Financial Mistakes Women Make in the Divorce Process

During the divorce process, it is common for many divorcees to rely solely on their family law attorney to evaluate the long-term impact of various settlement options, and  look to a wealth advisor post-settlement to create a financial plan. This delay is a serious misstep. Your family law attorney is the primary expert in navigating your divorce settlement, but collaboration with a qualified financial advisor on the details of your marital estate and how each asset might impact your financial goals is critical — and far more impactful before you make an irrevocable decision.  

To optimize your settlement, your team must have a comprehensive understanding of the assets in play. This includes their tax consequences, earning power, future growth potential, transaction costs and liquidity characteristics. For example, private equity, stock options, business interests, real property, retirement accounts and collections all have distinct attributes and potential challenges that should be considered in your settlement. Remember, the devil is in the details.

Divorce can be one of the most emotional experiences of your life. And decisions made during the divorce process can have dire financial consequences. One common and often highly emotional misstep is for the newly single to retain the family home – only to find that it must be sold later in order to maintain liquidity. This is usually less than ideal. While married couples are entitled to a $500,000 capital gains tax exemption on the sale of a primary residence, you can only exclude $250,000 as a single sole owner. Second, by not selling and splitting the proceeds as part of the divorce settlement, you will absorb the full brunt of transaction costs – including Realtor fees as high as 6% – that could have been shared. Finally, though each circumstance is different, the equity in your home is probably not an ideal vehicle to support your long-term goals.

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Another common misstep is a failure to maintain liquidity – in other words, not having access to enough cash. With legal costs tending to escalate in proportion to the balance sheet at stake, not being able to fund divorce proceedings independent of your spouse can have severely negative consequences on your legal strategy. Second, separations often require an array of both expected and unexpected expenses – potentially including new housing, furniture, automobiles and untold smaller items.

More important still is maintaining the long-term liquidity to fund your goals – and doing so should be top-of-mind when reaching a settlement. Remember:

• Automobiles, boats and furniture are depreciating assets.

• Retirement accounts carry significant penalties and tax consequences if liquidated.

• Real estate can generate high carrying costs and on average only appreciates at the pace of real inflation.

Even potentially profitable investments, such as a stake in a business or limited partnership, must be weighed against liquid assets you can use now to establish long-term security.

Negotiating the amount of your child support, and in some cases spousal support, is only the first step. Securing the income is another ballgame. Across the United States, more than half of custodial parents fail to receive full child support payments.³ We therefore often suggest obtaining a wage assignment order for child and spousal support when possible – even in amicable situations.

You should also consider using a life insurance policy to insure all support obligations.

• Begin by checking whether your existing policies have death benefits large enough to cover the present value of future support.

• Negotiate so that ownership of the policy is transferred to you. If this is not possible, work with the insurance company directly before finalizing your settlement agreement. In either case, you need to ensure you are notified immediately if premium payments are missed.
  

• If you need to purchase a new policy, attempt to negotiate the premiums into your settlement so that the paying spouse covers the cost. After all, the policy is insuring their liability to you. 

If your divorce settlement includes an equalizing payment, whether in a lump sum or series of payments, there are steps you can take to ensure its integrity. For instance, you can work with your attorney to create a support order ensuring that the payment is not dischargeable in bankruptcy. And in order to protect yourself from non-payments, you can explore a deed of trust specifying collateral. Incentivizing your ex-spouse to be timely and diligent with payments is important, as pursuing enforcement through legal channels is expensive and time-consuming.

If the equalizing payment has been ordered without collateral, or there otherwise won’t be sufficient funds to satisfy the payment in the event of your ex-spouse’s death, consider taking out a life insurance policy. While this important step won’t protect you in the case of bankruptcy, it will safeguard your asset in the event something happens to your ex-spouse.

With the marital balance sheet split in half and two lifestyles to fund, change is often inevitable – regardless of the terms of the divorce settlement or net worth of the individuals. Failure to adapt to these new circumstances can be dangerous, as overextending yourself in the present can lead to liquidity issues, or worse, in the future.

In addition to working with your wealth advisors to create a plan to meet your goals, one best practice is to strive to live not within – but below – your means. Generating a surplus each month to replenish savings and investment accounts that were, potentially, halved during the divorce process can help give you peace of mind, knowing that you are on track for a secure financial future. And that is the best lifestyle of all.