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Eight Financial Mistakes to Avoid in Divorce

Amanda Burge, CFP®

Director of Financial Education

Last Updated
January 10, 2022
Man and woman sitting next to each other in serious discussion

Tips for a Fair and Successful Division of Assets

For many people, going through a divorce is one of the most emotionally charged periods of their lives. While you’re trying to navigate all the challenges of starting a new chapter of your life, it can be downright overwhelming to even consider the financial implications of your divorce. Yet, it’s important to approach the process with a clear head in order to avoid making irreparable financial mistakes. Here, we outline eight common pitfalls your wealth manager can help you avoid.

  1. Overlooking the impact of taxes – Different types of assets have different tax implications. As you are dividing assets in the divorce, consider the after-tax value of each proposed split to help ensure you’re not taking on an unfair share of the tax burden.
  2. Not understanding your full financial picture – If you don’t have a full understanding of your marital assets and accounts, your spouse may have an advantage over you when it comes to settling your financial issues. It’s important to collect and document as much information as possible. If you suspect your spouse may try to liquidate, move or retitle marital assets, be sure to alert your financial institutions and place a hold on your accounts.
  3. Underestimating your monthly expenses – Even if you have a good handle on your current monthly expenses, dividing those assets in half will likely not suffice. Splitting one household into two means two mortgages/rent payments, two internet/cable bills, two utilities payments… you get the idea. Estimate your expenses in light of your new financial situation, not your current one.
  4. Trying to rush the process – There’s no way around it; divorce is not fun. No one wants to draw the process out any longer than necessary. However, rushing through important financial matters may lead to an unfair division of assets. Take your time in evaluating each and every potential decision to make sure you’ve covered all your bases.
  5. Keeping a house you can’t afford – If you will have primary custody of your children, it may be tempting to want to stay in your family home. However, this might not be the best financial decision if the mortgage payments, maintenance and property taxes are more than you can afford on your own.
  6. Not understanding all assets’ potential value – A common mistake is to take a “snapshot” of all assets’ current market value and use that to make decisions. However, certain assets may be worth more than is reflected in that snapshot view. For example, rental properties may be worth more over time than their current value, especially if they generate income and have the potential to appreciate in value. Pay attention to each asset’s tax basis, present value, potential appreciation, income potential and transaction costs to help ensure you’re making an apples-to-apples comparison.
  7. Forgetting to account for your spouse’s Social Security eligibility – If you’ve been married for 10 years or more, the non-working/lower-earning spouse is eligible to receive Social Security benefits based on the higher-earning spouse’s work record. Don’t forget to account for Social Security as you’re dividing assets.
  8. Neglecting to update beneficiaries and estate planning documents – Once your assets are divided, there’s one final step you must take before heaving a sigh of relief. Don’t forget to change the beneficiaries on any life insurance policies, IRAs and employer-sponsored retirement plans. You’ll also need to work with your estate planning attorney to update your estate planning documents, such as wills, trusts and any powers of attorney.

At Creative Planning, we understand how challenging navigating all aspects of a divorce can be. That is why we focus on providing you with confidence and security by helping you determine your financial need, gain an understanding of your options and make decisions that are in the best interest of you and your family. For help navigating your divorce, or for any other financial matter, please schedule a call.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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