Approximately 95 percent of divorces are settled out of court. If you or your attorney make a mistake during the divorce settlement, it can affect you for the rest of your life.
Your divorce settlement agreement will cover three main areas:
- Dividing property
- Spousal support
- Child support and custody
In 2017, you will need to know what to ask for in your divorce settlement agreement to avoid big regrets later. Shown below are twelve ways to financially get the most out of your divorce.
1) Keep the Big Picture in Mind
Divorce is complicated on many levels: emotionally, legally, and financially. Facing the end of “happily ever after” can be gut wrenching. Given the complexities involved, it can be difficult to stay focused on the big picture. Treat divorce like a business transaction by determining your goals during and after the divorce so that the decisions you make today will set you up for the best position in the future. Before you start a fight about the kitchen chairs, make sure you view every decision during divorce through this lens: “Will this be helpful in the long run?” By staying focused on the big picture, you can avoid small squabbles that will end up being more hurtful than helpful.
2) Hire Your Own Attorney
You should not share the same attorney with your spouse. Perhaps your spouse has suggested that you share an attorney to save money. Nevertheless, as you try to decide what should be included in a divorce settlement, it is imperative that you have an experienced family-law attorneyto stand up for your interests. Otherwise, you could regret it later.
3) Look for Hidden Assets
Do you suspect that your spouse might be hiding money from you? During divorce, it is an all-too-common occurrence. Failing to look for hidden assets can cost you a lot of money that you might be rightly entitled to receive.
Your spouse could hide assets from you by
- transferring them to a friend;
- reporting a lower income and higher expenses;
- creating fake or inflated debt;
- withdrawing a lot of money and putting it into a safe deposit box;
- overpaying taxes to the IRS;
- undervaluing assets, such as antiques and collectibles.
If you suspect that your spouse is hiding assets from you, you should consider having a private investigator or forensic accountant review your financial details. Hiding assets during a divorce is a crime that has penalties. You need to protect yourself if you have any suspicions.
4) Know How Much You Owe
Debt is a highly contentious part of divorce, and it is one of the common reasons why marriages end. Debt includes credit cards, any other form of credit, mortgages, and any loans.
Early in the divorce process, check your credit report to see every account with your name on it. If your name appears on an account, you are legally responsible for it—regardless of what your divorce settlement states. To avoid a detrimental impact on your credit, keep your payments current on joint accounts.
In divorce, you need to plan, do your homework, know how much you owe, and stay on top of any outstanding debt both during and after the divorce process. Poor credit can keep you from getting a mortgage or a car loan—or just moving on with your life.
5) Find Out What Your Assets Are Really Worth
It is not always easy to determine the value of certain large assets. For example, if your home has not been recently evaluated by a certified appraiser, you may not know how much the home is currently worth due to fluctuations in prices. Determining the value of the home is not as simple as logging in to an online appraisal website, such as Zillow or Redfin. Furthermore, the value of jewelry, art, antiques, and other collectibles is difficult to assess, so it may be wise to get an expert opinion.
One common negotiation tactic that your spouse may use is attempting to mislead you about the value of assets, which can lead to a one-sided divorce settlement. Do not let that happen to you. Properly appraise any valuable assets you have questions about.
6) Learn the Rules of Retirement Plans
Pensions, an IRA, a 401(k), and other types of retirement plans have their own set of rules. They also have specific procedures you need to follow during divorce. If you are deciding whether or not you should keep a retirement plan, you need to know the various financial and legal complexities involved.
For example, many defined benefit and contribution plans require a Qualified Domestic Relations Order (QDRO) to split the retirement plan. Failing to follow the necessary rules can cause you to have a variety of post-divorce headaches.
7) Evaluate the Liquidity of Assets
Not all assets can be immediately sold. Some may take months or even years before you can receive the cash you need. For example, if you want money from your home, it may take months to sell or refinance. Investment and retirement accounts may require different time periods, ranging from a few days to several years before you can access the funds in the account.
For example, hedge funds and private equity funds may have multiyear lockups that prevent withdrawals from your account. For every asset you are thinking about keeping during divorce, you need to know how hard it will be to liquidate when you need the funds. Otherwise, you could find yourself needing money but not being able to access it.
8) Realize Tax Consequences
Taxes can have a major impact on your divorce settlement. If you receive spousal support, that money is considered your taxable income, but if you are paying spousal support, those payments are tax deducible. On the other hand, child support is not taxable for the recipient or the payer.
When evaluating your home, investment accounts, and other assets, taxes get even more complicated. If you do not understand the tax consequences of your settlement, you could find yourself in an unwanted position: $1,000 is only worth $500 after you pay your taxes. To ensure that taxes will not take too much of a bite out of your divorce settlement, consult a Certified Divorce Financial Analyst (CDFA) or CPA.
9) Understand Every Word in Your Divorce Settlement
Divorce settlements are often long, complex documents. They have many legal terms and phrases, which will affect you for the rest of your life.
You might be unclear about part of the settlement or have a question about its significance. If so, be sure to ask your attorney for further clarification. The settlement may have a mistake, or a clause may not accurately reflect your best wishes.
Asking questions—no matter how small—can save you a lot of regret and heartache.
10) Determine if You Can Afford the Settlement
Is the settlement something you can afford over the long term? Even though the settlement may make sense over the next year, it may not make sense in five, ten, or twenty years. As part of the process, you should create an appropriate budget for your life as a single person, which includes your estimated income, expenses, and taxes.
You should determine if the divorce settlement allows you to live comfortably in the future or if you will need to make lifestyle adjustments. To make sure it is financially feasible for you, have a CDFA help you analyze both the short- and long-term implications of the settlement.
11) Secure Support Payments with Insurance
Spousal support, child support, and other divorce settlement payments can occur over the course of many years (and in some cases, a lifetime). What happens if your soon to be ex-spouse unexpectedly becomes disabled or passes away but still owes you support?
This situation can cause a host of financial complications, so you need to protect yourself. One method is to secure your divorce settlement with life insurance and/or disability insurance.
If your ex-spouse is no longer able to make payments for some reason, you will then have insurance that can take care of any unpaid support. Many people fail to utilize this option. Should something unforeseen happen to your ex-spouse, you will have a good layer of protection.
12) Create a Post-Divorce Financial Plan
Even though you have signed the divorce settlement, you may not have finished the divorce process. You will have to make sure that everything occurs during the settlement—as you agreed.
For example, if your spouse is supposed to remove your name from a joint account, you must follow up to ensure that it has been removed in a timely manner. If you are supposed to receive part of a retirement plan at some point, you need to mark your calendar accordingly; then you can ensure that you do not forget about it later on.
Your tax status will change after the divorce, so you should consult a CPA to help you navigate your tax situation. You should sit down with a financial planner and plan for retirement—adjusting for your new life.
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Shawn Leamon, MBA and Certified Divorce Financial Analyst, is the host of the Divorce and Your Money Show, the #1 show on iTunes that discusses personal finance issues in divorce. He is also author of Divorce and Your Money: The No-Nonsense Guide, available on Amazon. Learn more at www.divorceandyourmoney.com.
Disclaimer: Divorce and Your Money and its affiliates do not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.