Part 2 – DURING:
The financial decisions you make during the settlement process will significantly affect your financial future. That’s why it’s crucial to understand and consider the potential long-term financial consequences of your decisions before you agree to a final settlement.
Here are common financial mistakes made during the divorce process:
– Not preparing a complete and accurate accounting of income, expenses, assets and debts:
Divorce financial specialists are trained to follow a comprehensive process in order to gather all of the necessary financial data needed to prepare meaningful reports and provide recommendations based on your specific needs and objectives. By considering all of the pertinent financial data during the early stages of the process, it is much more likely that your long-term financial needs will be met.
– Not identifying separate and community property.
California is a community property state so having a basic awareness of the community property rules will allow you to understand your financial rights and obligations. With the exception of inheritances and gift, everything acquired from the date of your marriage to the date of your separation is generally considered your community property. Any debts you incurred during the marriage are also typically considered community debts. If you owned separate property prior to marriage and kept that property “separate” from the community property, it will most likely remain separate. There are exceptions to these rules so it is in your best interests to seek legal and financial advice with regard to community and separate property before you agree to a final settlement.
– Seeking financial and tax advice from professionals who are not experts on financial and tax issues related to divorce.
Despite a lack of formal financial training, attorneys and mediators have been thrust into the roles of financial analyst and adviser. Most couples will benefit from the services of a divorce financial specialist who is trained in dealing with the short-term as well as the long-term financial issues related to divorce. When dividing assets and planning for your financial future, a specialized divorce financial advisor can be particularly helpful. Many attorneys and mediators lack formal training in accounting and financial planning, but they are expected to negotiate financial settlements that will have both a short and long-term tax and financial impact on their clients’ lives.
– Keeping the house when you can’t afford to.
The family residence carries strong emotional feelings for many couples going through divorce, especially when there are minor children involved. As difficult as it might be, keep your focus on the long-term financial consequences of keeping a house you may not be able to afford.
– Not identifying income available for support, from all sources.
California law defines the factors that are considered in calculating the amount of spousal support. Legal and financial divorce professionals have the expertise to help you identify how those factors might be applied to your specific circumstances.
– Not taking into consideration the appropriate value for a business.
California law defines the factors that are considered in determining the value of a business for purposes of a divorce. As with the family residence, business ownership can also trigger strong emotions. Each spouse often has a significantly different opinion as to the value of the business. Consider hiring a “neutral” business valuation expert to provide you with an independent opinion regarding the value of the business.
– Not considering the income tax consequences related to spousal support.
Alimony (Spousal Support) is deductible for the spouse who pays it and is taxable to the spouse who receives it. Child support, on the other hand, does not qualify as a tax deduction for the spouse who pays it and it is not taxable to the spouse who receives it. The federal tax code specifies eight requirements that must be met in order for the payments to be considered alimony (spousal support) and therefore qualify as a tax deduction. Consider consulting with a divorce financial specialist, who is qualified to provide tax advice and to review the support agreement. The financial specialist should be able to confirm if the spousal support should qualify for the tax deduction and whether there are other options available that might result in less tax for either spouse.
– Not considering your post-divorce housing expenses:
Before you can truly evaluate whether or not you should keep the family home, it is important to understand the true cost of home ownership. It is also crucial that you consider the following: who will pay the mortgage, property tax, repairs, homeowner insurance and other home related expenses, such as: landscaping, lawn care, homeowner’s association fees, replacement of major appliances, replacement of heating and air conditioning, basic maintenance and major repairs and improvements.