Christina provided tips and resources for financial planning through a divorce in the MoneyGeek article "Financial Planning for a Divorce". Included in the article are important resources, and the steps to navigating the whole process, and Christina gives insight on some of the most common financial mistakes that are made during a divorce.
You can read Christina's excerpt below and you can read the whole article here on the MoneyGeek website.
What are some common financial mistakes people make in a divorce?
Divorce is a complex and emotional process that can significantly impact your financial future. Here are some common financial mistakes people make during a divorce:
Neglecting to hire your own professional team — an attorney: This happens if you are not familiar with the household's finances, a financial advisor and potentially a tax professional and counselor. Often, someone suggests that using one attorney or advisor can help save money. While this is possibly true, not hiring separate professionals to educate you and advocate for your needs could cost you financially and emotionally more in the long run.
Failing to account for all assets and liabilities: It is important to make sure that all assets and related liabilities are accounted for and valued accurately. This includes retirement accounts, investment accounts, real estate and any other assets that may be subject to division in the divorce settlement. While it's common for one person to handle finances during a marriage, both parties need a clear understanding when divorcing.
Overestimating your ability to maintain your lifestyle: Many people underestimate the impact that divorce can have on their financial situation. It's important to be realistic about your ability to maintain your current lifestyle and make adjustments accordingly.
Failing to consider tax implications: Divorce can have significant tax implications, particularly regarding the division of assets such as retirement accounts and real estate. It is important to work with your financial advisor and tax professional to ensure that you understand the tax implications of your divorce settlement.
Overestimating your capacity to separate financial decisions from emotional decisions: For example, someone often wants to remain in the family home (usually for the children), but this may be a financial pitfall either due to carrying costs being too high for one person and/or having a large majority of assets in illiquid form (i.e., not easily accessible) — another important conversation to have with a financial professional.
Neglecting to update estate planning documents, titles or registrations and beneficiary designations after the divorce is complete to determine if any changes are required. Failing to update beneficiary designations on retirement accounts, life insurance policies, and other assets can result in unintended consequences in the event of your death or the death of the designated payor of spousal support for a specified time period. You may want to consider buying an additional life insurance policy to protect against an unexpected loss of income.
Navigating a divorce can be challenging, both emotionally and financially. If you're going through a divorce, working with a professional team that can help you make informed decisions and avoid common financial mistakes is essential.
Are collaborative divorces gaining in popularity? When is it appropriate or inappropriate?
Collaborative divorces are gaining popularity because many couples want to end their relationship in an amicable manner and avoid the courts. The process often lets both sides feel heard as all parties (including the professionals) have agreed to work towards an equitable and agreeable solution for everyone. In addition to specialist attorneys, a collaborative divorce team often includes a financial advisor with special training and the designation Certified Divorce Financial Analyst®, or CDFA®.
Their roles and responsibilities in a collaborative divorce include maintaining impartiality and completing a thorough review of the family's finances. The planner reviews and itemizes assets such as homes and cars; debts and loans, including mortgage(s); insurance policies and coverage like health and life insurance; and the children's and spouses' financial needs going forward.
The planner is not operating from a position of trying to "get the most" from one party for another during the collaborative divorce. His or her duty is to maximize the financial strength of the entire family, despite the impending separation and split of the spouses, for the long-term benefit of all.
Collaborative divorce could be an appropriate path for those capable and willing to work together collaboratively and put aside resentment and anger. However, collaborative divorce is not an option for couples with a significant power differential or accusations of abuse (physical, mental and/or financial).
How do the financial costs of collaborative law compare with those of litigation?
Collaborative divorce can often lead to lower financial costs as the goal is to avoid going to court, but if the process is long and drawn out, the costs can still be significantly higher than with other methods.
What about when children are involved — how do custody issues affect the financial cost?
Custody issues vary depending on each state. It is important to research the rules in the resident state and then seek legal guidance for specific questions.
Are there time savings in a collaborative divorce or mediated divorce compared with full litigation?
There is usually significant time savings when choosing either a collaborative or mediated divorce approach versus litigation. The main reason is that divorces rarely go straight to court; they are often preceded by numerous years of contentious back-and-forth negotiations between the two sides—and they still can’t come to an equitable agreement.
However, time savings may not be the ultimate goal for some parties (especially in cases concerning abuse); therefore, litigation may be the appropriate path. As always, getting legal guidance during the beginning stages could provide insight as to what might work best in your situation.
Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Clute Wealth Management and LPL Financial do not provide tax or legal advice or services. Please consult your tax or legal advisor regarding your specific situation.