Separating finances is one of the most stressful parts of any divorce settlement. For many partners, assets such as a house can take on outsized emotional value, while subjects like alimony can become deeply personal. Factor in feelings of anger or resentment, and it’s easy to see why many partners fail to remain clear-eyed with their finances.
Here are 4 common financial mistakes that partners make when settling a divorce, and 4 best practices to help you avoid them:
Failing to See the Big Picture
One of the biggest mistakes partners make is focusing on assets individually and losing sight of the big picture. But each financial decision you make impacts every other one, from capital gains and taxes to interest and inflation. A resolution that may seem fair on balance might actually leave you with a greater tax burden going forward, for instance, so it’s important to continuously maintain a holistic view of your finances when structuring a settlement.
Best Practice: Before you begin separating finances or agreeing on who gets what, create a detailed list of all your combined assets, investments and sources of income, as well as any shared debts or losses. Be as comprehensive as possible, so that the big picture always stays in sight.
Failing to Look Down the Road
Another common mistake that partners make is valuing finances at today’s worth and not factoring how those amounts will change over the years. Some investments such as real estate and stocks may increase in value, while other assets like vehicles and electronics are more likely to depreciate. Unless you and your spouse are going to liquidate all assets and split the cash, it’s critical to weigh the likely benefits (and costs) of each financial entity as time progresses.
Best Practice: Take your comprehensive list of assets and investments and project each one’s change in value over the next 5 years, 10 years, and 20 years. Then divide your list into two columns: those that you expect to increase in value, and those that you expect to decrease in value. This helps assure that splitting assets isn’t just fair and equitable today, but for the future, too.
Failing to Settle Your Debts
Many partners fail to resolve unsecured debt, such as credit card debt, before they finalize their divorce. Any expenses incurred on a credit card before the divorce are the responsibility of both spouses, and banks and creditors will continue to pursue you for unpaid balances (and damage your personal credit) regardless of whether they were your purchases or not. Just as it’s important to evenly divide assets in a fair settlement, it’s imperative to evenly divide debts, too.
Best Practice: Before finalizing your divorce, it’s best to first pay off all of your debts and cancel any joint credit cards. If it’s impossible to completely settle the balances, it’s still best to evenly transfer any remaining debt to credits cards in each spouse’s individual name, then cancel all joint cards and factor the total into the resolution.
Failing to Agree on Retirement
A final common mistake that partners make is failing to have a Qualified Domestic Relations Order (QDRO) drawn up and signed before the divorce is final. A QDRO is a legal document that outlines how you and your spouse agree to divide any retirement accounts such as a pension or a 401(k). Even if both partners agree to terms, if there isn’t an executed QDRO the retirement plan administrator can’t make payments to the non-employee spouse.
Best Practice: If you or your spouse has a pension plan or defined contribution plan (such as a 401(k), 403(b), or 457), ask your mediator to help you draw up a QDRO. The retirement accounts may not be payable for years to come, but they should be factored into your settlement now—and into a QDRO—before finalizing the divorce.
These are merely 4 of the more common mistakes that divorcing partners make; there are many more, and you can ask your mediator to walk you through the ones most relevant to your circumstances. Even with the most amicable of breaks, partners are under great stress and fail to see all the financial pitfalls in their path. An experienced mediator will guide you through them and assure that you end up with the fairest, most equitable resolution.
Let an expert guide you through the divorce process. Contact South Bay Mediation to set up a free consultation to discuss your needs.
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