The way you transition through divorce will have an enormous impact on your life for many years to come. Here is a list of 8 financial mistakes to avoid as you work through negotiating your divorce settlement:
- Not understanding your overall financial situation
One of the biggest mistakes you can make, is to stay in the dark about your finances. If you’re in a situation where your spouse made most of the financial decisions during your marriage, it’s time to be proactive about your financial situation and develop a strong understanding of your marital assets and liabilities. This is even more important if you think there is a possibility that your spouse may liquidate assets from the marriage or move assets into his or her name. Be proactive and learn everything you can in detail about your financial situation and consider seeking help from both a divorce attorney and divorce financial professional.
- Not planning for taxes
It’s very important to do tax planning during the divorce process in order to avoid surprises on April 15. People often forget to make accurate calculations about the after-tax value of their assets. For example, after the divorce you will be responsible taxes on the capital gains that occur on sales of stock that you acquired as part of the divorce settlement. And of course, retirement accounts have a lower value than standard investment accounts because of the tax consequences at liquidation.
- Over valuing assets that you have an emotional connection to
During divorce negotiations you will want to avoid emotional attachment to your belongings. For example, people often over value their house because they don’t want to move and they have a strong emotional attachment to the house. However, in many situations, it doesn’t make financial sense to keep the house. Beyond the house decision, people have a tendency to over value personal items such as paintings, furniture and collectibles. Your goals during divorce negotiations should be to maximize your finances for the future and to make sure that you cover your short and medium term living expenses.
- Forgetting to update your estate planning information
Following a divorce it’s very important that you update your beneficiaries for life insurance policies, wills and retirement accounts. It’s useful to get advice from an estate planning attorney when making these changes, as it is not uncommon for a divorce Judgment to place requirements on these assets. Just remember, revisions to policies should not be completed until final entry of a Judgment for Dissolution of Marriage.
- Failing to consider Social Security benefits
In a marriage longer than ten years, a spouse may be entitled to receive a benefit from social security which is equal to one half of their spouse’s benefit, without effecting the amount of their spouse’s overall benefit. It is important to discuss the social security implications of a divorce with a professional in order to properly plan for retirement.
- Failing to plan adequate insurance coverage
The premature death of your ex-spouse after the divorce could have a devastating financial impact on you if your ex-spouse is not insured or is under insured. By having adequate insurance in place you can offset the loss that occurs when you no longer receive child support payments or spousal support payments. It is important to review your life and disability insurance policies to make sure that you’re covered in the event of unexpected death or injury, and unmet financial obligations agreed to in the divorce settlement are met.
- Failure to budget and plan your finances
Two households are more expensive than one and it is likely that your combined expenses are going to go up after the divorce. It’s vitally important that you put a realistic budget in place to make sure that you can meet your living expenses and save for the future.
- Battling it out in court without considering mediation
You may not need to take your divorce to court. If you think you can work together with your spouse to reach a fair settlement on most of the issues related to your divorce, then choosing mediation may be for you. Engaging in the process of mediation may save you thousands of dollars over litigating in court. In addition the mediation process offers flexibility for you and your soon-to-be ex-spouse in making decisions on how you want your divorce structured. This is in stark contrast to the adversarial divorce process which occurs during a litigated divorce. In court the judge makes all the decisions for your settlement. It is important to consider mediation as an option, but mediation is not a fit for everyone. If you believe your spouse is hiding assets or is not the type of person who will fairly negotiate, then mediation may not be an option for you. A key ingredient in mediation is that both parties are willing to compromise.