The Four Biggest Mistakes People Make in Divorce Settlements
Financial matters are a concern among virtually all divorcing couples. Most people worry about how their lives will change on a single income, how they will make ends meet, and whether they can negotiate a divorce settlement that is truly equitable and fair.
You can alleviate these fears and take better control over your financial future by educating yourself on the biggest mistakes that most couples make. To better understand these errors, Katherine invited Nancy Hetrick to the Divorce Dialogues podcast. Nancy is a Certified Divorce Financial Analyst (CDFA), she assists divorcing clients with crafting creative out-of-court settlement agreements and making the process kinder, gentler, and more affordable. Let’s look at some of the potentially devastating blunders she’s seen.
#1–Ignoring Tax Implications
A division of assets that seems clear-cut on paper may present a different reality when taxes come into play. “Unfortunately, we often find that even though a couple may have gotten what they think is an equal 50-50 split, after taxes, it may turn out that one person’s 50 percent is a little more equal than the other person’s 50 percent,” says Hetrick.
For example, a couple has a cabin worth $100,000 and $100,000 worth of savings. They may decide that it would be fair if one person keeps the property and the other keeps the cash savings. However, if the spouse who keeps the cabin chooses to sell it later, they may have to pay significant capital gains taxes, particularly if the cabin was initially purchased for a sum much lower than $100,000. In the end, the cabin-owning spouse will wind up with significantly less wealth than the one who receives the cash.
This example is just one of the ways taxes can render a seemingly equitable division of assets inequitable. Be sure to have a tax advisor knowledgeable in divorce matters review your proposed financial settlement and explain the tax consequences of each item.
#2–Holding on to Real Estate You Can’t Afford
For some people, the idea of selling or giving up the family home in a divorce is too painful to contemplate. You might keep the house because you want to hang on to stability, says Hetrick. However, a few years down the road, you may realize that you really can’t afford it. If this occurs, you’ll have to deal with the selling of the house and all the associated financial and emotional costs on your own.
The prospect of selling the family home may be emotional, but you need to look at the long-term consequences of your actions. Is it realistic that you’ll be able to afford the mortgage payments and property taxes? If you unexpectedly need to repair the roof or the boiler breaks down, will you be able to shoulder those costs on your own? If the house is likely to create a financial and emotional crisis later on, you might fare better by considering options that involve letting the home go.
#3–Failing to Receive an Independent Valuation of Marital Assets
In a famously public and ugly divorce, Jamie McCourt reached a $131 million settlement with her husband, Frank McCourt. The agreement stated that in exchange for this sum, Jamie would give up any control over the Los Angeles Dodgers, which she claimed to co-own with her former spouse. Frank sold the Dodgers for $2.15 billion two weeks later. Jamie sued Frank for $770 million, claiming he fraudulently undervalued the team in their negotiations. He denied the claim and responded that she should have gotten an independent valuation of the team. The judge agreed with him and upheld the original settlement.
If the assets at stake in a divorce are overvalued or undervalued, the divorce settlement can be wildly imbalanced. Couples must ensure that they have conducted independent research and have a professional value of the assets to avoid unhappy financial surprises later.
#4–Failing to Search for Creative Solutions
Many couples are surprised by the kind of creative solutions that are possible in divorce settlements. For example, let’s say a parent wants to keep the children in the family home until they graduate from high school but can’t afford the mortgage on a single income. The couple might craft a divorce settlement that agrees to keep the children in the home until they graduate, then sell.
Hetrick notes that consulting a CDFA when negotiating a divorce settlement might cost upfront but can save far more money in the long run. CDFAs specialize in coming up with creative solutions that bring genuinely equitable results. “We try to get as creative as we can to maximize everything that you’ve accumulated during your marriage, so you both get more of your own money at the end of the day,” she says.
You may also want to read: 10 Mistakes People Make When Going Through Divorce
If you’re considering divorce but would like to try an approach that might mean a brighter future, call our team at Miller Law Group to schedule a confidential consultation.