- Financial blunders in divorce are common, but can be avoided with proper planning.
- Over 70 percent of seniors report concern about inflation and having less money than planned for at this point in their lives.
- Assets providing lifelong income are often an essential replacement for terminated spousal support and insufficient earnings.
This is the third post in a series about how to prepare and protect your financial well-being during and after divorce. Read the first and second posts here.
"Gray divorce" refers to couples 50 and older. To provide information about important financial topics to gray divorce couples and their adult children, I recently spoke with Lili Vasileff, a Certified Divorce Financial Analyst, mediator, and litigation divorce financial expert, who is a nationally recognized speaker, practitioner, writer, and author of four books on divorce, including Money & Divorce: The Essential Roadmap to Mastering Financial Decisions published by the American Bar Association.
CH: What are some tips to avoid the most common mistakes made in divorce?
LV: Some of the biggest financial blunders are also the most common. Most result from poor planning. In my experience, especially for women over 50, the number one post-divorce regret is feeling rushed or coerced into making long-lasting financial decisions before being fully informed and ready.
The reality of the situation is that in most divorces, the pace of the divorce process is unpredictable. At any given time, it is likely spouses are not in sync with each other to move forward to reaching resolution. The less financially experienced and vulnerable spouse may feel unprepared, coerced, frightened, or paralyzed by uncertainty. Yet the cost of not reaching resolution quickly enough, or having a proposal reneged upon by their spouse, results in their rush to settlement to get it over with. The regrets are the aftertaste.
Tip 1: Be prepared and do your homework. When prepared, take back control of the process. You are entitled to have each option fully explained to you, compare each option to your priorities, and continuously measure the downside risk of how well you are financially protected. Knowing you participated fully in your financial decision-making will give you stronger confidence to plan forward post-divorce.
CH: You mentioned financial blunders being common and due to poor planning. Can you share some of these mistakes and how to avoid making a lousy split worse?
LV: Let’s start with what can hurt you financially post-divorce and is often insufficiently dealt with during divorce.
Dealing with Debts—It is too easy to simply divide debts and assume each spouse will do their duty to make payments. Just as properly valuing assets is important, knowing which debts impact you and your credit rating is also essential.
A big mistake is saddling yourself with an unfair share of marital debts or debts that put you at risk if your spouse defaults. Responsibility and liability vary from state to state because some are community property states, and others are equitable distribution states. Creditors will pursue either party to the fullest for joint liability with little if any, consideration given to your divorce agreement. Credit cards, loans, mortgages, lines of credit, and leases are all contracts governed by federal law, not state laws. State laws govern divorce.
Tip 2: Uncover any debt problems during divorce, and whenever possible, pay off debts before you are divorced, or try to refinance them so they become the sole responsibility of one spouse in the future. Always run a credit check with all three major credit bureaus on you and your spouse. You may uncover unknown consumer debts, business liabilities, and business-related pending lawsuits. Have a plan for debt repayment as part of your budget.
CH: What kinds of common mistakes do couples make when dividing assets?
LV: Cracking the Nest Egg—Dividing retirement assets can be complicated. There are issues of improperly calculating who gets what and when and potential penalties and taxes incurred if done improperly. Failing to divide retirement assets correctly will also result in loss of tax-deferred growth and perhaps your survivor benefits.
Be aware that not all retirement assets are the same. The Employee Retirement Income Security Act (ERISA) ensures that federal law governs most employer retirement plans and protects the assets of workers in the private sector. Retirement assets are usually the second largest asset in the marital pies (after the family residence) and include 401K plans, pensions, profit-sharing plans, and individual retirement accounts offered by employers, such as SEP IRAs and SIMPLE IRAs. A Qualified Domestic Relations Order (QDRO) is required to divide these assets.
A QDRO will not only divide the retirement asset but can protect your rights as a survivor should your ex-spouse die. Some plans guarantee a payout as an annuity over your entire lifetime; others are divided as a lump sum.
Lastly, do not miss out on a one-time opportunity available only pursuant to divorce to withdraw cash via QDRO from a retirement asset without a 10 percent penalty (if younger than 59 ½). Withdrawing cash can help you pay bills, and legal costs, pay off debts, or be a down payment on a new home. While you will incur ordinary taxes on cash withdrawals, liquidity access may be a critical advantage.
Tip 3: You have one shot at dividing marital property. There are no do-overs. Work with a financial expert, such as a Certified Financial Planner™, a Certified Divorce Financial Analyst (CDFA™), or a Certified Public Accountant (CPA), to evaluate your options for dividing all assets to meet your needs and goals.
It is a big mistake if you fail to calculate values accurately for how to divide and directly transfer these retirement assets to your ex-spouse. Half of the U.S.'s single or divorced senior women are uncomfortable with their current financial state and want to increase their monthly cash flow.
Assets providing lifelong income are often an essential replacement for terminated spousal support and insufficient earnings. It is tragic to unknowingly give away "golden assets," such as pensions or annuities that provide lifetime income.
CH: What other mistakes during the divorce process might slide by and negatively impact post-divorce financial security?
LV: Taxes and Hard-to-Value Assets—Don't be hoodwinked. Even if two assets appear to have the same value on paper, taxes can make one worth less than the other at the time of valuation. An asset's cost basis is crucial and should be determined upfront before you divide any asset. In simple terms, the cost basis is the original purchase price of an asset. Typically, spouses equally share the cost basis of all assets in the division (without other strategic financial considerations) to share equally any gains or losses.
It can be daunting and expensive to divide hard-to-value assets. However, you may get less than your fair share if you overlook something valuable. You may need a financial expert to help you if there are hard-to-value assets, such as a share of a family business, professional partnerships, rental properties, deferred compensation (restricted stock, stock options), or private equity investments.
You may be entitled to your share of the value whether or not these assets can be transferred to you in your name. It is critical to your long-term financial plan to address in your divorce how you protect your share, negotiate for any offset in value with other assets, and account for any taxes due on such assets.
Tip 4: Work with a tax expert, Certified Financial Planner™, or forensic accountant to value the asset(s) and after-tax amount, determine if and when you will realize value, and protect your rights legally. Include in your divorce agreement a notification protocol to promptly access net realized proceeds when paid to your ex-spouse. Remember, you must assume responsibility for tracking and monitoring all assets due you in the future, including future vesting events and distributions.
Copyright 2023 Carol R. Hughes, Ph.D.
AAG Modern Retirement Survey, 12/8/2021, www.aag.com/retirement-survey-2022