When people get divorced, it’s the spouse who hasn’t had a whole lot of experience with the family’s finances that often ends up on the short end of the stick. Even the spouse that has been taking care of the finances can sometimes make some big mistakes when divorcing, many times due to the extra stress that divorce causes.
That’s why, when getting divorced, both spouses should understand what their financial needs will be once they’ve gone their separate ways. Below are a number of the biggest money mistakes people make when getting divorced and how to avoid them. Enjoy.
Mistake #1: Underestimating your cash flow needs. This is one of the key areas that divorcing couples need to understand because cash flow, the ability to access cash and use it for daily expenses, is a vitally important for day-to-day decisions. If cash flow is a problem, valuable assets that are co-owned should be sold off, including “liquid” accounts like mutual funds, Roth IRAs, stocks and bonds.
Of course if cash flow isn’t a problem, it should be determined which of these accounts can possibly be left alone to generate more money in the future. That might be difficult however, especially if the divorce isn’t amicable.
Mistake #2:Forgetting about joint liabilities. Simply put, even if you and your soon-to-be ex-spouse agree to split a liability, the lender is not obliged to honor your settlement agreement. In most cases mortgages will have to be refinanced, outstanding tax liabilities will need to be paid and any type of credit or debit accounts that are held jointly will need to be canceled.
Settling any joint liabilities before your divorce is completed, or paying them off by transferring them to the spouse who will be responsible for paying them in the future, is vitally important. Running a credit check to make sure that your spouse doesn’t have any secret outstanding debts is also a very good idea.
Mistake #3: Neglecting to pay taxes on your assets. One of the most critical areas that you need to review when divorcing is the impact that taxes will have on your investments. Simply put, while 2 assets might have equal value on paper, that value could change drastically once taxes have been factored into the equation. Any unrealized capital gains on your taxable investments should also be factored in, since they will come due someday in the future. Luckily, the first $250,000 of any gains you make from the sale of your principal residence are sheltered from the tax man.
Don’t forget to also review the last 3 to 5 years of tax returns you filed as a couple as well. So-called “tax assets” like capital loss carry forwards, charitable contribution carry forwards or net operating losses should all be taken into account.
Mistake #4: Overlooking the division of retirement accounts and assets. Depending on how long you’ve been married, your retirement assets may represent a large portion of your net worth. There are quite a few special rules that allow the transfer of retirement assets to be tax-free when you are divorcing and you definitely want to know how these should be handled correctly.
Mistake #5: Forgetting to divide digital assets. While digital assets like pictures, videos and so forth might not have a lot of financial value, the emotional value that can be very high. Making arrangements with your soon-to-be ex-spouse to be able to access these digital assets with the correct passwords is important and, in some ways, might even help the two of you to remain friendly after the divorce is finalized.
Hopefully these 5 Mistakes, and what to do about them, have opened your eyes to the realities that you will face before, during and after your divorce is final. Hopefully your divorce is amicable but, if it’s not, avoiding the mistakes above might well mean the difference between going into the next phase of your life well-funded or… not.