Avoiding Costly Financial Decisions in Divorce
Divorce often raises complex financial issues, and bad decisions can have long term catastrophic effects. Experienced attorney Kathleen M. Newman of the DeWitt LLP law firm can help you navigate these critical issues.
What are some common financial mistakes? What are some tips for avoiding them?
- Not Having a Post-Divorce Financial Plan. Since divorce settlements often have impacts that last for many years, it is important to have your end goal in mind when it comes to post-divorce finances. Many of the financial assumptions relied upon in married life no longer apply in divorce. For example, while the law in Minnesota only provides for child support through age 18 or graduation from high school, we know that children rely on their parents for college or other career training, ongoing group medical insurance, uninsured medical and dental costs, and even cell phone access, long after the child turns 18. My team at DeWitt can help you establish a budget and point you toward an independent financial planner to prepare you for a post-divorce financial life. It is important to identify your financial goals and prepare a financial plan before you negotiate the financial aspects of your divorce.
- Failing to Recognize Areas of Common Interests. While you must guard against an overreaching spouse, do not let this blind you to common areas of interests with your soon to be ex-spouse. Tax issues, which permeate many financial aspects of a divorce, are often one such area. For example, both spouses are liable for taxes due from audits of joint tax returns, so you are often better off cooperating to avoid these potential liabilities. As discussed above, post high school financial issues are another important area for cooperation. While you can agree to include provisions in your divorce decree to cover adult children, if you go to trial, a court cannot order those provisions absent agreement.
- Keeping Certain Assets You Can’t Afford. We are often emotionally attached to certain assets accumulated during the marriage, and the marital home is often one of them. While a home is an asset and will have a value placed on it during the divorce, it is not always an appreciating asset. Since the Great Recession, home values have not risen as they had pre 2008.Homes also consume income through mortgage payments, real estate taxes, home maintenance/repair costs and homeowner’s insurance. And, if you are awarded the home and later sell it, you will be responsible for paying the sale commissions. Does it make financial sense for you to keep the house? This requires long term goal setting and careful analysis unique to each situation to avoid later financial hardship.
- Cashing in Investments to Pay Current Bills. Money is usually tight during a divorce with the cost of maintaining a second household, and professional expenses. You should be cautious about liquidating assets to pay these expenses. First, if a divorce action has been started, you may be prohibited from liquidating assets pursuant to the temporary restraining provisions in the divorce Summons. If you sell highly appreciated assets, you may owe substantial taxes. Also, while your 401(k) may seem like a good source to solve cash flow issues, pre-divorce withdrawals may expose you to not only significant taxes, but to a 10% penalty depending on your age.
Take-away: Divorce nearly always raises complex financial issues. If you are considering a divorce, please contact Attorney Kathleen M. Newman of the DeWitt LLP law firm to help guide you through these challenging issues.
“10 Mistakes to Avoid When Divorcing Over 50,” Investopedia (March 30, 2020).
“Facing Divorce? 7 Common Costly Financial Mistakes to Avoid,” Forbes (October 25, 2018).