Love's Calculator
Your wedding day math was simple: 1 + 1 = 2. But divorce math is trickier, especially when emotions divide your common sense. The following financial mistakes are the ones to look out for and get local legal advice on.
Miscalculating Living Costs
Many people struggle to get a clear picture of their living expenses after a divorce, and this can cause some serious money troubles. It's important to look at all the costs you'll need to cover, like rent and insurance, since these might rise once you're alone.
Miscalculating Living Costs (Cont.)
What you can do is gather information from bank statements, credit card statements, and previous bills to give you a real image of your spending habits. This data will keep you aware and help you avoid overlooking any recurring expenses.
Skipping Adequate Budget Planning
Surely, a well-structured budget is essential for managing your new financial life. Without a clear budget, you may find yourself overspending or unprepared for unexpected costs. So, here's how you may want to prepare such a budget.
Skipping Adequate Budget Planning (Cont.)
What you need to do first is evaluate your current financial status. This includes income sources and any debts. After that, list down all your monthly expenses, such as utilities, groceries, personal care, etc., and categorize them into fixed and variable expenses. Then, just adjust and monitor regularly.
Overlooking Undisclosed Assets
Some spouses intentionally hide assets to avoid sharing them. This can include failing to disclose bank accounts, investments, or even jewelry. They might set up trusts or "gift" money to close ones with the understanding that these funds will be returned after the divorce is finalized.
Overlooking Undisclosed Assets (Cont.)
During the divorce discovery process, you can request detailed financial disclosures from your partner, like tax returns, bank statements, and investment records. Remember that hiding assets is contempt of court and can bring sanctions against the offending one.
Disregarding Tax Consequences
If you ignore the tax ramifications of divorce, it could show you unforeseen expenses and lost savings opportunities. So think wisely. Your filing status for tax purposes is critical. If your divorce is fixed before December 31, you cannot file jointly for that tax year.
Disregarding Tax Consequences (Cont.)
This could then affect your tax liability. When couples are getting a divorce, moving assets between each other usually doesn't lead to any immediate tax issues. However, transfers made within one year after the divorce or as part of a divorce agreement can be executed without tax implications.
Underestimating Home Ownership Burdens
The most critical factor here becomes whether you can afford the home on a single income or not. Make sure you can handle your monthly mortgage payments on your own, without depending on spousal or child support, since those might not always be reliable.
Underestimating Home Ownership Burdens (Cont.)
Secondly, owning the family home may affect your long-term financial health. Suppose you buy out your partner's share of the home; you will need sufficient funds or financing options to do so. This could, again, involve taking on additional debt or refinancing.
Ignoring Child Support Implications
You should know that it is legally required of both parents to provide for their children, regardless of custody agreements. Child support is essentially determined by the non-custodial parent's income and the child's needs, and it is usually ordered by the court.
Ignoring Child Support Implications (Cont.)
Failing to adhere to these child support obligations might, unfortunately, result in legal consequences, which include wage garnishment, loss of licenses, or even jail time for non-payment. Child support amounts are often decided based on parents' incomes, the number of children, etc.
Bypassing Essential Professional Guidance
Believe you know it all? No, you don't. There is absolutely no harm in opting for some professional advice. After all, divorce laws vary by state and can be intricate. Secondly, a financial advisor or a divorce financial analyst can help you understand your current financial status.
Making Unsustainable Commitments
This isn't as chill as it sounds. Sometimes, promises made during divorce talks can actually be seen as contracts. If one person doesn't follow through on their part, they might end up facing legal trouble, known as breach of contract for breaking that agreement.
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Hiring A Vindictive Lawyer For Revenge
Aggressive attorneys frequently use strategies that lengthen court cases and increase legal costs. They might quarrel over every little thing, which could lead to a lot of billable hours and rapidly increase expenses without necessarily strengthening your case.
Neglecting Estate Planning Updates
Let's look at the importance of updating your estate plan. Divorce fundamentally alters family relationships, so remember to remove your ex-spouse as an executor or beneficiary. Also, appoint new beneficiaries, such as children or other relatives.
Neglecting Estate Planning Updates (Cont.)
Another thing that can be done is to establish guardianship arrangements for minor children if applicable. Many assets, like life insurance policies and retirement accounts, pass directly to denoted beneficiaries. So, see that all beneficiary designations reflect your current wishes.
Failing To Recognize HMRC
Failing to recognize HM Revenue and Customs (HMRC) as a common adversary during divorce proceedings is one major financial pitfall. Divorce is inclusive of the division of marital assets, which can trigger various tax consequences. For instance, Capital Gains Tax (CGT).
Failing To Recognize HMRC (Cont.)
Transfers of assets between spouses during divorce typically incur no Capital Gains Tax. However, the no-gain/no-loss treatment is time-sensitive; it lasts for three years after separation or until the decree is absolute. After that, transfers may incur CGT based on market value.
Refusing To Consider Mediation
Mediation is less expensive compared to traditional litigation. By working together to achieve an agreement, couples can save on legal charges and court fees. Mediation also gives faster resolutions compared to court proceedings, which can take months.
Refusing To Consider Mediation (Cont.)
You get to have control over outcomes. In mediation, both parties have a say in the final agreement. This approach allows couples to come up with final solutions that work best for their distinct circumstances. Also, such sessions are private and not public records.
Letting Emotions Drive Asset Decisions
Being emotionally attached to personal possessions may affect judgment and make it challenging for such individuals to perceive the wider picture. This is because parties tend to get absorbed in arguments about certain sentimental goods in the house.
Letting Emotions Drive Asset Decisions (Cont.)
Instead of actually concentrating on an equitable distribution of assets overall, this attachment may result in spending more on legal fees than the asset is worth. Feelings of resentment will arise if one party believes they are receiving less than their fair share.
Forgetting Retirement Fund Division
It is said that retirement accounts, including 401(k)s and IRAs, are supposed to be among a couple's most valued possessions. If these are not taken into consideration, there may be an unfair property division that puts one spouse at a financial disadvantage.
Forgetting Retirement Fund Division (Cont.)
To divide retirement accounts like 401(k)s and pensions, a QDRO is necessary. This legal order permits the distribution of retirement plan benefits without incurring penalties. Without a properly executed QDRO, the division may not be enforceable.
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