Avoiding Bad Financial Mistakes During Divorce

In these economic times, many marriages slide into trouble over money. But when a marriage dissolves, any hint of financial trouble before the divorce has the potential to slide the split couple into disaster.

Even when money is tight and parties are distracted by the pain of a breakup, financial and tax planning need to be front-and-center in divorce planning. Here are critical steps that need to be taken by divorcing individuals:

Find Experienced Divorce Advisers

A good divorce attorney isn’t necessarily a shark. The choice of attorneys — for men as well as women — should fit the challenges being faced on both sides. Good divorce attorneys definitely cost money, but they pay for themselves, in addition to CPAs and financial planners familiar with the divorce process.

Among such major issues as division of marital property, exclusion of non-marital property, and various ways to structure ongoing financial contributions from one party to another, all the advisers in the process should understand Qualified Domestic Relations Orders — known as QDROs (pronounced “Quad-Rows”) to assure that pension assets will be shared fairly.

Most of the legal cost in a divorce is based on the presumption that assets are being hidden. If divorcing couples were to consult a tax adviser prior and draft a financial statement agreeable to both parties, legal fees could be dramatically reduced.

Know the Tax Ramifications of Alimony

It is possible to deduct some alimony payments, but you need to get the advice of a qualified accountant first. There are several requirements that need to be made, including:

• The payment must be made as part of a legally binding written agreement.

• That agreement cannot state that the payment is not alimony.

• Payment must be made to or on behalf of your ex-spouse unless there are payments diverted to others directed in writing by your ex.

• Payments must be made in cash or cash equivalents.

• Alimony cannot be treated as child support.

• Your obligation to pay ceases if your ex-spouse dies.

Value the Assets Before You Agree to Take Them

If you’re getting the house, does it have a 20-year-old furnace and a roof that’s about to cave in? A thorough inspection by a licensed inspector could help. If you’re getting the family car, is it past warranty with a funny sound coming from under the hood?

If your spouse runs a lucrative business that you’ve worked for or invested in, how do you know you’re getting the right share? Hiring a valuation expert may be necessary. Divorcing spouses need to make sure they have enough money to finance repairs and replacement of assets that they’ll be paying for as a single person.

Think of the Kids

In many states, college-age children have the right to demand financial support or college funding at the state level so their education isn’t interrupted. While both parents should advocate in their kids’ best interest, this isn’t always the case. Be aware of your state’s divorce laws with respect to secondary child support.

File Taxes Wisely

There are always special situations in a divorce that will determine whether a couple will need to file jointly or separately during the last year that the marriage exists. It’s best for both sides to get some assistance filing their taxes during their divorce year and the year afterward.

Get Help Documenting Child Support

Child support guidelines vary from state to state. If your state has a special program that allows a spouse to pay into a special account so child support is recorded every month, consider it. It provides a paper trail and enforcement system for assuring that kids get the money they need. Federal law requires all child support payments be made by wage assignment and health insurance by Health Insurance Orders. A majority of child support orders go unpaid. Make sure you know the laws to force compliance.

Once the Divorce is Over, Watch the Spending

Budgeting early in the process may cut down on the risk of overspending, which is a temptation after a painful event. Both necessary and unnecessary spending after a divorce is a key reason the newly single tip into bankruptcy. Make sure it doesn’t happen to you.