Scott Sagaria at the California Family Law Blog has noted a recent article in USA Today that explains five common mistakes people make when dividing their finances during a divorce, and the information contained in this article could be very helpful to anyone facing a similar situation.
1. Many couples scrambling to obtain a divorce settlement wish to keep the house at any cost. However, financial experts say that more attention should be given to who can afford to maintain the property, pay the mortgage, and manage the taxes. While it is possible to ask for spousal support to help make the mortgage payments, unexpected maintenance costs may pop up, and make home ownership more of a liability than a luxury.
2. Clean separation of assets and debts is another difficult task, but one that Howard Dvorkin, the founder of Consolidated Credit Counseling Services says is absolutely necessary, or the consequences can be devastating. Although the task may seem insurmountable, “the alternative is much worse,” says Dvorkin. “Having a spouse drive up your debt when you’re not married anymore” can seriously affect one’s credit score.
3. Depending on your former spouse to comply with financial arrangements is also a huge mistake, according to the USA Today article. Although both parties in a divorce are beholden to a court-ordered divorce agreement, creditors do not fall under that arrangement. If your ex spouse is supposed to pay the mortgage, but doesn’t, “the lender is going to sue both of you,” remarks Melissa Avery, an Indianapolis family law attorney. This holds true in Santa Clara County and Alameda County divorce cases as well; if your ex fails to pay the mortgage, you may be hurt when applying for future loans.
4. Wills and trusts can also be seriously impacted by divorce proceedings. If divorced spouses wait unnecessarily long to change a beneficiary on a will, for example, the money may go to the wrong person—your new spouse may get nothing, while your ex spouse inherits the amount provided for in your will.
5. Finally, NEVER forget which amount of money in your divorce settlement is alimony, and which amount is child support. Whereas child support payments are not taxable to the recipient, alimony payments are. Furthermore, there are limits to how long a person can receive such payments—child support payments can no longer be received once the child turns 18 or is done with college, while spousal support generally ends once the recipient remarries.
SOURCE: USA Today (text of article appears below)
|Breaking up is hard to do financially|
Sure, it can be hard to think about money when you’re mourning the loss of a personal relationship.
But forging a clean break — financially and personally — will make it easier to move on with your life.
One of the worst mistakes that divorcing couples make, financial experts say, is to drag out the process in hopes of securing more money, and sometimes causing more pain to the other person.
In the end, such sparring can serve only to whittle down the amount of money you have to split.
Couples "waste money because they declare war," says Ginita Wall, a certified public accountant in San Diego who specializes in divorce. "Their kids go to community college, and their attorneys’ kids go to Harvard."
Divorce is a time to take stock of your assets and debt. The longer you and your spouse have been together, the more intertwined, and complicated, your financial ties probably are. Multiple bank accounts. Credit card accounts. Mortgages. Auto loans.
How to unravel them? Carefully.
Here are five common mistakes couples make when they separate their finances — and tips on how to avoid them:
1: Hanging onto the house at all costs.
Many divorcing couples want to keep the house, rather than sell it, so the kids won’t have to change schools or upend their weekly routines. But Lynnette Khalfani Cox, who writes financial books and hosts seminars on money topics, says many couples tend to fight over the house without giving enough thought to whether the person who gets it can afford the mortgage, upkeep and property taxes.
In a divorce settlement, you could ask for a certain amount of spousal support to help defray the monthly mortgage payments. But that won’t cover unexpected repairs to the home.
"For many people, women in particular, the house represents financial stability and emotional attachment, but it can be a huge economic noose around their neck," Khalfani Cox says.
If you’re counting on alimony to pay the mortgage, and your ex falls behind on paying, it could put you in a precarious financial position. At worst, you could lose the house if you can’t pay and hurt the credit records of both you and your spouse.
2: Failing to make a clean financial break.
Separating all your assets and debt is a monumental task but one you should do promptly to prevent unexpected credit card charges and bank withdrawals.
Start by ordering your credit reports. By law, you’re entitled to a free credit report from each of the three bureaus — Experian, Equifax and TransUnion — once a year. (You can get these reports by going to AnnualCreditReport.com.)
Find out which accounts are in both your names and arrange to have your spouse’s name taken off. With joint bank accounts, transfer the money into individual accounts and close the joint accounts.
