Tuesday, 8 January 2019
Going through a divorce is never, ever easy—no matter why it's happening.
And when your feelings are on a roller coaster, you're apt to make financial mistakes that could resonate the rest of your life.
Carol Ann Wilson is a Colorado-based author and financial divorce expert. She says the first thing to do is to make sure you have copies of all your financial and asset documentation—as soon as you realize a divorce is possible or imminent. If you leave the house and then have to chase them down from your spouse or an attorney, it could take much more time and money than if you'd done it earlier.
It also helps you to understand what's at stake—especially if you haven't been managing the money. Wilson says many of her clients are commonly left in the dark when it comes to their spouse's retirement accounts, and that can make them vulnerable in the divorce proceedings by not being prepared to argue their side.
The other way to save money and protect yourself is to try to remain as civil as possible, and cover as much ground on your Marital Settlement Agreement (MSA) as you can before you see a lawyer, says, Atlanta- based Andrew Poulos a principal at Poulos Accounting and Consulting, Inc. If you're being too contentious or greedy, he says, you could easily burn through $50,000 or more in legal fees—which would probably be better spent on college tuition or a new home.
The other imperative is to make a budget and understand exactly how much you spend—down to the last penny. “Most households live beyond their means and never, ever do budgets," Poulos says. “Every little thing starts adding up." When you know where every single dollar goes, you can come to a more realistic settlement and support request.
You also may want to set up a separate bank account to fund the transition if you don't already have your own—but with the full understanding that draining a shared account could backfire against you, and that any new accounts are still considered a joint asset.
Wilson also outlines these other critical ways to save money during a divorce and protect yourself financially:
A mediator will help both parties work toward an agreement but can't actually give legal advice—even if it's an attorney providing the mediation. A collaborative attorney is counsel who can provide legal advice. Each party retains his or her own and they are bound by an agreement that the divorce won't go to court and will end in a settlement.
There are some 401(k) early-withdrawal penalty loopholes where you'd still pay the tax, but save the penalty fee that even divorce attorneys don't know about, Wilson says. But you need to be absolutely certain of what you're doing, and work with a professional to tap into them.
Another little-known law has to do with selling the marital home. Keep the deed in both names if you can, Wilson advises. “What drives me nuts is realtors don't even know this tax law, and it saves divorcing people money. It's only for people going through divorce." There's a $250,000 exclusion for capital gains per person, so if you're both still on the deed, you have $500,000 worth of wiggle room. If the home is paid in full and sells for $600,000, taxes only need to be paid on the extra $100,000.
The Qualified Domestic Relations Order (QDRO) is an agreement regarding retirement plans and pensions. Wilson says there are a couple ways to approach it: The two parties can either spilt the benefit on retirement, or do some kind of “buyout" up front. This means if the retirement plan is worth $500,000 and the home is worth $500,000, one person would get the home outright and the other would get the full retirement benefit. Again, it helps to go over this with a professional to understand all possible outcomes.
Wilson says it's important to come to an agreement you can live with because you can't change anything regarding property settlements. “It's a done deal, and it cannot be undone unless there's fraud."
If there's a detail you've left out, such as how the kids' college tuition is handled, then try to come up with an agreement together where you can file a new motion or amend the original contract. “But if they can't agree, then the person who loses just loses, and this is why they have to be careful," warns Wilson. If you're able to come to an agreement or get a court order when circumstances change, you can modify child support payments.
Wilson also says investing in a good lawyer who specializes in divorce can make all the difference, especially if your case is particularly complicated or contentious. “Divorce law is so complicated," he stresses. "It's a total law unto itself. They should hire the best, just when there are a lot of assets and it's complicated."
There are also ways to do it yourself and services that help move paperwork. “When it's not complicated, I see a lot of people doing it themselves. However, I can see mistakes that they make," Wilson says. “I saw one agreement where it said they agreed that they would divide his pension in half when he received it. Well, it had no other details in there, and there's no pension that would give her half based on that sentence. She just lost it."
If you do come to an agreement yourself, take it to an attorney to draw it up in legalese.
If there's alimony and child support involved in the agreement, what happens when the spouse who's paying passes away? There should be a way to protect that maintenance, Wilson says, and life insurance on the paying partner can cover it.
You should also make sure you've got health insurance if you were covered under your spouse's plan. When you buy your own insurance, either through COBRA, a job, or on the marketplace, that can count toward your monthly expenses when you're calculating support payments.
Wilson says the best approach is to try to remain neutral during financial negotiations. She recalls a client who was so sentimentally tied to his bank account filled with poker winnings that he spent the equivalent amount fighting for it. “Share information instead of having to pay for subpoenas in court and attorneys," she says. “Pretend like you're just dividing up a business. Keep the emotions out of it.
"It will save you the most money of all."
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