Aviva Pinto is a CDFA, CDS and Managing Director and Wealth Manager at Wealthspire Advisors.
Divorce is a challenging and emotional process that can have significant financial implications. Proper financial planning and awareness of common pitfalls can help you navigate this difficult time more effectively. As a certified divorce financial analyst, my specialty is helping clients effectively navigate this process and achieve financial freedom.
Here are some common financial mistakes to avoid during a divorce:
Rushing The Process
While it may be uncomfortable living under the same roof as someone you are divorcing or wanting to get the process over with to move on, rushing through a divorce can lead to insufficient asset evaluation. Marital assets encompass more than just bank accounts and real estate; they also include investments, retirement accounts, business interests and personal property.
For example, consider a scenario where one spouse hastily agrees to a settlement without fully understanding the value of their partner’s stock options. Later, they discover that these options are worth significantly more than anticipated, leading to an inequitable division of assets.
Overlooking Hidden Assets
In some cases, one spouse may try to hide assets or debts to skew the division in their favor. Detecting hidden assets or undisclosed liabilities requires meticulous financial scrutiny and, sometimes, forensic accounting.
For example, a spouse might transfer funds to a secret bank account or purchase expensive items such as art or jewelry to hide assets. Without a thorough investigation, these assets might go unnoticed.
Keeping The Family Home Without Considering Costs
Many clients tell me that the family home is important because they have children who have grown up in the home and are attending local schools. But keeping the family home comes with financial responsibilities such as mortgage payments, property taxes, homeowners insurance, maintenance and repairs, utilities and homeowners association fees.
For example, a spouse might insist on keeping the family home for emotional reasons but later struggle with the financial burden of maintaining it. This can lead to financial instability and the need to sell the home under unfavorable conditions.
Not Properly Dividing Retirement Accounts
Failing to properly divide retirement accounts can result in significant financial loss. It’s important to understand the rules and regulations surrounding the division of retirement assets.
For example, if a person doesn’t understand the rules for dividing a retirement account and how to roll the assets over to maintain tax-free status, they may lose a significant portion of their retirement savings due to penalties and taxes.
Ignoring Tax Implications
Different assets are taxed differently, and without professional guidance, one might end up with a settlement that appears fair but has adverse tax consequences.
For instance, a spouse might agree to take the family home without realizing the capital gains tax implications when they sell it in the future. Similarly, selling appreciated securities in an investment account leads to large capital gains taxes that will need to be paid in the following tax year.
Not Understanding Complicated Assets
Complex assets include businesses; real estate; investment portfolios; luxury items such as art, jewelry and high-end cars; trusts; intellectual property; offshore accounts; restricted stock units; unvested stock options; and pensions. Understanding the value and implications of these assets is crucial for a fair settlement.
For example, a spouse might own a business with significant value, but without proper valuation, the other spouse might not receive their fair share.
Failing To Think Long-Term About Maintenance And Child Support
Child support ensures that the children’s needs are met, covering expenses such as housing, food, clothing, education and medical care. Spousal support helps the lower-earning or non-earning spouse maintain a standard of living similar to what they had during the marriage.
For example, a spouse might agree to a lower amount of spousal support without considering the long-term financial impact. This can lead to financial hardship and the need to renegotiate support agreements in the future.
Not Seeking Professional Advice
Neglecting professional advice during a divorce can lead to costly mistakes, legal complexities, emotional stress and inefficient processes. For example, a spouse might try to handle the divorce process independently without consulting a financial advisor or legal professional, and then make decisions based on emotions.
A certified divorce financial analyst and a matrimonial attorney can properly address all legal and financial aspects. They can keep you well-informed and support you throughout the divorce process, helping you make decisions that are in your best interest and those of your family.
Set Yourself Up For A Strong Financial Future
Divorce is a complex and emotional process that requires careful financial planning. By avoiding these common financial mistakes and seeking professional advice, you will be better positioned to navigate this challenging time more effectively and put yourself on the path to long-term financial stability. By following best practices, you can work toward a fair and equitable division of assets that supports both parties’ financial futures.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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