In this final article of a three-part series, I address the last three (#7-9) most common financial mistakes made during the divorce process. Increased awareness of these issues helps divorcing individuals avoid mistakes that could be avoided with the right information.
Mistake #7: No Post-Divorce Planning
One of the most common mistakes is the failure to budget based on one’s new lifestyle. This happens most often when one spouse keeps the home for the sake of the children or an emotional attachment. The expense of maintaining the home and the lack of liquidity often results in a rapid depletion of cash, leaving no choice but to sell the home earlier than expected. This scenario can be avoided if you look at your expenses versus liquid assets and income. This analysis should be completed prior to a settlement. If it is determined that you will be unable to maintain your lifestyle with the proposed offer, you may want to re-negotiate.
Mistake #8: Not Maintaining Control over Insurance Policies
Most divorce agreements require that the individual paying alimony, child support, college costs etc. obtain a new life policy or maintain a current one with adequate coverage. If you are the beneficiary of this policy, it is critical that you are listed as either the owner or the irrevocable beneficiary. If you are not, the ex-spouse who took out the policy may stop making payments or change the beneficiary. As the owner or irrevocable beneficiary, you would be notified of any issues with the policy, such as non-payment of the premium, and could take action and prevent the policy from lapsing or being cancelled.
Mistake #9: Failure to Identify All Assets
Do you completely trust your soon-to-be ex-spouse? In many cases, there is often suspicion that money is hiding somewhere. Usually this fear is unfounded, but in order to achieve peace of mind that all assets have been disclosed, there are various places to look for any hidden accounts.
Tax returns are one of the best places to start. Most people are uneasy about misleading the IRS for fear of penalties, fines and even prison. Go back at least 5 years to look for any inconsistencies in income, the presence of trusts, partnerships or real estate holdings. Look closely at interest and dividend income. If it disappears in one year, where did the asset producing the income go? If your spouse is a business owner, corporate or partnership returns may show a change in salary, charging personal expenses to the company, or excessive retained earnings. Another common trick is to put a “friend” on the payroll, who agrees to give back the money paid to him after the divorce. A forensic tax professional is of tremendous help in this area.
Checking account statements and cancelled checks for a purchase you never knew about, such as an investment property, can make a substantial difference in total assets to be divided.
Savings accounts may reveal unusual deposits or withdrawals in amount or pattern that could point to a hidden asset such as a brokerage account.
Brokerage statements are valuable in tracking the purchase and sale of securities. If securities are sold and the proceeds are not accounted for, you can be sure that the assets are out there somewhere.
Expense accounts can be abused when corporations give employees a great deal of leeway in their expense account reporting. Cross checking between expense account disbursements and savings/checking account deposits may indicate a pattern of abuse if the deposits exceed legitimate business expenditures.
Children’s bank accounts may be opened as a custodial account for the intent of hiding assets as well. In some of these cases, interest is not reported as income on tax returns, and no return is filed for the children.
In Summary
A Certified Divorce Financial AnalystTM (CDFA) has extensive training in the financial issues of divorce. He or she will analyze the long-term financial impact of a proposed settlement and help you determine if it is feasible. Remember that a proposed settlement might look fair initially, but without proper analysis and forward looking projections, mistakes could be made with dire financial consequences down the road. The bottom line is don’t agree to a settlement until you understand its long-term impact on your financial future!
Bill Donaldson is an investment advisor representative with Conscious Capital Wealth Management, LLC (CCWM) and has over 17 years of experience as a financial consultant. CCWM employs a holistic model that aligns one’s unique financial goals with their dreams, visions and overall well-being. A successful life is one of balance. We recognize that money alone does not create peace of mind.
Investment advisory services offered through Conscious Capital Wealth Management, LLC, a Registered Investment Advisor. For locations and to learn more visit or call us at 860-659-8299 www.consciouscapitalwm.com.