If you think weddings are expensive, the cost of a divorce may shock you.
With 50% of all marriages in the U.S. ending in divorce, there’s a lot of baggage to be sorted out. The process can create a series of monetary disasters for those who aren’t careful.
Here are seven financial mishaps that people often make during divorce and how you can avoid them.
Mistake #1: Assuming litigation is the only option.
Mediation or collaborative divorce can ultimately deliver significant savings compared to traditional divorce proceedings. Mediation, an alternative dispute resolution (ADR) process, may not involve lawyers and relies on a neutral third party to help devise an agreement. In collaborative divorce, each spouse is represented by an attorney trained in the collaborative process of negotiating deals that are fair to both parties. Collaborative divorce, while more expensive, can be a good option when the relationship is more problematic but both parties want to avoid the even higher costs of litigation. Choosing avenues that avoid the adversarial processes of traditional divorce as much as possible generally deliver significant financial benefits.
Mistake #2: Forgoing a formal separation agreement.
In Maryland, couples with minor children must wait one year before they can file for divorce, so it’s important to get the clock started with a formal separation agreement. This legal document is enforceable, and you can use it to agree with your spouse about a number of different issues with which you will need to contend during your separation period. In addition, it freezes the value of your marital assets and ensures that you don’t become liable for any new debt your spouse may incur.
Mistake #3: Not fully considering tax implications or hard-to-value calculations when dividing assets.
Investments, property, retirement accounts and other assets may have the same face value now, but trigger different tax consequences later—and that can dramatically affect how much they’re worth. For example, if you’re in the 35% tax bracket, your million-dollar brokerage account isn’t subject to income tax and is still worth $1,000,000 after taxes. Your million-dollar IRA, on the other hand, would only net $650,000 after taxes. It’s important to consider all latent tax consequences, their potential impact and your divorce settlement, and make sure you’re comparing apples to apples. Consider consulting a divorce financial analyst for more complex asset calculations such as pensions and stock options.
Mistake #4: Getting too attached to your property.
Sure, you love your family home,but you shouldn’t relinquish other valuable assets or rights in order to keep it. While it may seem traumatic to sell the house, it may be for the best. The cost of maintenance and the time required for upkeep often become overwhelming. As a result, cash flow also gets impeded, leaving fewer assets on which to live.
Mistake #5: Assuming you’ll receive alimony.
If you’re the lower earning spouse, there’s no guarantee that you’ll receive alimony. It’s being granted less frequently and there’s no set formula that’s applied universally. The 2019 Maryland tax law also affects these payments: If you receive spousal support, that money is no longer considered taxable income; if you are paying spousal support, those payments are no longer tax deductible.
Mistake #6: Allowing vengeance and anger to drive your actions.
You may want to fight tooth and nail to take as much away from your spouse as possible during the divorce process, but the only one who wins in this type of scenario is your divorce lawyer. He or she stands to make a fortune off of your billable hours.
Mistake #7: Waiting too long to consult an attorney.
When divorce seems inevitable, the first thing to do is seek advice from a lawyer not affiliated with your spouse—even if you’re hoping to settle out of court. Only an attorney can assess whether your divorce is a good candidate for alternative dispute resolution (ADR). Be sure to choose an attorney that’s a respected expert in divorce matters.
Having a solid understanding of your current financial situation and a plan for your future is the best way to avoid financial mistakes during the divorce process. FAI’s friendly, knowledgeable advisors can help protect your finances in the face of any life transition. To learn more, please contact us.
About FAI Wealth Management, Inc.: Located in Columbia, Maryland, FAI focuses on helping clients create the financial future they desire by protecting their wealth, making the most of their assets, and planning for life’s uncertainties. The firm combines fee-only, fiduciary-driven guidance with highly personalized, consultative financial planning and investment services that enable individuals, families, and businesses to navigate complex life transitions. Founded in 1987, FAI currently manages more than $350 million in client assets nationwide. For more information about FAI Wealth Management, please visit the website at https://www.faiwealth.com or call 410.715.9200.