Women and Investing
4 money mistakes to avoid when you’re getting divorced
Finance experts say there are four things to avoid if you’d like to salvage your financial future after a divorce.
According to Nolo's 2019 data, the average cost for a divorce in the United States was nearly $13,000—and the average processing time was a full year. These numbers can double and triple when a couple is at loggerheads, forcing them to go to court and rack up an unpredictable amount in legal fees. No matter how much cash you have in the bank or how little money you have hidden under your mattress, divorce can destroy your financial future if you haven't taken the necessary steps to protect your cash, real estate, and retirement assets.
Divorcing couples often do their research about laws in their state, since each has different rules about dividing marital assets. States such as New Jersey, California, and Nevada offer self-help centers that help decode these laws. Still, most people will think to call a divorce lawyer before a financial planner. Yet finance experts say that that is just one costly mistake that divorcing couples simply can't afford. Here are the top four.
Attorney Dori Shwirtz runs divorceharmony.com, an online platform for marital and divorce mediation. She's known for trying to avoid court at all costs and aiming for the quickest and easiest path to dissolving a marriage. She advises her clients not to take any drastic action when they initially decide to divorce.
"It's never a good idea to make major life-changing decisions when you may not be thinking clearly," Shwirtz explains. "Seek out as much knowledge as possible on divorce and don't go it alone." Just like a wedding party, a divorce is a team sport.
Shwirtz says that it can save time and money to assemble a divorce-support team, including therapists, financial experts, and health coaches, well before any paperwork is filed or any major conversations are had. Not only can a support team help you better decide if now is really the best time to divorce, but they can also ensure you stay resilient through what may be an arduous and lengthy process. Experts say that many aspiring divorcees wait until they're emotionally distraught to start interviewing tax accountants and financial planners, who can help them run projections and make money moves that will set them up for post-marital financial success.
Alex Beattie, cofounder of the Divide and Thrive Divorce Organizer, takes it one step further: Even if you're not deliberately withholding, now is not the time to be lazy or slow in gathering the information a lawyer needs to defend you properly.
"A lawyer can only help put together a list of all of your marital assets if they are told what—exactly—you both own," Beattie says. "Note what was purchased during the marriage and what was purchased prior to, and by whom. Consider having artwork, collectables, or jewelry of value professionally appraised. If you want to keep the family home or business, get granular," she suggests. Again, it only hurts you to keep this valuable information from your attorney. So, err on the side of oversharing.
"While smaller property like personal possessions is unlikely to be of financial concern, it's not unusual for larger assets to fall victim to disputes," says attorney Brent Kaspar, the managing partner of Kaspar and Lugay, LLP. "For assets such as investment accounts that pay dividends or any type of real estate, working with an attorney that is experienced in high-stakes business negotiations can ensure that the valuation is truly fair and protected from these disputes." As a member of both the California Bar and the California Board of Accountancy, Kaspar knows the true cost-savings that a mediation or alternative dispute resolution could provide.
"Once the full fair market value of every significant asset is known, the task is to divide it equally," he continues. "In high-net-worth divorces, this may be best accomplished through mediation instead of through the court system. This allows spouses to negotiate and discuss their options. The court system, on the other hand, will hear arguments and then decide without further input."
If the couple can manage to converse directly—or through legal counsel—they may only need the guidance of a neutral party to see the forest for the trees. Assuming that you must go to court is a costly error.
Kaspar says that business law attorneys come in handy when a divorce will also result in a split of a family business, or when one member of the couple owns a well-established company. "Businesses are evaluated differently than other types of property," Kaspar explains. "Because of the intangible nature of most parts of a company's value, the process can be complicated."
"A dollar does not always equal a dollar," laughs Sandy Swanson, a private wealth advisor at Potentia Weath, based in San Jose, Calif. "In many divorce cases, one member of the couple has been planning this divorce consciously or subconsciously for a while. In preparation, some of the combined assets may have been re-titled or moved to cash, so as not to be considered community property in the negotiation."
Her job is to look at the value of each asset in after-tax dollars. Some assets, such as retirement accounts, are taxable as income. Some assets, such as stocks held for more than a year and real estate, will be taxed at the capital gains rate. "A dollar value on paper today can be a very different value after taxes," she cautions.
Similarly, when considering debts, a $60,000 mortgage is a less expensive debt than $60,000 on credit cards, because interest rates on credit cards are typically higher than those applied to a secured loan, like a mortgage. Swanson says that people in the middle of a divorce might be inclined to think that they know these nuances, but it is best to avoid freelancing as an appraiser or accountant in your own case. Unless you're a trained professional in these areas, avoid this mistake by hiring a pro who can properly weigh the value of an asset or liability against interest rates, inflation, and fair market-value.
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