Written by: Manjula Shaw, CFP®, CDFA®
“Tips from the Trenches” is a series of articles based on conversations with professionals who work with individuals facing or considering the prospect of divorce. Watch this space for conversations with professionals in family and collaborative law, such as forensic-certified public accountants, mediators, marriage counselors, family court judges, and valuation specialists.
Manjula Shaw is a Certified Financial Planner (CFP®) and an Asst. Vice President at Tanglewood Legacy Advisors. As a Certified Divorce Financial Analyst (CDFA®), Manjula specializes in helping individuals navigate the financial complexities of late-stage divorce, including asset division, alimony, and child support.
Manjula’s conversation is with Karen King, a Certified Public Accountant and a CDFA® with over 30 years of experience in accounting, financial planning, tax, and forensic accounting. Karen’s practice focuses exclusively on the financial aspects of divorce and family law, and she is most passionate about serving as a Financial Neutral in Collaborative Divorce cases.
What are Common Financial Pitfalls in Divorce?
I. Not Knowing Your Full Financial Picture: If you have read my previous blogs, you know that gathering all your financial documents and understanding your complete financial situation, including assets, debts, and expenses, is crucial step number one before and during a divorce. Failing to do so could lead to an improper division of assets or unexpected financial obligations.
Karen helped a divorcing couple who owned three annuities in their brokerage account.
There are various types of annuities, each with unique benefits and limitations, costs, and tax consequences. Sold by contract, in its simplest form, an annuity is a financial product issued by an insurance company that provides a series of payments or a lump sum in the future.
For this couple, the annuities were a significant portion of their assets, so dividing them fairly was important. One annuity was individually owned, and the other two were jointly owned. Most insurance companies do not allow splitting the joint annuity under the existing contract. Instead, they must be surrendered, which can result in income tax on the gains accrued within the annuity contract and potential surrender charges. After the surrender, if the divorcing individuals wish to purchase two separate annuities, the insurance company needs to issue two separate annuity contracts, and these new contracts may contain additional fees. Karen emphasizes that careful consideration must be given to the tax consequences and fees that may erode the joint estate, and the nuances need to be understood as a part of understanding the full financial picture. Please speak to a CFP® or CDFA® to navigate the complexities.
II. Ignoring Taxes: Divorce can have tax implications, especially when dividing assets like retirement accounts or selling property. Ignoring these tax consequences could lead to unexpected tax bills or missed tax savings.
Karen’s case study of a couple who owned a primary home and a lake home is an excellent example of being tax-savvy. They considered selling both homes but did not need to rush. The couple had lived in the primary home for decades, and the home’s value had grown significantly. Karen advised the couple to sell it before finalizing the divorce to use the five hundred thousand dollar capital gains exclusion for a couple selling their primary home. If sold after the divorce, each spouse would only get a two hundred and fifty thousand dollar exclusion, leading to higher taxes. For the lake house, Karen suggested that one spouse live there for twenty-four months before selling and allowing to take advantage of the primary home capital gains exclusion.
III. Agreeing to Unfair Settlements: Rushing into a settlement without fully understanding its financial implications could leave you with less than you deserve. Karen advises her clients to take time to negotiate a fair settlement considering immediate and long-term financial needs.
IV. Not Planning for Future Expenses: When negotiating a settlement, it is essential to consider future expenses such as housing, health care, and childcare. Underestimating these costs could lead to financial hardship down the road.
V. Forgetting About Debts: Debts acquired during the marriage are typically divided in divorce. Forgetting to address debts like mortgages, loans, or credit card debt could leave you responsible for payments you did not anticipate. Remember that joint debt during marriage continues as joint debt after your divorce.
VI. Overlooking Asset Division: Property division can significantly impact your financial future. To ensure a fair outcome, carefully consider the division of assets like the family home, retirement accounts, and investments.
VII. Not updating Legal Documents: After divorce, it is essential to update legal documents like wills, trusts, and beneficiary designations to reflect your new circumstances. Failing to do so could result in unintended beneficiaries or asset distribution.
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at
www.family-cfo.com/important-disclosure-information/
