The Do’s And Don’ts You Need To Know
In a depressed economy, the terms of a divorce settlement must be even more carefully considered. Salvaging a couple’s finances may mean waiting to settle the divorce until the economy improves or finding ways to settle that don’t involve liquidating assets.
“They need to recognize that it may be a poor time financially to proceed, or then find a way to share in the value going forward,” said Glenn Bishop, a certified divorce financial analyst in Texas. “They need to be thinking in those terms.”
If it is possible to maintain the finances without selling anything, Bishop recommends trying it. If not, the couple might take a financial hit, he said. Regardless of whether your divorce is amicable or acrimonious, you’ll need to come to terms with your spouse on critical issues such as your child (custody, support and visitation), property (division and/or transfer of joint personal and business assets), spousal support and any other relevant issues related to your dissolving marriage.
Even in friendly divorces, spelling out the precise terms of the split is recommended. By putting all the terms in writing, there is no (or much less) confusion about where each party stands. Also, any divorce court appearances will go much more smoothly because judges tend to honor a well thought out and well written agreement that covers the key material aspects of the divorce. Settlement agreements, although usually filed with the final judgment, can be entered into at any time before that ultimate date.
THINK AHEAD
When you are trying to reach a fair divorce settlement, think not only of your current circumstances but also about your future. What might look like an equitable distribution of marital assets and debts, in fact might not be so fair when viewed over longer the longer term.
For example, a 50/50 property split is not necessarily a fair property division. Carefully consider the future value of any property. For example, the type of stocks you might receive such as a retirement account could, in fact, post tax problems when that money is withdrawn years down the road. Similarly, while there often is much sentimental value to the family home, if you plan to sell it soon after the divorce, depending on your local real estate market and circumstance, that move could cost you tax-wise.
That is why, before accepting any settlement offer from your spouse, review the terms with a qualified financial expert (such as a such as a Certified Divorce Financial Analyst) for a full assessment of what it might mean to you financially today and in a few or several years.
BE FINANCIALLY RESPONSIBLEWorking with a financial professional in addition to your divorce attorney also will help you retain a realistic perspective on your finances. In the ideal case, both parties should represent their pre- and post-divorce finances accurately and in a legitimate way. Doing otherwise only fosters distrust and antagonism, which will likely be counter-productive financially, as well as could cause problems in trying to come to an agreement on other issues, especially those involving the marriage’s children.
Will both spouses work post-divorce? Or will one require additional support because that party must remain at home to care for children or other dependents? About those dependents, do the children need special schooling? Are they planning to attend college? Have savings already been started for them and who will continue to add to those education funds?
Consider inflation and other financial effects don’t underestimate inflation’s effect on any agreement. When possible factor that into a lump sum or spell out any increases to continuing periodic payments. Along that same line, also consider the future value of any investments (along with future potential tax costs) of any holdings that are divided between you and your spouse.
Also consider the liquidity of any asset split. While the dollar amounts might be the same where one party gets bank accounts and the other gets stocks and other equities, accepting mostly illiquid property could pose cash flow problems. This type of liquid-vs.-illiquid division sometimes caused problems when the family home is involved. The spouse who takes the highly-valued real estate, for example, finds himself or herself house rich but cash poor and unable to meet usual, day-to-day living expenses.
DON’T DISCOUNT DEBTStarting over after a divorce is hard enough. You definitely do not want to try to rebuild your life with bad credit causing problems. You can, however, take steps to minimize this problem during the divorce and settlement process. As part of discovery, both parties should obtain copies of their credit reports so they can identify all joint accounts, any accounts that either might have been unaware of and those accounts that pose any potential credit problems.
Pay off and close all joint accounts before the divorce settlement. Creditors don’t care how a settlement agreement divides responsibility for the debt; they just want the payment. And in a joint debt, (credit cards, auto loans, etc.), each party is liable for the full amount of debt until the balance is paid. If any of the debt is owed to the Internal Revenue Service, you need to clear this up as soon as possible. Even after your divorce is final, you still might be liable for taxes incurred when you filed joint returns.
DON’T IGNORE INSURANCE
Typically, the party responsible for child or spousal support payments obtains life insurance to guarantee the value of this money in case of death. Make sure that the spouse whose support the policy is designed to protect, or who is the custodial parent of the minor children receiving child support, is the owner or irrevocable beneficiary of the policy.
If not, the ex-spouse who took out the policy could stop making payments without his or her ex knowing about it until the policy is needed but no longer exists. The owner or irrevocable beneficiary, however, would be notified of any outstanding issues, such as premium non-payment, as soon as the issue arose and therefore could take appropriate action.
Also keep in mind the need for health insurance coverage for yourself and your children. If one parent has access to medical insurance for family members, examine how such coverage can be maintained.
BE READY TO NEGOTIATE
Both parties want to ensure that any settlement is fair and properly provides for their children. That means that both sides should be willing to negotiate. The key is to do so in good faith, with adequate representations (both legal and financial) and with all the relevant facts on hand.
Never feel pressured to accept or make a payment out of guilt or some other emotion. Discuss all the possible pros and cons of each offer proposed during the settlement process with your legal and financial advisors.And while divorce can be tiring, frustration and tedious, never accept a settlement, in part or whole, just to get the process over with sooner.
