One of the largest causes of anxiety in a divorce is the financial negotiation to come to a settlement. Splitting the assets is also one of the aspects of your divorce that has the most pitfalls and ramifications, resulting in potentially severe long-term impact. Here is a comprehensive (but not all-inclusive list) of financial common pitfalls and mistakes:
Non-Retirement accounts
- Not having up to date balances on accounts and agreeing to amounts.
- Not having a complete list of all assets and liabilities (banks accounts, investment accounts ESPPs, ISOs, RSUs, employee benefits etc.
- Not understanding how to calculate RSUs and other assets that vest as an asset vs income item.
- Not understanding the cost basis of an investment or property.
- Not valuing the after-tax value of a rental or transferring a rental property correctly.
Retirement accounts
- Not having up to date balances on accounts and agreeing to amounts.
- Not having a complete list of all retirement plans (IRAs, defined contribution plans, defined benefit plans etc.).
- Not understanding the value of a defined benefit plan.
- Assigning an equal value to retirement assets as non-retirement assets.
- Not calculating a pre- and post-tax equivalent of retirement assets when offsetting non-retirement assets.
- Not understanding how to avoid the 10% for pre-59 ½ distributions when your client needs cash from a retirement account.
- Understanding how to divide an IRA (you do not use a QDRO).
- Not knowing how to complete a QDRO and when to file the QDRO.
- Separating traditional and Roth retirement accounts on the marital balance sheet (do not lump them all together).
Marital Home
- Becoming emotionally attached to the marital home.
- Keeping the marital home when you cannot afford it, often resulting in becoming a financial slave to the home.
- Not understanding the tax implications of keeping the home or selling the home together.
- Not understanding the potential capital gain exclusions, tax impact, and costs of selling a home.
- What alternative housing is available that may suit your needs better or meet your needs and be less costly.
- What will it cost to refinance if you buy out your spouse and what would be the new mortgage payment?
Support payments and Reimbursements for Expenses
- Not understanding how maintenance (alimony) and child support works or the duration of these payments.
- Planning for changes in child support as children age out.
- Evaluating whether a buyout of support is feasible or a better approach.
- Not protecting support payments with life insurance.
- Not understanding who should own the life insurance policy.
- Not having details about reconciling expenses and reimbursing them in a timely manner.
Miscellaneous Items
- Not identifying your priorities and values to build a strategy off of.
- Not compiling a complete marital balance sheet.
- Not understanding the full financial picture and focusing on aspects of the finances.
- This includes believing a 50/50 division of assets is equitable.
- Not looking at the long-term horizon and “just wanting to get through the divorce”.
- Not taking into account or understanding the tax impact of certain transactions.
- Ignoring discussions around debt or understanding how it is divided.
Hirsch Serman, MBA, CPA, CDFA is a financial coach and tax professional. Hirsch is the founder of Lifecycle Financial, a company that helps those going through Divorce and other life cycle changes to navigate the financial pitfalls of a new life dynamic. The company was founded through personal experiences in divorce and watching the changes in an aging parent. He has worked in finance for over 25 years (including financial planning and tax) and has taught on the university level as well as conducted seminars for high school youth, corporations, and non-profits on personal finances and taxes. Hirsch is a member of the American Institute of CPAs, The Institute of Divorce Financial Analysts, Member of the Divorced Girl Smiling advisory board,, The Amicable Divorce Network, The Divorce Support Network, and The Domestic Violence Coalition.
Get to know Hirsch through his radio show The Financial Wellness Hour or reading his blogs and articles.
INC., US News & World, The Memphis Business Journal, Medium, Authority Magazine, DivorceMoms.com, The Amicable Divorce network, and many other media outlets have all covered his work in Divorce and Hirsch was awarded the prestigious Comcast Rise award and has been selected to be a New Orleans Entrepreneur Week Fellow. Hirsch has a passion to serve others and has worked with numerous non-profit boards including First Year Forward, The United Way, and Texas College. Please reach out with any comments to hirsch@lifecycle.financial.