to complete a QDRO for qualified retirement accounts.
If your MSA says that you receive a portion of your spouse’s qualified retirement account (such as a 401k, pension, 403b, etc.) then you need to remember to complete the QDRO and have that filed and then submitted to the plan administrator. For a long time, we used to complete QDROs in house because we were concerned that our clients wouldn’t do them. While we now refer that out, we still make sure that they contact the attorney completing the QDRO early on and get that done.
12. Failing to ensure your spouse’s support obligations are insured.
If your spouse is required to pay your child and/or spousal support, then you need to make sure that the obligation is secured with life insurance and even disability insurance. The life insurance is important because if your spouse dies then your support ends and you’re now raising a child(ren) on your own and don’t have their support to help.
13. Not thinking through the tax basis on stocks.
If you’re dividing a non-retirement taxable brokerage account or other stocks, be sure that you look at having the account divided such that the average tax basis is divided equally. This means that you’re not getting all the stock with the low tax basis that requires you to pay a lot in taxes later, while your spouse takes the ones with a higher tax basis, not owing taxes later and getting to pocket more money. The financial institution where you have your account can do this for you but you need to make sure that is accurately reflected in your marital settlement agreement.
14. Forgetting to update your estate planning documents.
Way to often I hear that people never update their estate planning documents and their ex-spouse is still their health care power of attorney, or they haven’t put in place a new trust to protect their assets. It’s so important that you review your estate planning documents and ensure that you update them to reflect who you want making decision if something happens to you and who you want to leave your assets to.
15. Not developing a post-divorce financial plan.
Once you’re divorced, you’re now on your own financially and things are likely looking a lot different than they did when you were married. Make sure that you work with a financial planner on an ongoing basis to develop your post-divorce financial plan.
We want to help you avoid these critical financial mistakes in divorce, so contact West Coast Family Mediation today to discuss your unique situation.
By: Amanda Singer, Esq., MDR, CDFA®
