Sure it’s an emotional time. Your marriage is coming to an end whether you initiated it or not. Many couples start out amicably and want to handle the divorce “fairly”. As time goes on, divorce may bring out the worst in someone. The horror stories you hear about women getting ripped off become very real when you are personally put in that place. Most importantly, remember that whatever happens during the divorce will impact you the rest of your life. It is a serious financial challenge that will determine your future success or failure.
1. Keeping the home
Often in a divorce settlement, women want to keep their family home. It minimizes the trauma of a move, especially if there are children involved. It seems like a great idea because it transitions the family instead of displacing the family. The husband, in return, receives all the liquid assets such as investments and cash. Liquidity is the ease of turning an asset into cash. Many attorneys will see the distribution as 50-50%. All too often, women realize 2 or 3 years later they cannot afford the property tax and maintenance and are forced to sell. Considering the cost of selling a home and the tax consequences, the value may be significantly less than the liquid assets the husband received. Parting with the house may be emotionally difficult but should be considered. A house is just brick and mortar, a home is where the heart it. Ask yourself, is the house truly an asset or an anchor?
2. Not all assets are created equal
Certain assets have tax advantages over others. For example, $50,000 cash and $50,000 IRA are not equal. After taxes and penalties, the IRA value may be as little as 25,500 to $37,500 depending on your tax bracket. It is not uncommon to “feel the inequity” of the settlement years later after the divorce. Reality sets in when the woman needs a new car or a big repair on the house. The cash is tied up in retirement or illiquid assets. Meanwhile, the ex-husband’s accounts continue to grow. Other assets may be subject to long term capital gains tax of 15% to 20%. Stock options are subject to ordinary income tax. After tax, $150,000 of stock options may only be worth $90,000.
3. Failure to identify Hidden assets
Divorce is a “premeditated” process by the individual who starts the process. That individual has the time and knowledge that leads to hiding assets, removing items from the family home and a variety of illegal activities. Often the emotion “greed” takes over in an effort to protect what they feel is “their money”. Unfortunately, this prevents a fair settlement. There are professional forensic accountants that will be able to assist in this area. Please seek their help as soon as you suspect any unusual activity in bank accounts, brokerage accounts, new accounts opened with custodial responsibility or any unusual behavior. Take note that “old cars” may have collector value and if that old car suddenly disappears, it may be of value that is being hidden from you.
4. Assuming Alimony is Secure
After the divorce, women may feel beholden to their ex-husband because they rely on the alimony. Unlike child support that is enforceable through garnishment of wages, you are relying only on your ex to make alimony payments. If he does not make payments, you’re back in court to try to enforce it. In addition, alimony or spousal maintenance to the recipient is taxable as ordinary income. Assuming you receive $50,000 in alimony, your net after a 28% federal tax bracket is only $36,000. Given some flexibility in choosing assets, it might serve you better to swap out other assets in favor of highly taxable income like alimony.
5. Unaware of Back Taxes Due
Beware if your husband has not paid taxes or even filed. The IRS does not care who was responsible, only who will pay the bill. You may be stuck with paying a portion or all of it. The IRS can hold you responsible for up to 3 years after a divorce and may also question joint returns for seven years. It would behoove you to contact IRS, check County Property Tax records and consult with a tax consultant.
The divorce decree should also state how the last return will be filed. Married, filing jointly may save considerable taxes for both parties. The following year after the divorce, you will file single or if you qualify, head of household.
6. Not Understanding Retirement Accounts and Penalties
Often women receive the majority of their settlement in the form of equity in their family home or in retirement accounts. When one spouse receives the assets from the other’s retirement account, a Qualified Domestic Relations Order (QDRO) is used to transfer ownership. The QDRO eliminates any penalties and taxes. Without a QDRO, withdrawals are considered distributions and are subject to ordinary income tax, penalties and possibly a mandatory 20% tax withholding. If you receive retirement assets as a check, you must deposit the money into an IRA within 60 days to avoid being considered a taxable distribution.
7. Not Evaluating Debt and Credit Scores
Many women are surprised to find new accounts in their credit reports when they are reviewing their “pre-divorce” credit. There are a lot of surprises that pop up during the months between when the divorce papers are served and when the divorce becomes final. Understand that any joint credit remains your “joint” responsibility. If your ex is required to zero balance a credit card and doesn’t, a creditor may come after you for payment. The IRS can also hold you responsible for up to 3 years after a divorce and may also question joint returns for seven years. Ideally, the divorce decree will have a paragraph that describes the actions that will take effect should one party not do what was expected relative to payment of debt. Remember also, that your credit scores will change when you become single.
8. Not Maintaining Insurance Policy Records
You are promised child support and/or alimony. What will happen if your ex dies? Most of the time, the divorce decree will require a life insurance policy to cover the value of child support, alimony and other needs such as college tuition. It is critical that you are either the owner or the irrevocable beneficiary of the policy. If you are not the owner, request duplicate copies of statements and correspondence. Your “ex” could easily stop premium payments or change the beneficiary and you would never know about it until it’s too late. Take responsibility for your future financial stability and cover your bases by putting the correct processes in place.
9. Avoiding Discussion on College Tuition
Many couples save for college educations for their children. Remember that most women will have less income to make contributions after the divorce.
10. Divorcing Shortly Before Your 10th Wedding Anniversary
This can be a very expensive mistake to make regarding your Social Security Benefits. A divorced woman will be eligible for divorce spousal benefits based on her ex-spouse’s work record if the marriage lasted at least 10 years. Divorcing before that 10 year anniversary may cost you lost benefits as much as $100,000 or more over your lifetime. If possible, defer the divorce settlement until after your 10th wedding anniversary.