Ending a marriage, particularly one of longer duration, is very similar to the breakup of a business partnership. There are many consequences divorcing spouses face as they figure out how to divide their estate. Without careful planning and consideration, there can be serious consequences to the settlement that seems so simple on paper.
Here are the top five common mistakes in divorce settlements.
1. Allowing emotion to guide you rather than logic. Let’s admit it, very few couples stand up before their friends and family with the belief that they will someday end their marriage. However, they do stand up before family and friends, confident in their love and emotional commitment to one another. That love and emotional bond you have with your spouse builds over the years through shared experiences — such as the birth of a child. When a marriage ends, the stages mirror those of grief following the death of a loved one. Do not allow shock, anger, resentment, grief (all universal emotions at various stages in your divorce) to impair the logical side of your brain. Being guided by emotion will lead you to agree to a property settlement that may not be in your best interest. Always seek out professional help from a therapist as you navigate these stages of grief. The investment in your emotional and mental health is invaluable.
2. Not hiring your own attorney. Many couples attempt to save a few dollars in their divorce settlement by hiring “one” attorney because their divorce is “easy and “straight forward.” This idea sounds great, but you should be wary of any attorney who tells you that he or she can represent you both in the SAME divorce action. Ethically, an attorney licensed in Michigan, cannot serve two spouses who are adverse to one another in the same divorce action. Meaning the hired attorney will be representing only one spouse, even if he or she prepares all of the documents. That attorney does not represent your best interests and is not your advocate. Please hire your own attorney, even if it is just to review the final documents. The price of not doing so will be far higher than the attorneys’ fees you pay.
3. Forgetting to secure the payment of property settlement and support payments in the event the payor passes away. Many divorcing couples fail to include provisions in their Judgment of Divorce to secure property settlement and support payments. Commonly it is done by allowing the spouse who is the recipient of the property settlement payment or the support payment to continue as the beneficiary on a life insurance policy on the payor spouse’s life. Even when these provisions are included in the property settlement, there are other things to consider, as well. You need to make sure to regularly ask for documentation from the payor spouse about the status of premium payments on the policy. If your spouse passes away, without naming you as the beneficiary on the life insurance policy, you could be in the terrible position of suing his estate or the Trustee of his Trust. Likely meaning you will be suing your grieving children who are the beneficiaries of estate or Trust. It is also probable that the Trustee is using the assets of the Trust (your children’s assets) to pay the attorney defending the Trustee. A lose-lose scenario for you.
4. Failing to consider the effect of taxes when valuing assets in the marital estate. For example, money paid into a pre-tax retirement account is not the same as the equity in a house. Money paid into an Individual Retirement Account (this does not include Roth IRAs) and many company 401(k)s are considered pre-tax for income tax purposes. Meaning that when the money is taken out, the account holder will pay income taxes at the time of the withdrawal. Many couples barter assets back and forth in negotiating their property settlement and forget to consider the tax consequences of the assets they are receiving. You can avoid this by meeting with a tax advisor to walk you through your property settlement, to discuss potential tax consequences. This pitfall is easily avoided by simply adjusting the values of the assets so that the tax consequences are considered.
5. Not considering what tax year the final Judgment of Divorce will be entered and the effect of your filing status after the divorce is finalized. It is not uncommon for couples to reach property settlements before they have to enter the Judgment of Divorce with the Court. Meaning, by delaying entry of the Judgment of Divorce, they can control what status they select for filing taxes. The implications of that decision can be significant. For example, perhaps one spouse is receiving spousal support, and the other is paying support. Maybe one spouse is unemployed and earned no income for the year the couple is getting divorced. It is very likely that if they delay entry of the Judgment of Divorce to after the first of the new tax year, as a family, the tax liability will be far less because they can file Married Filing Jointly. By filing together, you both claim your children jointly as dependents and benefit from the associated tax credits.