While a divorce may leave a mental or emotional toll on both parties, it doesn’t have to hurt financially. Avoiding money mistakes can go a long way in easing the pain. From holding on to the family home to ignoring your expenses, here’s a look at five financial mistakes that should be avoided at all costs during a breakup.
1. Ignoring the tax implications of divorce
Clearly separation and divorce requires a number of emotional and practical considerations for people to deal with, and tax is unlikely to be at the top of people’s agendas. However, if it is totally
forgotten, the amount of tax payable could be higher than anticipated, on top of what might already be a costly process.
There are tax implications related to many aspects of divorce from dividing assets, selling the marital home to childcare. There are many ways to reduce or avoid a tax hit, for example, knowing when best to transfer assets – for example, it may be more tax efficient to make any transfers in the tax year of separation and not wait until after April, which could result in unnecessary tax costs.
Always consult with a financial advisor for the full tax implications of divorce.
2. Failing to evaluate the long term impact of divorce settlements
When you’re reviewing your spouse’s proposed divorce settlement, always consider the long term impact of the settlement on your finances. There are many factors to consider, including assets, income, living expenses, inflation, maintenance costs, child support, taxes, retirement plans, investments and child-related expenses such as education. There are specialised divorce computer models that produce comprehensive and realistic analyses of your post-divorce lifestyle. You should speak with a financial advisor to help you get to grips with the long term implications of a proposed financial settlement.
3. Moving out of the marital home before consulting a lawyer
Volunteering to move out of the marital home can result in negative legal consequences. By leaving of your own accord, the judge may order you to stay away until a decision has been made about the home, a process that can take many months. It may also indicate to the judge that you are the wealthier spouse and can afford to support two residencies. Down the road this may lead to the judge ordering you to pay maintenance charges.
If possible, it is best to stay in the martial home until a decision has been made in a court of law about the future of the property. Of course, the exception to the rule is if you are living with a violent or abusive partner, in which case finding a safe alternative place of residence quickly is imperative.
4. The belief that all assets are created equal
When dividing marital assets, it is important to weigh their true value. Do you choose a £30,000 car or a £30,000 mutual fund? How about a £600,000 bank account or a completely paid £600,000 home? Choose carefully because the car will depreciate in value, and taxes, maintenance and capital gains can take a chunk out of the home’s true worth. Homes are particularly difficult to value because the market can fluctuate, and they’re worth nothing if you can’t afford the payments and lose the house in foreclosure. Instead of focusing on the now, always think of the future.
What will the asset be worth? What expenses - penalties for early withdrawal, taxes, depreciation - are involved?
5. Not considering out of court settlements
If you and your spouse can work together to reach a fair settlement on most or all of the issues in your divorce - child custody, child support, maintenance costs and property division - choosing mediation or a collaborative approach to resolve your divorce case may save thousands of pounds in legal fees and emotional aggravation.
The Collaborative process involves a team of specially trained professionals working with you both. Two family lawyers, a family consultant (counsellor) and a financial advisor will support you and your family through the process in a way which promotes collaborative planning for the future. Specialist financial advice and skilled counselling/coaching support in negotiating the transition from being a couple to being co-parents for your children are invaluable benefits of this process.
This supportive process provides divorcing couples with a lot of flexibility, in terms of making their own decisions, about what works best for their family, compared with the traditional adversarial legal process, which involves a court trial where a judge makes all the decisions.
If you’re considering an alternative to a court based divorce, contact a local collaborative professional for advice and information.
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