HomeBlog10 Common Financial Planning Mistakes in Divorce

divorceMajor life changes, such as marriage, divorce and widowhood are considered among the most stressful to endure. Who has the presence of mind to deal with their finances when emotions are in turmoil? Proper planning and guidance can have a major impact. This is why I have put together a list of ten of the most common financial mistakes to avoid:

1) Don’t assume that a 50-50 division of assets is fair.
There are many factors that play into an equitable division of property. Some examples are length of marriage and disparity in earning capacity. It is important to remember that an equal division of assets is not always equitable.

2) Understand that one financial decision may effect another.
During a divorce there are many financial decisions that need to be made; however, each cannot be made in a vacuum. They are integral to one another and must be evaluated at the same time.

3) Don’t disregard the impact of taxes in your divorce settlement.
It is important to understand the tax ramifications on investment assets that you may receive in a divorce settlement. You must determine the after-tax value vs. taking the investment at face value.

4) Guarantee alimony and child support payments with life insurance.
If something were to happen to the spouse required to pay alimony or child support, the payments would cease. Consider a life insurance policy to cover these payments.

5) Proceed with caution when dividing retirement accounts.
Retirement accounts tend to be the largest assets split during a divorce. There are many factors to consider when dividing a retirement plan. For example, with a defined contribution plan you must have a QDRO (Qualified Domestic Relations Order) drafted. This document must be written specifically for the plan. The plan administrator cannot act without that document. Another issue to contend with is that the 10% early withdrawal penalty when a spouse under 59 ½ needs cash flow, but the only asset to get it from is a retirement plan. Rule 72(t) can allow for this. Consult with a professional who understands this rule and can provide assistance in obtaining the desired cash flow.

6) Evaluate and project settlement proposals into the future.
The tendency is to focus on the immediate asset division as well as child support and alimony. Failure to project a settlement 10, 15, or 20 years into the future is a detrimental mistake.

7) Don’t keep the house if you cannot afford it.
This can be a tough and very emotional decision. Typically, women will want to hold onto the house as an asset, especially when they have children still in school. It is important to understand that this is an illiquid asset that requires a certain income flow to sustain it. Evaluating whether you can afford to keep the home or not is very important before the divorce settlement occurs.

8) Your divorce attorney may not know and understand all of the investment rules and nuances.
Your attorney is the expert on legal advice, just as your accountant will provide the best tax advice. Consult with a financial planner to understand investment rules and how they impact your divorce settlement.

9) Create a post-divorce budget before you settle.
Many times divorcing spouses do not understand their post-divorce expenses and are unable to cover all of their bills. Take the time to create an accurate and realistic budget before you settle.
10) Don’t wait until it’s too late to ask, “How do I know that I will be financially secure after my divorce?”
Commonly held assumptions about divorce can work directly against your financial needs. Speak to someone who understands the ins and outs of a divorce financial settlement before you accept any kind of agreement. Make sure that your divorce settlement works in your favor.

Contact Fragasso Financial Advisors to analyze the long-term forecasting of your assets against your needs. 

Fragasso Financial Advisors does not furnish legal or tax advice. Consult with a divorce, family law attorney or tax professional regarding your specific circumstances.

Listen to our Financial Planning in Divorce episode of The Advisor,
with Christine Robinette, Client Experience and Strategic Implementation Manager

Christi Robinette

 Our focus in this episode of The Advisor is on the financial aftermath of divorce and how to plan and mitigate it.
Listen to this episode now!

Fragasso Financial Advisors does not furnish legal advice. Consult with a divorce or family law attorney regarding your specific circumstances.