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You may need more than a divorce attorney!
Divorce is something no one hopes will
happen to them when they get married. Unfortunately, almost half of all marriages do end in divorce. Since few people have
pre-nuptial agreements, most divorces involve bitter tangles over children, money and assets. When it comes to the tax and
financial implications of divorce, an attorney is not the only one you should rely on for advice.
I have found ten common mistakes people
make in the divorce process. A tax or financial pro can help you avoid them.
- Don’t
let emotions guide you in determining the divorce settlement. Divorce is about
a lot of things, but it is mainly caused by emotional issues or financial problems.
You may love or hate your soon-to-be ex, but don’t trust him or her to do what is right for you or your children. You must make the settlement using reason, planning for the unexpected. He or she
may want to pay a large alimony and a small amount in child support by telling you they want to see you are “taken care
of.” That may result in less tax for them, but a large tax burden for you
and your children should you die before they reach 18. Financial planning is critical!
- Get
a good family law attorney, but don’t forget to hire a financial professional to assist in evaluating assets and financial
strategies. It may cost extra, but in most cases it will result in a far better
settlement. A Certified Public Accountant (CPA), Certified Financial Planner
(CFP), or an Enrolled Agent (EA) can be invaluable. What is the house really
worth? If a business is involved, what are the consequences of its disposition
or its true value in the divorce settlement? Your spouse might tell you their
business is losing money or has no assets. You need to know the truth!
- Getting
the house in the divorce is not always a good deal. Women often want the house in the divorce because they are raising a family
or are emotionally attached to it. If it has a mortgage attached to it, it might be better to sell it and split the equity.
If you aren’t working and are raising kids, do you really want a big mortgage payment?
- Failing
to fight for the most child support you can get! Large alimony and low child support payments are generally not a good deal
to the spouse receiving the payments. Alimony is tax deductible to the party
paying but taxable to the party who receives it. Child support is tax free to
the recipient and not deductible to the payer. Also, alimony may terminate upon
marriage or death, but Child Support continues until the child reaches 18.
- Failure
to specify who can claim the kids on the tax return. The divorce should specify
who is entitled to claim the children. In some cases, Form 8332 Release of Claim
may need to be filed with IRS.
- Lack
of planning with regard to life insurance. Life insurance should be reviewed
in the event of divorce. You may want to take your ex off of your policy as beneficiary,
but do you really want to make your children beneficiaries? This can
be a big mistake as the funds may go to a trustee until the kids reach majority. Work with your attorney and life insurance
agent on styling the beneficiary designation so your wishes are carried out. A trust or estate plan
may be necessary. If you are the party getting child support or alimony, make sure you have a policy on your ex in the
event of death. Otherwise, the alimony and child support stops and you could face disaster. If you have insurance
you are protected. A 20 year term plan should cover you until the kids are out of the house.
- No
income modeling done in the calculation of alimony. Your spouse may be a corporate
executive and have great future earning potential. He or she may have stock options. An income model should be made to determine the potential he or she has and how it
can affect your claim in the divorce.
- Failure
to secure a Qualified Domestic Relations Order (Quadro) in the event of a 401K or other tax impacted investment that is divided
in the divorce. If you don’t do the right thing, huge tax penalties can
be imposed on taking money out of IRAs, 401Ks, or Annuities. A good family
law attorney can help with this but your uncle Joe or aunt Jane who handles bad check defense may not be the one to handle
your divorce. He or she may not be familiar with a Quadro.
- Failure
to have assets professionally appraised. If you have rental houses, oil and gas investments, etc., get a professional valuation
or you may be cheated in the divorce settlement. The spouse who handles these investments may not be honest with you on the
values. Just because he or she loves the kids or was married to you for thirty years does not mean you can trust them.
- Lack
of faith in yourself and your future. Divorce is bad but it is not the end of
the world! You may have some tough times but your life will go on. Nobody knows what tomorrow may bring. It may bring love
and happiness. You must have faith that you can take care of the kids and be successful in whatever you choose to do. Money’s
not everything, but if you don’t have faith in God and yourself, you won’t be financially successful.
That is my list and it is my prayer that
it has helped you in some way. Be strong and be forceful. Don’t get walked on!
J.R. Coleman, E.A., A.T.A.
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