Credit card accounts are a little trickier. If you’re the primary card holder, you can remove an "authorized" user without the user’s permission. But on joint accounts, some credit card companies require you to close the account entirely, instead of just letting you remove one person.
There’s another problem with this strategy: If you close multiple joint credit card accounts, it could lower both your credit scores. Khalfani Cox, who is recently divorced, says she and her ex-husband trusted that the other wouldn’t go on a spending spree. So they took a few years to close their joint accounts, instead of doing them all at one time, to minimize the effect on their credit scores.
For this to work, though, you have to "think long and hard about if you have a spouse (who) has been financially responsible throughout the marriage," she says.
Couples who are involved in contentious divorces shouldn’t wait to close joint accounts. Howard Dvorkin, founder of Consolidated Credit Counseling Services, says that even if doing so hurts your credit score, "The alternative is much worse: having a spouse drive up your debt when you’re not married anymore."
If you have good credit, creditors may offer an alternative that minimizes the hit on your score: Open up an individual account and have your credit history transferred over, says Barry Paperno, manager of consumer operations at Fair Isaac, the creator of the FICO credit score.
That way, you don’t have to go through the rigmarole of applying for a new account, which could lower your credit score.
3: Counting on your ex to honor financial commitments.
As part of a divorce agreement, your ex might agree to pay the mortgage, alimony or child support.
Don’t count on it. Even if your divorce seems amicable, you should plan for the possibility that your spouse won’t be able to honor his or her financial commitment.
Remember, also, that while you and your spouse are bound to any court-approved divorce agreement, your creditors are not.
"Just because the court order might say your spouse has to pay the mortgage, if he doesn’t and the mortgage is in both your names, the (lender) is going to sue both of you," says Melissa Avery, a family-law attorney in Indianapolis.
If both your names are on the mortgage and your ex doesn’t pay, you’ll have to decide whether to pay it yourself, or risk your credit score getting whacked — and having that black mark haunt you when you apply for loans.
You could sue your spouse to force that person to pay up, but bear in mind: That process could take a long time. While you’re waiting for your ex to pay the bill, both your credit scores could be damaged.
4: Forgetting to change your will and beneficiary forms.
Courts often require you to wait until a divorce is final to change your will and the beneficiary on your life insurance and retirement accounts.
But some ex-spouses needlessly wait even longer, Avery says, to make such changes. Waiting can be especially perilous if you remarry. If you die in the meantime, your ex-spouse, rather than your new spouse, could get all your money.
You should also remember to revise your power of attorney, so you don’t unintentionally grant your ex-spouse the power to make financial and medical decisions for you.
If you have kids, consider including a clause in the divorce agreement that requires each person to maintain a certain amount of life insurance to benefit children if one of you dies, Avery says.
5: Overlooking taxes.
In a divorce, your goal might be just to get as much money as possible from your spouse. So it’s easy to overlook whether the money you’re getting every month is considered alimony or child support.
That’s a big mistake, says Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, because alimony is taxable to the recipient and deductible by the person making the payment; child support is not. Thus, the recipient is often better off getting a larger amount of child support, rather than a larger amount of alimony and having to pay taxes on the alimony.
Of course, there are other considerations. Alimony usually lasts until the person remarries, while child support lasts until the child reaches 18 or leaves college, Ochsenschlager notes.
Also consider taxes when you’re splitting up retirement accounts, bank accounts or other assets. One rule of thumb: Hard cash is usually more valuable than money in retirement accounts.
If you decide to invest the cash, you’d be taxed only on your capital gains and at a maximum long-term rate of just 15%. By contrast, with a tax-deferred retirement account, you’d have to pay ordinary income taxes on all the contributions and earnings — and at a stiffer top rate of 35% — once you withdraw the money.
"Donald Trump says cash is king, so when you’re in a divorce situation, you might want to follow Trump’s adage," Ochsenschlager says.
|CHECKLIST FOR SEPARATING FINANCES|
|• Gather copies of tax returns; request credit reports.
• Close joint credit card accounts and other lines of credit.
• Pay off household expenses from joint bank accounts; close accounts, and transfer funds into individual accounts.
• Consider selling the house to get it out of both your names. Or, refinance it to put it under one person’s name.
• Check overlooked assets: frequent-flier miles, club memberships, vacation pay.
• Update your will and the beneficiary forms on your life insurance and retirement accounts.
• Revise your budget. Consider hiring a financial planner
Source: USA TODAY research