Your finances are probably among your primary concerns when you’re getting a divorce. Unfortunately, there are a number of common pitfalls that could affect you long after your divorce is finalized. Here are the top five money mistakes to avoid so that getting a divorce doesn’t leave you in financial ruin.
1. Not Working with a Financial Professional
When getting a divorce, it’s critical that you accurately identify all of your assets and debts so they can be equitably allocated between you and your soon-to-be-ex-spouse. It is equally important that you fully understand the assets, which may include pensions, Stock Options, Restricted Stock Units, ESOP Plans, and many others. During the collaborative divorce process, you’ll have access to a neutral financial specialist who can help you through this process.
Overlooking or not fully understanding assets or debts can leave you with a much different settlement than you expected. Remember to include assets that produce future income, like pensions, business revenue, or stock options.
2. Ignoring Tax Implications
Not all assets are worth their “face value” due to tax regulations. For example, proceeds from the sale of your house will have a different tax liability compared to the distribution of a retirement account of the same value. Assets like life insurance policies or annuities may have tax implications, surrender charges, or costs incurred by dividing the asset.
Your financial professional can help you evaluate the tax implications for each asset in your divorce. This can prevent you from getting stuck with a higher tax bill because you didn’t understand how your taxes would be affected.
3. Letting Feelings Get in the Way
If you believe the divorce is your fault, you may be feeling guilty for your actions. Often, this guilt leads the one who feels responsible for contributing more than they might otherwise be required to do to try to “make up for” their mistakes. If you hope to get back together, you might consider paying more as a sign of goodwill. Unfortunately, if your spouse does not share your goals, you may be stuck making these high payments for many years, even if the two of you never reconcile. Emotional ties to certain assets, such as the home, may lead you to make decisions that are not in your best interest.
Conversely, if you believe the divorce is the other spouse’s fault, you may feel motivated to “punish” that person by making demands far in excess of what a reasonable outcome might be. This could result in much higher legal costs than necessary.
Instead of letting your emotions dictate your legal decisions, consider working with a team of collaborative divorce professionals to brainstorm solutions for a mutually agreeable outcome.
4. Draining Your Retirement Account
It can be tempting to pull money out of your retirement account when getting a divorce. Some people do this to pay off debts, pay legal fees, or other expenses in an effort to simplify the process. Others do it because they think it’s the only way to “divide” the asset. Unfortunately, this decision may be jeopardizing your future. Not only might you have to pay taxes on withdrawals and penalties if not done properly (depending on your age), but you could end up paying taxes on the withdrawals rather than continuing to defer the tax liability.
Instead of draining your retirement, if at all possible, leave that money where it is. You may have less ability to add to retirement accounts following your divorce. You and your soon-to-be-ex can work with your collaborative divorce professionals to brainstorm other solutions for dividing the retirement assets and paying your debts. Count on your neutral financial specialist to help set expectations for your financial future.
5. Not Updating Beneficiaries after the Divorce
With all the stress of getting a divorce, it can be easy to forget to update beneficiaries on your insurance policies, retirement accounts, bank accounts, and other assets once the divorce is final. This can create complications and unintended outcomes if you predecease your former spouse.
Unfortunately, updating your estate plan isn’t enough. Even if your Will stipulates that your assets should go to your parents or children, the named beneficiary on certain assets will typically prevail. Thus, your assets could end up going to your ex-spouse, even if that’s not what you intend. As soon as you finalize your divorce, take time to update the beneficiaries for all assets to ensure they’re distributed in accordance with your wishes and the court’s orders.
Best Legal Choices Can Help
Getting a divorce is never easy, and financial issues can make it even more complicated. The professionals at Best Legal Choices can help you evaluate your options to make the right decisions for your situation. Contact Best Legal Choices today to learn more about how to avoid money mistakes when you’re getting a divorce.