Family Law
Thirteen Critical Mistakes Made During Divorce
When you're going through the pain and emotional battles of a divorce, it's easy to overlook financial issues that can hurt you long after any hard feelings have healed. Here are 13 critical financial mistakes that you can't afford during a breakup:
1. Using your lawyer as a financial planner, therapist or messenger. One client the firm represented incurred an excess of $25,000 in legal fees in just two months. Attorneys generally charge $200 to $300 per hour ($450 for partners in well-known New York City and Los Angeles matrimonial firms) and are not skilled therapists or certified financial planners. If you need emotional support for career counseling or financial analysis, utilize qualified professionals and save big money in fees.
2. Not hiring a lawyer. When the divorce matter entails real property, trust, child support or financial matters that are complex, not hiring a competent attorney can cost you more money to fix problems that were created by doing the divorcee pro se than if you had hired an attorney to do legal work to begin with.
3. Hiring a combative lawyer as punishment. This is a bad idea for two reasons. First, except in extremely egregious cases, divorce settlements are determined by equitable-distribution laws, and courts will not punish your ex-spouse financially for being a bad person. Second, a combative attorney will increase the cost of litigation. High divorce costs mean less money left over for living. Treat divorce as a business arrangement, and get your revenge by living well post-divorce.
A competent aggressive attorney that does not engage in legal work that is unnecessary or done just to increase the cost of litigation for the opposing party will perform better on your case. The attorneys at James, Vernon & Weeks have high ethical values and aggressively represent their clients, but they do it in a professional manner.
4. Hiring a lawyer without getting referrals. The best method of finding a competent attorney is by asking others you know. Just hiring a lawyer based upon what they charge, what firm they are with or age or gender of the attorney are not the best indicators of a competent and good attorney. Instead, ask the attorney about their experience, how long they have practiced in family law, if they have litigated issues to through the appellate courts, if they have litigated issues such as yours before and how they handled those situations. But most importantly ask those that you know for referrals. The attorneys at James, Vernon & Weeks will provide referrals from clients upon request.
5. Bringing an emotional attachment to assets. The marital residence, the pension you earned, a painting purchased during your marriage -- these assets bring an emotionally charged debate to divorce negotiations. The fact is many single people can't afford the family home on their own. A house is an asset that has a low return on investment (real estate appreciates at the rate of 2% or 3% annually) and is a major cash expense (mortgage payments, taxes, repairs, heat and electricity). Fighting over the furniture or appliances will cost you more than if you replaced the asset. Fighting over the family dog or other pet will also increase your litigation fees exponentially. Be open to creative methods of dividing assets that you may retain a personal attachment to. I.e. splitting custody of the family dog between houses.
6. Not considering mediation. If assets are moderate, joint custody is workable and your spouse is agreeable to a fair settlement, mediation will save thousands of dollars in legal fees and emotional aggravation, and provide more flexibility than an adversarial legal process. It may also assist the relationship of the parties after the divorce is entered. Mediation won't work if one spouse is hiding assets or income, or is unwilling to consider the needs of the other.
7. Becoming a financial victim. If you suspect your spouse is planning a divorce, now's the time to make copies of all important financial papers, from property and investment records to bank statements, credit card bills and tax returns. Worried that your estranged spouse may liquidate or re-title marital assets? Notify the holder in writing and get a court restraining order or injunction. Watch out for cash in joint checking or brokerage accounts, and protect the cash value of your life insurance.
Invariably, clients underestimate or omit expenses when they produce their initial budget for temporary orders, and then later on in the divorce process they complain about being unable to pay bills. Use a financial professional to help you produce an accurate and complete budget.
One indisputable fact of divorce is that two households cost more to operate than one but income is unchanged. Many people start their post-divorce lives not fully understanding that their settlement must last a significant amount of time -- perhaps the rest of their lives. Financial planning can help people transition from married to single life by prioritizing financial goals, developing realistic expectations and producing written plans for allocation of financial resources.
8. Forgetting to update estate documents. After heavily contested divorces, many people forget to change the beneficiaries on their life insurance policies, individual retirement accounts and wills. The result is that ex-spouses end up inheriting estates the decedent may have intended to pass along to children, a new partner or a favorite charity.
9. Failing to recognize your enemy: the Internal Revenue Service. Work with a divorce financial planner or tax accountant to minimize the total taxes you and your ex will pay during separation and after divorce, and share the money you save. Don't forget that both parties are liable for taxes due as a result of audits on joint returns. Don't count on the innocent-spouse rule to protect you.
10. Not evaluating a divorce settlement on an after-tax basis. The bottom line is the share of marital assets you get after the tax man gets his. Say your spouse handles all the investments and offers to split them 50/50 or wants you to take the marital home and sell it. Sound fair? Look at the value of your assets relative to your spouse's on an after-tax basis and talk to your tax professional. Then decide if you like the deal.
11. Accepting a settlement that isn't as good as it seems. Both spouses and children must make compromises in their lifestyles after a divorce. A settlement that does not give one spouse enough money to live on is likely to go into default in the future. Be fair, but verify the numbers. Get payments upfront whenever possible, even if you get less in total. Secure all payments with assets and insurance.
12. Not waiting until the spouse is eligible for Social Security. If a couple is married for 10 years or more, the spouse is entitled to receive half of the spouses’ Social Security at retirement. The spouses’ Social Security payments are unaffected. It's ironic that the average length of marriage for people who get divorced is 9.6 years. Waiting just six months longer will increase retirement options for a spouse with no reduction in the other spouses’ payments.
13. Failing to adequately insure the divorce settlement. Premature death or disability of your ex-spouse can result in loss of maintenance, child support, college tuition or property settlement. Life and disability insurance can guarantee your payments and your family's security. Also, don't ignore the high cost of purchasing individual health insurance.
Parts of this article was originally reported and written by Lee Slater for divorce360.com and subsequently modified by the family law attorneys at James, Vernon & Weeks.