“Attorneys often tend to feel they have the knowledge and experience to take care of many complex financial matters on their own, even though most do not hold any sort of business degree. This can create costly mistakes for their clients if they do not fully understand the complicated financial concerns at hand.”
- Joseph E. Cordell, Partner of Cordell & Cordell, the largest family law firm in the United States
Your divorce lawyer is essential for advising you on the legal aspects of your divorce. However, most divorce layers are not financial experts, and your attorney can make costly mistakes that could end up hurting you for many years after your divorce is over.
I am going to show you the five most common financial mistakes your attorney could make when crafting a divorce settlement—and what you can do to protect yourself.
When you think about finances in divorce, it is not important what you get, but what you get to keep. There are tax consequences to almost every major financial decision. However, while divorce attorneys are great at helping you negotiate a settlement, they often fail to account for the tax implications.
Retirement accounts (such as IRAs, 401ks, and pension plans) have different rules when it comes to withdrawing money from the account when you need it. You may think an account is worth $100, but after you pay all the taxes and penalties, you only have $50 left.
If your attorney does not help you navigate the tax consequences of every potential asset and account, you can find yourself agreeing to a settlement that is not fair, and does not make financial sense later.
What if you plan to sell your marital home after divorcing? Many divorce attorneys fail to advise a way to save $250,000 in capital gains taxes: selling your home while you are still legally married. That information could mean a lot more money in your pocket after the divorce is over.
How should you file your income taxes? There are tax traps regarding spousal and child support, which marital status you choose, and how you handle a tax refund when you are getting divorced. A wrong decision while getting divorced can cost you for the rest of your life.
Investment accounts are one of the most complicated financial assets in the world. There are hundreds of thousands (if not millions) of different investment options. After a decade of exclusively working in the financial services industry, there are some areas that I still find complex.
How can you expect someone who went to law school to make the proper investment and financial decisions for you? Numerous times, I have seen even the highest-profile family law attorneys make easily preventable mistakes when dividing investments during divorce.
Let us look at a few basic examples:
Mutual Funds: Mutual funds are common, but they come with risks you may not consider as you negotiate with your soon-to-be ex-spouse. Is the money in a taxable or tax-deferred account? Is there is a high portfolio turnover in the fund? In other words, is there frequent buying and selling of investments associated with it? If so, there could be a large, unexpected tax liability that you will not discover until the end of the year. Furthermore, there are hundreds of different strategies and structures of mutual funds, so you should be very selective about which ones you fight to keep.
Stocks: If you are thinking about keeping an individual stock, do you know its cost basis (which has a huge impact on calculating future taxes if you sell it)? If the stock is a big portion of your overall assets, do you know how to “hedge" it or diversify the risk? There are some incredibly complex considerations regarding stocks, and many books are dedicated to this subject alone. Taking the word of your family law attorney (or worse yet, your spouse) without getting specialized help could be an expensive mistake.
Alternative Investments: Are trying to split a hedge fund or private equity fund? Do you even know what these assets are? Be very careful. Many of these funds involve periods of up to 10 years in which you cannot sell them. Therefore, if you need the money, you could find yourself in a tough financial position.
You may have suspicions that your spouse is hiding money from you. Sometimes it is obvious, but other times, it can be difficult to tell. When your marriage is on the rocks, it is a very common occurrence for money to start disappearing. If you and your spouse own a business, then hiding money becomes much easier.
Given the financial complexities of identifying red flags, many divorce attorneys often inadequately search for hidden assets, which is secret money that you may be entitled to receive. Your spouse may do things like transfer money to friends, report lower income or higher business, create fake or inflated debts, withdraw money in cash and hide it, overpay the IRS and keep the refund, or mislead you about the value of assets.
Finding hidden assets is complicated and potentially expensive, as it may require you to employ a forensic accountant or private investigator. That said, failure to examine this kind of misdeed could cost you a lot of money.
What happens if your spouse unexpectedly stops making child or spousal support payments because they die or become disabled? Support payments may be an essential income source for you, and a sudden loss of payments could cause a host of financial complications.
Many attorneys fail to advise this cost-effective way to protect you: getting insurance to make support payments should the unforeseen happen. The specific implementations can take many forms, but if you are the beneficiary of the policy, you will be protected.
However, you should make sure you own the policies, and that any premium payments are kept current. Otherwise, you will find yourself at a loss when you need the funds.
One day, your divorce will be over—even if it does not feel like it now. Before you sign the settlement papers, are you sure the agreement will make sense for you in the long-term? Many settlements may make sense for the first year or two, but you can find yourself realizing you made a major mistake later down the line.
Divorce attorneys generally do not prepare long-term financial plans for you. All too often, I see people like you put in this position: Just a few years after the divorce, they are scrambling for money or considering bankruptcy.
You may regret having chosen to keep that house, or choosing a bigger retirement account (versus cash in a bank account today). You do not want to end up in a position where you are asset-rich but cash-poor. Most of the time, divorcesettlements are tough to change, so you must be sure you can afford the settlement when you sign on the dotted line.
Get specialized help. You are paying your lawyer for advice about the law. Be sure to have someone help you handle the complex financial issues during divorce, such as a Certified Divorce Financial Analyst (CDFA). CDFAs are trained by theInstitute for Divorce Financial Analysts.
Their mission is to "assist the client and his or her attorney to understand how the decisions he or she makes today will impact the client’s financial future.” Some CDFAs operate in general regions, and others like me help people across the country.
Fortunately, there are some great FREE resources out there. For instance, I host the Divorce and Your Money Show, which is the #1 podcast in the United States that discusses the financial issues in divorce.
You can also check out these courses:
By doing your homework and not being afraid to get help, you can successfully navigate your divorce. Then you will end up with the settlement you deserve.
Do not get f***ed.
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Shawn Leamon, MBA and Certified Divorce Financial Analyst, is the host of theDivorce and Your Money Show, the #1 show on iTunes that discusses personal finance issues in divorce. He is also author of Divorce and Your Money: The No-Nonsense Guide, available on Amazon. Learn more atwww.divorceandyourmoney.com.
Disclaimer: Divorce and Your Money and its affiliates do not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.