A recent article in the Wall Street Journal discusses how many people filing for divorce fail to consider the short and long term financial consequences of the manner of divorce and the outcome of divorce as they proceed through divorce. As a result, some – many – people end up surprised in a bad way after the dust settles.
We have touched upon this same point in previous posts, and the warnings of the article deserve a review.
First, carefully consider the disposition of the marital residence. Generally, both spouses want to lay claim to the marital home. After all, who wants to leave their home? But the reality of divorce means two people who shared one home must now live in separate households they each must independently support. This latter point tends to get too little attention in the heat of divorce. Winning the marital residence in the divorce may seem an empty victory if you have to sell it six months later after realizing you cannot afford the mortgage, the upkeep, the taxes – and this loss is all born by the “winning” spouse, as the “losing” spouse has no legal liability for any of these aspects after the divorce. It makes good financial sense to determine the exact monthly cost of maintaining the marital home in advance of any final settlement and, if the cost is unworkable, to assure that the house is sold so that both spouses bear the costs of putting the home on the market and any tax consequences associated with the sale.
Second, a divorce really proves to be a terrible forum for seeking retribution from a spouse who you feel has done you wrong. Why? A court has no power to exact the emotional satisfaction you seek; a court will not bankrupt a spouse just to satisfy the hurt of the other spouse. Marital misconduct may result in some unequal distribution of the marital property, but not nearly to the extent of the emotion of the hurt spouse. Further, when you begin litigating for revenge rather than closure, you litigate the wrong things in the wrong way – you may feel a tinge of satisfaction in a “gotcha” move, but it will only be temporary as it will unlikely win you any points in the final divorce outcome. All the extra maneuvers, however, will cost you a great deal more in legal fees, and whether paid out of your pocket or from your former spouse’s pocket, the net result is to reduce the final marital estate to divide. In the end, your anger only steals from yourself.
Third, thinking only in the present during a divorce can have devastating consequences after divorce. Whether in a hurry just to leave a spouse and a terrible marriage or too caught up in the moment to imagine life after divorce, the failure to consider the actual cost of living independently can have potentially prolonged financial damage. If you underestimate your expenses or miss the value or presence of assets, you wind up shorting yourself in the financial settlement you craft. Too many individuals in divorce end up spending large chunks of retirement funds to pay monthly expenses higher than anticipated. Much better for an individual to downsize than to dig into retirement, but better still the individual who properly assesses the costs of living independently and makes those expenses part of the calculation of property division and spousal support.
Fourth, remember that different financial settlements have different tax implications. Recall the marital residence example above – taking the house means taking all the tax burdens associated with it, whereas selling the house means sharing the tax burdens. Do your investment accounts have pass through mechanisms for division? The more you consider these issues before a settlement, the more likely you avoid losing money to the IRS.
Finally, tie up loose ends. After the divorce, while you may not have any legal ties to your former spouse, you may still have some financial ties you want to end – like beneficiary status in a will, trust or deed. Additionally, you may want to keep a certain tie – insurance, from health benefits (like long-term care) or a guarantee on maintenance or support for you and/or the children. Some of these policies should be made part of the settlement, while others remain housecleaning to do after the divorce is final.
As you can see, divorce need not be a “money pit” if handled thoughtfully and with as much advance planning and emotional distance as possible.
If you have questions about finances in divorce, contact us – we can help.