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When you took those vows 10, 20, 30 years ago you never dreamed it would come to this. You are now getting divorced and you feel like the rug has been pulled out from under you. All the plans you made for your future must now be rewritten. Your life is about to change and you have no idea how to even begin the process of divorce.
First, take heart. You are not alone, although it may feel that way. Over fifty percent of all first marriages end in divorce…so you are in the majority!
Second, take a deep breath and gather your thoughts. Try to put your emotions aside and think financially. Someone once said, “Marriage is all about love and divorce is all about money” and I couldn’t agree more. Therefore your focus should now be about securing your (and your children’s) financial future.
So don’t throw up your arms and surrender just to get this over with. Instead, arm yourself. Understanding the following information could significantly increase your chances for a financially secure life, both now and in the future.
1. Believing that an equitable division of property means a 50/50 split
Equitable does not mean equal! Depending on the state, circumstances such as length of marriage and income and future earning capacity may be considered when property is split. For example, a 30 year-old woman with an advanced degree will probably rebound financially much faster than a 55 year-old homemaker that’s been out of the workforce for decades. It is important to understand that you could be entitled to more, or less, than 50%, depending on the circumstances and choices made during the marriage.
2. Not knowing the difference between separate and marital property.
There are some differences in how each state defines property, but generally anything you owned prior to the marriage is separate property (including, in most cases, your engagement ring). In addition, if you received an inheritance, gifts from third parties (not your husband) or were awarded “pain and suffering” in a personal injury case they would typically also be considered separate property. However, all property that is acquired during the marriage (including gifts that you gave each other for birthdays, anniversaries, etc.) is considered to be marital property no matter which spouse owns the property or how it is titled. There are some gray areas here, so it is important to contact a divorce professional to understand your rights. For a more detailed discussion on separate and marital property, please see my previous HuffPost article.
3. Forgetting Assets.
People tend to forget assets such as pensions, 401Ks, IRAs, stock options, restricted stock, deferred compensation, life insurance, annuities, value of professional licenses, tax refunds, time shares, country club memberships and other executive perks such as accrued vacation time. All of these items have value and should be considered during a divorce.
4. Not analyzing how your various divorce settlement options will impact your future financial security.
Once your final divorce decree is signed, it may be difficult, or even impossible to make changes. Unfortunately, you often have only one shot to get it right, so you should do everything in your power to make sure that you do. Don’t let your emotions or your desire to finalize your divorce stop you from thoroughly analyzing both the short- and long-term financial and tax implications of any proposed divorce settlement. What may initially seem reasonable may prove to be disastrous for you 10 or 15 years down the road. The only way to know that is to work with an experienced divorce financial planner who can analyze your various divorce settlement options to make sure that your financial future will be secure. Please remember that most divorce attorneys are not trained to do that type of in-depth financial analyses (they just don’t teach that in law school).
5. Not understanding why some assets that are valued the same are not worth the same.
It’s important to understand that not all assets that are valued the same are actually worth the same.
For example, let’s say you’re trying to decide whether to keep the $600,000 bank account or the $600,000 house that’s completely paid off. You really love that house and you’re leaning in that direction. Great idea? Maybe yes, maybe no. You need to remember a few things that will impact your bottom line – Like real estate taxes that need to be paid every year, upkeep and maintenance, fuel costs, etc. And when you eventually sell your home you may be hit with a big capital gains tax bill. For example, let’s assume you bought the home for $200,000 and it’s now worth $600,000. Your capital gain is $400,000. Subtract your $250,000 capital gains exclusion as a single person and you’ll have to pay capital gains tax on $150,000. At the current capital gains tax rate of 15%, that’s a $22,500 tax bill!
So which asset would you prefer now – the house or the cash?
6. Not securing alimony, property settlement and child support payments with life insurance.
If you are depending on alimony or child support to maintain your lifestyle and that of your children, have you ever stopped to think about what might happen if that were suddenly not available to you? Alimony payments will end upon the death of your ex-husband. In many jurisdictions child support will not end, but will become an obligation of his estate. One way to ensure that you would not be financially devastated by the death of your ex would be to obtain a life insurance policy on his life. As with everything else, there’s a right way to do this and a wrong way and it is important to get guidance from an experienced divorce financial professional prior to settling your divorce.