When you're married, you and your spouse share nearly all of your personal assets. When you separate, the assets have to be divided, and that's a complex process full of potential pitfalls. Here are the five biggest mistakes we see people make during the asset division portion of a divorce.
Not accounting for your post-divorce liquidity needs
This is the most overarching issue we see with couples who are getting divorced. They fail to fully account for just how much more expensive it is to live separate lives. Especially if you've been married for a long time, you're used to pooling income and expenses. Post-divorce, you have to pay for everything yourself. That means you need money you can easily access, not just your half of the assets in whatever form they're in.
It takes time to figure out exactly what your post-divorce life will look like. That's why it's important to plan ahead. That's also why you need some cash on hand to cover any unexpected expenses during your transition. Make sure you get a reasonable cash cushion out of your asset division if at all possible.
Failure to account for tax implications
Just because two assets have the same nominal value doesn't mean they're worth the same once they're transferred or liquidated. Different assets are taxed differently. That can result in an inequitable split if one spouse ends up with more tax liabilities than the other.
For instance, you'd generally rather be awarded $10,000 in a savings account than $10,000 in stocks, because if you sell those stocks, they'll be taxed as a capital gain and you'll lose some of that value. When we negotiate asset division, we account for the actual take-home value of each asset, after taxes, in order to make sure the division is fair.
Withdrawing money from your retirement accounts
This is really a subcategory of the tax implications pitfall we just mentioned. It is worth breaking out separately because of the specific rules that apply to retirement accounts, however.
If you have a 401(k) or similar employer-provided retirement account, you may be tempted to just withdraw money from it and give it to your spouse. This a very bad idea because you'll be subject to a 20 percent tax withholding and, if you're under the age of 59 1/2, a 10 percent early withdrawal penalty.
Instead, you need to work with an experienced attorney to create a qualified domestic relations order (QDRO), distinct from your divorce decree, that spells out what needs to be done with your retirement accounts. You need a separate QDRO for each account that needs to be divided.
Not accounting for all the implications of selling the house
In general, there are three things that can be done with your home when you get divorced:
- One spouse "buys out" the other spouse's equity in the home and assumes full ownership.
- One spouse maintains occupancy of the home for a specified period of time (for instance, until the youngest child turns 18) while the other maintains shared ownership.
- The house is sold and the proceeds are divided between the spouses.
Which one of these options you should choose depends on the amount of mortgage debt and equity tied to the home, your overall financial situation, and the needs of your children and family as you move forward into separate lives. The key is to consult an attorney to go over your options and the implications of each course of action. For instance, for tax purposes, it is generally better to sell the house while you can still take advantage of the higher tax exclusion for married couples.
Not taking the long view
It's easy, and completely understandable, to be consumed by short-term thinking during a divorce. You're trying to get out of a bad situation and take it one day at a time. Still, the decisions you make during your divorce can have huge implications for your quality of life years down the road. They can also impact the legacy you leave for your family. You need to think long-term, because there are many decisions that you can't just figure out later (at least not without taking significant financial penalties for changing your mind).
That's where talking to an experienced attorney can make a meaningful difference. We've helped thousands of people work through complex asset division situations. We can answer your questions and guide your decision-making during this important transition. Contact Courtney Clark Law P.C. today for a free consultation.