Attorneys say if both you and your ex-spouse feel
like you came out of your divorce thinking you gave
up a lot, your settlement was probably fair. Maybe,
but often your settlement’s results appear only after
you live with them for a while.
Here are five settlement pitfalls to watch for.
#1: House poor
People don’t like being uprooted and often hesitate to
inflict change on children who may already be upset
from the divorce. Others are seriously attached to
their house and likely invested a lot of work in it over
the years. Nevertheless, many of the recently
divorced ultimately find house payments difficult and
the house itself difficult to maintain alone.
Your house may also suddenly be too large and,
depending on the situation, can produce a huge and
unexpected taxable event such as capital gains when
you sell it.
All too often divorcing people focus on short-term
issues and benefits rather than considering long-term
effects of financial decisions. Some are so eager to
end the marriage that they don’t even want to discuss
the benefits and drawbacks of decisions.
Money decisions amid emotional turmoil almost
always come with obvious plusses and hidden,
eventual minuses. For example, if you keep the house
and the equity but give up some substantially equal
amount in a retirement plan account, you risk missing
out on investment-return gains in your retirement
accounts and lose that amount of savings for your
retirement and your future.
If you have to refinance the house to pay some of the
equity to your spouse, you may run into cash-flow
problems – essentially trading retirement savings for,
perhaps, equity in a home that you may ultimately find
too expensive to keep.
Always consider the long-term and the likely what-ifs.
#3: Real costs
Maybe you simply have to keep that rental home. Or
maybe you want your favorite investments in the
settlement. You’re likely looking at the current value of
the investment, without considering costs of
For example, if you receive the rental home and
eventually sell it, you might pay capital gains and
depreciation recapture, a sort of past-due for tax
breaks you take for wear on the property through
years and which can amount to a sizable tax bite. You
may also pay realtor fees and general sales
Always calculate the cost of eventually selling or
disposing of an asset that’s part of a marital
The major goal of some divorcing couples seems to
be revenge at any cost. These people appear unable
to speak civilly to each other, much less able to
discuss differences and mediate issues. Sometimes
they actively work to undermine each other, stall and
engage in other bad behavior.
Many not only create a poisonous atmosphere but
often ratchet up attorneys’ fees. Family law attorneys
often charge more than $350 an hour, may want a
$10,000 retainer (renewable when depleted, naturally)
and charge you 15 minutes of billable time for reading
one short email.
Sometimes attorneys also engage other experts, such
as business valuation specialists, pension evaluators,
certified public accountants, investigators and career
and vocation evaluators, among others. Fees can
If you’re willing to be reasonable, maybe try
mediation. If that fails, at least try to not fan the flames
and instead listen to the practical advice of your
attorney. Why break the bank?
#5: See only one price
A divorce settlement is often a large puzzle with lots
of pieces. People commonly look at one or maybe two
areas, not the entire picture.
For example, you and your ex can trade the child
exemption on your tax returns in different years.
Having a child one extra day a year may allow you to
claim head of household status when you file income
taxes, potentially a considerable saving. You may
also want to receive more maintenance (alimony) and
less child support – without realizing that alimony
incurs income tax.
Much like when you decided to divorce in the first
place, look at your settlement agreement as a whole.
All parts need to work together to help you thrive in
the near-term as well as in your future.
Talk to your financial advisor
Finally, make sure you talk to your financial advisor in
order to help you avoid these settlement pitfalls. And
your financial advisor can also help ensure your new
financial plan is consistent with your new
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