Once a marriage is broken down and one or both parties decides to divorce, the impact can be devastating.
Devastating not only to the couple, but also to family and friends.
Not only are they dealing with a traumatic emotional impact, they are dealing with a financial impact. Common financial mistakes include:
< Negotiating to keep the home when it can’t be afforded.
Don’t be house poor. Many divorcing spouses want to keep their homes for emotional reasons and to provide stability for their children.
However, maintaining the house also means mortgage costs, real estate taxes and upkeep expenses. The house is a nonliquid asset.
And it’s important to understand the possible income tax consequences upon the sale of the house, depending on the amount of appreciation. And how the sale of the house can affect each party.
< Not looking at the long-term impact of a divorce settlement. There are things to consider: cash flow, liquidity, taxes and longevity.
< Thinking that retirement assets have the same value as an equal dollar amount of nonretirement assets. Keep taxes in mind.
< Dividing a nonretirement portfolio the wrong way can trigger a vastly unequal capital gains tax consequence if there are embedded losses or gains in the portfolio.
< Failing to understand the tax implications of alimony/spousal support versus child support, as well as who claims the dependent children on their tax return.
< Failing to “insure” the alimony/spousal or child support payments you are receiving.
< Not understanding how to divide debt and the difference between marital and nonmarital property.
< Not understanding how divorce affects Social Security benefits. If you were married at least 10 years before the divorce, you may be eligible for a divorced spousal benefit. And if your ex-spouse dies, you may be eligible for a quasi-widow benefit.
< Not updating wills, trusts and beneficiary designations. Failure to do so could result in your ex-spouse inheriting an unintended windfall.
< Failing to put indemnification or hold harmless clauses in the divorce agreement.
< Not separating money and emotions. As humans, this is hard thing to do, but it is very important, especially when negotiating a settlement.
Thinking about all of these financial aspects of divorce can be overwhelming. There already are so many uncertainties, however your financial picture does not have to be one of them.
Partnering with a Certified Divorce Financial Analyst professional can play a vital role in ensuring your divorce doesn’t end up as a financial disaster.
A CDFA is someone who comes from a financial planning, accounting or matrimonial law background and goes through training to become skilled at analyzing and providing guidance on the financial issues of divorce.
He or she will partner with you and your attorney to analyze your financial data and develop a plan customized for you.
Deborah L. Peters is a registered representative of and offers securities through LPL Financial and offers investment advice through Private Advisor Group, a Registered Investment Advisor, and financial planning services through Capital Planning Wealth Management of Center Valley. She has held the designation of Certified Divorce Financial Analyst since 2016.