Littlejohn column: Five financial missteps to avoid during a divorce
Divorce is undoubtedly one of the most stressful life events. Even the most amicable of splits can be complicated and emotionally draining. We likely all know couples who have gone through a divorce, and it can be a trying time for everyone involved. It is also a time when financial decisions are made that can impact spouses and children for years to come. With all that can be on the minds of those going through a divorce, it’s important to try not to make any costly missteps.
Having worked as an advisor in the wealth management industry for the past 16 years, I’ve seen quite a few divorces. Below is a list of the financial missteps I’ve seen spouses make (or try to make) most often:
Mistake No. 1: Not Asking for Help Early in the Process
After deciding to get a divorce, the first person a spouse typically calls is an attorney. This may be the most appropriate first step, but other actions should probably occur simultaneously. While you will likely need an attorney at some point, divorce finances can be more stressful in the early stages than in the later legal stages.
Since part of splitting up your partnership involves assets, you should probably consider contacting an experienced financial advisor. This advisor can help you organize your household by listing all of your assets and debts and then assist you in valuing those assets.
At the same time, you might want to consider contacting support groups that work with individuals or couples going through a divorce. Asking for help early in the process may help you manage any feelings of depression, isolation or uncertainty.
Mistake No. 2: Making the Wrong Move with the House
People often make mistakes when deciding what to do with their houses as a result of a divorce. Since a house is probably one of your largest assets, knowing and evaluating all your options is critical.
Some people look to sell their houses too quickly — sometimes even before the arrangements are settled. One spouse may try to convince the other to go along with selling the house and splitting the proceeds 50/50. But remember that once a sale is finalized, there may be no going back. If there is equity in the house, developing a strategy before its sale can be critical.
Sometimes, there’s a grieving process that takes place when a home is relinquished. One or both spouses may have emotional attachments to the house or want to keep it for their children. One spouse may be willing to give up other assets to keep the property. Many factors need to be considered here, so be sure to take the time you need to think it through.
Mistake No. 3: Underestimating Your Post-Divorce Expenses
Maintaining two households is typically more expensive than maintaining one, and some people underestimate their post-divorce living expenses. You need to develop a solid, realistic budget before negotiating agreements concerning other items. An experienced financial advisor should be able to help in this area too.
Mistake No. 4: Ignoring Tax Consequences
There are often tax consequences that result from a divorce, including some that are related to property division and alimony payments. If you receive an asset as part of a settlement and need to sell it later, you should understand whether you will incur a capital gain or loss that will affect your tax situation. Some couples are quick to consider liquidating investments like retirement accounts. However, this may result in tax penalties or other adverse consequences. If you aren’t sure about the tax ramifications of a certain move, be sure to consult your tax pro before you act.
Mistake No. 5: Forgetting to Change Your Beneficiaries
After a divorce, people often forget to change their beneficiary designations for their work benefits, insurance policies, and retirement accounts. You’ll want to make updates that reflect your new situation. You should also consider whether creating new wills, trust documents and powers of attorney would make sense. In most cases, it does.
In most cases, divorce is a very stressful and complex experience for the participants. However, asking for help early on can provide valuable comfort and guidance through this challenging period. So don’t go it alone — leverage the expertise of professionals and other specialists who are used to helping people with this sort of thing. Doing so will likely pay dividends for years to come.
Brian R. Littlejohn, MBA, CFP®, CFA is the founder of Sherwood Wealth Management, an independent registered investment advisor (RIA) firm in Basalt. He specializes in inherited wealth and works with clients in the Roaring Fork Valley and beyond.
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