In the heat of the emotions of divorce, spouses will tend to fight hardest over large assets or assets with great sentimental value. The general theme tends to be, “I want to keep everything” even though that is not possible. Property needs to be divided, and spouses need to choose wisely.
Perhaps the biggest mistake a spouse will make is holding onto the marital residence when that spouse cannot afford to do so. If the court awards a spouse the marital home, that spouse has two immediate responsibilities: first, refinance the mortgage, and second, pay the other spouse his or her equity share in the house. It is possible to do the latter by foregoing other assets, but if a spouse cannot refinance, the house will have to be sold. And even if the spouse gets financing, if the mortgage and the upkeep on the home takes up too much of the monthly budget, the spouse probably made a poor financial decision.
Another common mistake is to think that money now is better than money later. For example, taking the house is an asset with defined equity; it represents money now. So would a cash settlement in exchange for other assets. People during divorce tend to think of having liquidity to pay bills in the short run to maintain the marital lifestyle. But that may not be a wise financial decision. Spending cash may be a necessity, but if you can set money aside in savings for retirement, the asset will not only grow in value you assure you have a nest egg. Too often during divorce, one or both spouses forego retirement funds to make immediate payouts, not only losing the retirement but also encountering penalties for early withdrawal and a big tax hit.
Speaking of taxes – spouses tend to forget some moves with assets have serious tax implications. For example, if the house will be sold, the spouses have to pay the capital gains from the sale unless those funds get rolled into a new house in six months. Selling stock will also have a capital gains issue. Certain financial arrangements may boost your annual income and push you into a higher tax bracket. A good rule of thumb is to think every action has a tax implication and to find out what it is before choosing a settlement route.
Finally, the biggest contingency spouses forget to address is the death of the spouse after divorce. If you are a parent receiving spousal support or child support, you anticipate those funds over the time the child is a minor. But if the former spouse dies, those funds disappear – unless you have that former spouse maintain a life insurance policy for the amount of the support owed.
Keeping a cool head and firm grasp on the financial implications of asset division during divorce is critically important.
If you have questions about asset division and divorce, contact us – we can help.