From Insurance to Taxes, Financial Tips to Consider in Divorce Settlement
When thoughts of divorce hammer home, you have to be careful not to get financially nailed. “When you divorce, you are divorcing your spouse and not your creditors,” says Steve Rhode, president of Myvesta.org, a non-profit consumer debt assistance service. “It does not matter what it says in the separation agreement, that document is between you and your ex and not you and your creditors.”
So, be forewarned, the promises your soon-to-be ex makes at the divorce negotiating table may not be any more lasting than the marriage vows and your separation agreement may provide very little protection in terms of your credit rating and potential bank repossessions in the near or far future. In the end, whatever bill has your name on it belongs to you in the eyes of the creditors and collection courts.
The goal, then, is to get your name off the bills you aren’t agreeing to pay in the settlement. From the beginning, ditch whatever preconceptions you have before you head to the settlement hearing for little is as it first appears. “For example, great care should be taken over the home mortgage payments since both parties continue to be responsible even years after the divorce,” warns Joe DuCanto, named by the Leading Lawyer Network as one of the Top 100 Leading Lawyers in Illinois and an Illinois Super Lawyer.
If you win the home in the settlement, you may lose in the end if you can’t afford regular maintenance and upkeep costs, yearly property taxes and home insurance, or even the mortgage payments if your spouse can’t pay the bill months or years down the road. Another caveat: that existing mortgage can count against you — even if you are not the one that got the house — when you go to borrow money later for another home, a car or a business.
The same holds true of many other so-called wins — such as country club memberships, where members may cold-shoulder the newly divorced and the value isn’t cashable. If you decide to sell the house and split the profits now rather than wrangle with the liability later, keep your emotions out of the sale.
“If you tell your listing broker that you are divorcing, that information might be disclosed to potential buyers — so simply state that you are selling ‘because we’re moving,'” advises Alison Rogers, licensed real estate agent in New York City and author of Diary of a Real Estate Rookie (Kaplan Publishing, 2007). “Keeping the divorce aspect of the transaction private will help you beat off the vulture buyers who think they can knock $10,000 off the price just because you are having personal troubles,” she explains.
Here are a few additional financial tips to help you before and during your divorce settlement.
1. Make a Complete Itemization of all Assets.
Count everything his, hers, joint assets, future expectancies, future inheritances, insurance, everything,” says DuCanto.Not sure if you thought of everything? Seek professional help from the very beginning. Over the past few years, my divorce mediation clients have found tons of value in working with a Certified Divorce Financial Analyst, also known as a CDFA,” says Josh Hoch, director of Mediation Services at Mediation Works Incorporated. “A company that I refer clients to is New England Divorce Solutions. They recently began offering services nationally.” Be sure to ask your attorney if you should freeze assets now.
2. Close Joint Accounts to Prevent your Ex from Adding to the Tab or Leaving You a Bill.
“Check with your attorney first as timing and motive can affect the outcome of the judge’s decision on asset allocation. Old accounts need to be closed, the proceeds divided as agreed upon and new credit established in individual — as opposed to joint — accounts,” advises DuCanto. “The same holds true of checking accounts as the bank can collect bounced check fees, insufficient funds and overdrafts from anyone named on the account. It’s also wise to be wary of the other side’s attempt to save money. The most interesting client story I ever had was a wife that persuaded her husband that he had lower interest rates on his credit cards and they should transfer her balances to his cards. They did and the next day she left,” says Rhode.
3. Watch Out for Tax Traps.
Vested stock options, 401(k) plans, IRAs, and the like need to be unscrambled and possibly there will ensue some transfers: the IRAs directly; 401(k) and other ‘qualified plans’ by way of a Qualified Domestic Relations Order (QDRO). “The action taken depends on the tax consequences of the various means or modes of asset division,” says DuCanto, who pioneered the application of tax law to matrimonial law in the 1950s — and divorce attorneys to this day follow his now famous plan to gain tax advantages for their clients in divorce settlements. “If you do agree to sell, hire one attorney for the sale and let him (or her) handle it,” adds Rogers. “Don’t blow it by each dragging your divorce lawyer to the closing.” There are ways to help you saw your assets in half and prevent your financial worth from turning to sawdust.
Your share of the assets could be substantially whittled away by taxes and penalties. Be sure you choose an attorney who understands tax consequences and involve your CPA in the process early on. “There are financial planning firms and CPA firms that specialize in divorce planning and/or litigation support, but the time to start that planning is as soon as the decision is made to divorce,” says Dylan Ross, CFP and owner of Swan Financial Planning in New Jersey.
“Give your financial advisor your attorney’s business card and vice-versa,” advises Michael Reid, CPA and owner of Reid Financial Group. “Encourage your attorney to call you before calling your advisor, in case you can answer questions quickly. Only have your advisor contact your attorney to ‘briefly clarify matters that you don’t understand’ to save on legal and advisor bills. These two professionals will provide checks and balances on each other.”
4. Guarantee Future Support.
Even if child support is addressed in the settlement, future events can bring the support to an abrupt halt if you don’t take precautions now. One tip before finalizing a divorce is to mandate continuing or new life insurance while support payments are being made,” says Tony Blasting, a CLU, ChFC, CFP, AEP, financial advisor at Northwestern Mutual Financial Network. “I have seen cases where this is overlooked. If your ex dies, that will be the end of support checks. Even when the mandate is in place, he or she may change beneficiaries or lapse coverage. The only sure protection is for the receiving spouse to own the policy.” Follow the same advice on ensuring the mortgage or other debts get paid, including future college costs, in the event your ex dies or becomes disabled.
5. Change Beneficiaries Immediately.
Unless you want “to death do us part” to turn into “to death doth us remarry,” change the beneficiaries on all your insurance policies. Review beneficiary designations. “Many people don’t do this and inadvertently leave their accounts to their ex-spouse at death,” warns Richard Krasney, CFP, President/ Personal Chief Financial, RJK Wealth Management, LLC. Make sure to review the designations. Most commonly, this would apply to pension accounts, annuities, IRA, 401ks, and other retirement type accounts, and life insurance policies.”There is one more money issue to consider: the cost of your attorney. In every bitter divorce, it’s the legal beagles that get the biggest bone. Look at mediation rather than traditional divorce. Divorce mediators can save you both a lot of time and money,” says Krasney. “A mediator is knowledgeable about the law and will be able to help you to determine if your request to saw the pet dog in half will just wind up wasting your time and money. They know the state laws and may be useful in situations where there isn’t bloodthirsty animosity toward one another.”
