Chances are, you have lots of feelings about the end of your Massachusetts marriage — including what it will do to your finances.
Of course, that’s just the beginning, as the financial implications of your divorce can easily live on for years to come — maybe even longer than the marriage itself lasted. Therefore, it’s important to cover all the bases to ensure you’re able to start your new single life in the best possible financial situation.
Even a divorce settlement that seems pretty cut and dry might not be as fair as you think. Here’s a look at eight ugly financial truths about getting divorced, because being informed is the key to protecting your assets.
Longer Divorces Tend To Cost More
Since divorces can involve a lot of personal issues, David Fowler, CFP, ChFC, founder of High Mountain Financial Coaching LLC, said things can get very emotional.
“This can cause some issues to stick, where one or both parties are unrelenting and trying to win,” he said. “The longer things go, the more expensive the process gets for both parties.”
Therefore, he said it’s best to come to a resolution quickly, as this will save a lot of money in attorney fees. This is something he knows from personal experience, as someone who has gone through a divorce.
“In my own case, I chose to take it on the chin and give more than what my lawyer recommended in order to expedite the process, which I think saved money in the long run,” he said.
Retirement Benefits Will Likely Be Split
Even if your retirement accounts are in your name, Fowler said roughly half of the money will go to your soon-to-be ex.
“With the higher expenses each party is most likely facing being single, this could lead to both having a harder time making ends meet when they eventually do get to retirement age,” he said.
This means you’ll likely have to work hard to play catchup adding extra funds to your account before you retire.
Keeping Your Home Can Be Tricky
It’s not uncommon for one party to keep the family home after the divorce, but this might be more complicated than you think.
“In the event both spouses were on the mortgage during the marriage, a refinance is likely required to remove the party that no longer has any ownership rights to the property,” said Michelle Katzen, CFP, certified divorce financial analyst, managing director for HCR Wealth Advisors, an independent financial advisory firm based in Los Angeles. “This process can be difficult, especially if the spouse retaining the home is unemployed.”
She said many banks require six to 12 months of proof of spousal support before allowing borrowers to claim it as income.
“Also, the remaining borrower will now have to qualify for the loan on their own, with their own assets, debts and income,” she said.
Tax Consequences Differ for Retained Assets
“Clients often don’t realize the differential in tax consequences across the different types of assets,” Katzen said.
She said the family home is one asset that can have large tax consequences.
“In the event one party keeps the home, but later decides to sell the property, there could be a very large tax bill owed,” she said. “In addition, real estate has large transaction costs for the seller, oftentimes north of 6% of the sale price.”
When liquidated, she said this can drastically impact the overall value of the asset.
You Might Need Life Insurance on Your Ex
Getting a divorce doesn’t necessarily mean you no longer need life insurance on your ex.
“For the party receiving spousal support, it is very important to obtain life insurance on the payee,” she said. “We suggest owning the policy and paying the premiums to ensure the policy stays in force and you remain the sole beneficiary.”
She said this will give you comfort in knowing you’ll continue to receive the benefit you’re relying on in some way if the payee passes away.
Assets That Seem Equal Might Not Stay That Way
“One big mistake I’ll see is people use dollar for dollar comparisons when splitting assets,” said Rachel Burk, a financial advisor and financial planning specialist at Offit Advisors, based in Columbia, Maryland.
For example, she said you might agree to take $250,000 of equity in the house, while your spouse gets $250,000 of the retirement fund.
“Those dollars today will not be equal in 10 or 20 years,” she said. “Investments can grow at double the rate of houses, and those dollars are not the same.”
Some Assets Might Be Hidden
You might think you know about everything that needs to be split in your divorce, but Olivia Summerhill, a divorce financial consultant with The Summerhill Firm, LLC, based in Seattle, said it’s not uncommon for assets to be hidden in unexpected places.
“The person wanting the divorce may have been planning for a long time and placed joint money in areas the other spouse may not see,” she said.
She said it’s easier for business owners to maneuver assets around without the other spouse knowing than those who work for a company and earn a paycheck.
“They may also plan for the divorce and give “loans” to businesspeople and then get those ‘loans’ back post-divorce,” she said.
Your Credit Might Not as Good as You Think
If joint credit cards and other debts are in one spouse’s name as the primary, this could be problematic for the other person, said Samantha Garcia, a wealth advisor and certified divorce analyst at Halbert Hargrove, based in Long Beach, California.
“For example, if every credit card that a couple shares is in one name, and then after a divorce, the other one can get cut off and has no credit card or mortgage history,” she said. “If they want to refinance their current mortgage because they’re taking it over, this can be problematic.”
She said she once advised a client in this situation to open a credit card in her name and make monthly payments to start building up a good credit score.
Should you be in the midst of a divorce or contemplating divorce, contact the Law Offices of Renee Lazar at 978-844-4095 to schedule a FREE one hour no obligation consultation.