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The Twelve Financial Pitfalls of Divorce
By Ginita
Wall, CPA, CFP®, CDS
An excerpt from the seminar "Second
Saturday: What Women Need to Know About
Divorce"
Each year, nearly 2.8 million men
and women go through the emotional
and financial trauma of divorce. During
divorce, many women are concerned about
financial survival—and with good
reason. Studies show that in the first
year after divorce, the wife’s
standard of living may drop almost
27 percent while the husband’s
may increase by as much as 10 percent.
Many factors combine to lower women’s standard
of living after divorce. Child support may not be adequate
to cover the true costs of child rearing, and she might
have lost many important years of career growth, making
it difficult for her to get back on her feet after
divorce.
Advance planning goes a long way. By
familiarizing yourself with the twelve
financial pitfalls of divorce, you
can save yourself a lot of heartbreak—and
hassle—in the future.
1. Not enough cash. Expenses
will begin to mushroom as soon as the
divorce process starts. Legal fees, court costs,
therapist bills, new living expenses, and myriad
other costs will drain your financial resources.
Money previously used to support one household must
now stretch to support two. If you are contemplating
divorce, now is the time to begin amassing the funds
you’ll need to stay
afloat.
2. Too little preparation. Divorce
is a long, complicated process that
requires careful preparation. Before you jump in
head first, consult with legal and financial professionals
and read books about the subject. Think about the
timing of the separation: Is your husband due a bonus
or other windfall in the near future? Don’t separate until after it arrives,
so it will be community property. Think about Social
Security: If you’ve been married nine years,
you might want to stick out the last year, so you can
collect on your ex’s earnings record. Finally,
don’t just pack your bags, load up the kids,
and drive away in a car that needs four new tires.
Before you separate, buy the clothes you’ll need,
perform maintenance on the car, and fix the kids’ teeth.
3. No records. The
three most important words during divorce
are: document, document, document.
Try to obtain copies of all financial
records before your divorce begins. Make a clear
copy of all tax returns, loan applications, wills,
trusts, financial statements, banking information,
brokerage statements, loan documents, credit card
statements, deeds to real property, car registration,
insurance inventories, and insurance policies. Also,
copy records that you can use to trace your separate
property, such as an inheritance or gift from your
family. These assets will remain yours as long as
you can document them. Copies of your spouse’s business records can
be a treasure map showing you where the hidden assets
are buried.
4. Overlooking assets. Don’t
overlook any assets—half of everything is yours!
Even if you don’t want an asset, it can be used
to trade for something you do want. Inventory safe
deposit boxes; track down bank and brokerage accounts;
review pay stubs, retirement plans, and insurance policies.
If your spouse’s business generates a lot of
cash, engage a forensic accountant to look for telltale
signs of additional income. Don’t overlook hobbies
or side businesses that might have expensive equipment
or generate income. If you have a PHT degree (Putting
Honey Through), you might be entitled to some reimbursement
for the cost of his tuition.
5. Ignoring tax consequences. Should
you take monthly alimony or a lump
sum? Should you take the brokerage account or the
retirement plan? Should you keep the house or sell
it now? Who should pay the mortgage until it sells?
Don’t ignore
the hidden tax costs of divorce in making these decisions.
Your situation may require some calculation by an accountant
to determine if you are really getting the best deal.
And, if there’s a chance that your past joint
tax returns omitted income or overstated deductions,
you may want to seek an indemnification clause to protect
yourself if the IRS decides to audit.
6. Ignorance is bliss. During
divorce, ignorance is certainly not
bliss—instead,
it can be very, very expensive. Don’t be a passive
observer of your own divorce. Doing as much as you
can by yourself will help you recover more quickly
from the divorce because you will have a healthy sense
of control over the process, be focused on practical
things, and be working with your ex to get things done.
Also, taking an active role in the negotiations will
help you to reach a better settlement than “letting
the attorneys handle it.” You will have less
conflict and litigation after the divorce, better compliance
from your ex, and better sharing of information about
the children. Your attorney may give you legal advice,
but all of the decisions are ultimately up to you.
7. Mixing money and emotion. During
this trying time, it’s easy to confuse your feelings
with the facts. Try to be as dispassionate and businesslike
as possible. View your attorney as a paid professional
rather than a friend or confidante. When your grief
is overwhelming, go home or to a friend’s house,
not to your attorney, who is billing you at his normal
hourly rate. Make property division decisions based
on your own long-term best interest, not out of revenge.
It won’t make you happy to declare war on your
ex. Make an effort to bring the divorce to a successful
conclusion with as little rancor as possible. A nasty
divorce benefits only the attorneys.
8. Not fighting for what’s yours. Women
tend to be supportive and sensitive
to the needs of others, to build bridges, and to “make nice.” These
tendencies often get in our way during divorce. Divorce
is about survival, not making friends. You have to
insist on getting what you need and deserve. Even if
you hope that you will eventually be able to reconcile
with your ex, don’t bend over backwards to make
it happen. Stand up for yourself and get your share.
If you reconcile, that’s fine. If you don’t,
you’ll still be able to take care of yourself
financially.
9. Not taking control. Going
through a divorce can sometimes make
you feel like the captain of a leaky boat on stormy
seas—there
seems to be a new crisis at every turn. Use this time
of upheaval to start taking control of your life. Vow
never to worry in the dark—if you can’t
sleep, turn on the light, pick up a pencil and paper,
and write down your worries. Then, you can go back
to sleep and deal with them first thing in the morning.
Also, try to get a lump-sum whenever possible so you
control the cash. Listen to your attorney, but make
your own decisions. This is your divorce—so take
control of the process!
10. Not being ready for the worst. During
divorce, prepare yourself mentally
for the worst that can happen. How will you cope
if your children get sick? If you have to move in
with your parents? If the divorce lasts for years
and you lose all of your money? If your ex remarries
within two weeks, moves to Tahiti, and/or refuses
to pay any support? Plan for the worst so what actually
happens will seem easy by comparison. Don’t panic and let your fears
rule your life. Face them, and take control.
11. Not developing a career. Many
women put their careers aside to concentrate
on their families. After divorce, you will probably
need to figure out a way to support yourself and
your children. Divorce is an excellent time to get
some career counseling at the local job center, university,
or community college. Prepare for the expense of
tuition and books while you get your career on track.
Remember: there’s
nothing like new knowledge and a fulfilling career
to bolster your self-esteem.
12. Not getting good professional advice. Right
now, you need all the help you can
get! Divorce can be very complicated, so don’t try to do it all
yourself. Hire an attorney who can give you excellent
advice—even if he or she isn’t the most
inexpensive. Engage a forensic accountant if you think
there might be hidden assets. Find a good therapist
to help you emotionally. Hire a divorce financial professional
to help determine the best settlement options for you.
Don’t skimp now on matters that will affect the
rest of your life.
about the author: Ginita
Wall |
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