Don't agree in haste
It’s no secret that many couples end up airing their grievances in court. About 50 percent of our married population ends up in divorce. Rarely looked back on with fond memories, the battling and legal costs bring anguish. Almost as rare is a financial planning discussion about the consequences of divorce before the final decree is agreed to by all parties.
The financial issues taking front and center in most divorce proceedings are tax consequences, insurance maintenance requirements, health insurance now and in the future, splitting up pensions and IRAs, dealing with family business issues, the use or sale of the family home … among many more potential issues. Many are so worn down by the time a settlement is near that there are many compromises made; some may last forever.
An example may be exchanging one asset for another. Let’s say that you want the family business and he wants the home. Today there may be appraised values that are similar, so the exchange appears to be equitable.
But the future has many unknowns and taking an all or none approach could be costly if you bet wrong. For example, the sale of the home could exclude between $250,000 and $500,000 from taxation whereas the business gets no exemption and pays tax on the entire gain.
A better approach – do not get emotionally attached to any particular asset and examine both your short and long term financial needs and goals. If your long term goal is to have a home with no mortgage, then perhaps receiving the home in your settlement may be ideal. Can you afford this home? What consequences does it bring to your current cash flow and your future needs for income from the sale proceeds of an unspecified amount? Crunching some numbers to assess the effect of keeping or selling the home, including any potential tax consequences, should be evaluated before you sign the agreement – not three years later when you are thinking of selling.
Another soft issue is the maintenance of life insurance for either spouse following the divorce. This is almost always negotiated into a divorce agreement, yet I have rarely seen any mechanism required that would tell the beneficiary whether or not the premium has been paid. In addition to keeping the policy alive, insurance policies should be evaluated every 5 years or so to verify they’re still on track to deliver what was promised. If it’s permanent insurance, beneficiaries may like the right to examine the policy from time to time to ensure it is still performing as originally illustrated. If it is not performing, the beneficiary under a decree of divorce should have the power to make changes to require greater premium payments or allow a switch to a new policy with better performance.
There are books written about the financial consequence of divorce. We can’t begin to cover it all now, so remember this: ask your attorney how they handle the financial consequences of your divorce and then hire someone who is a financial professional with experience in assisting with divorces. The worst case is that you’ll confirm that you are being well served.
This information is not intended to be a substitute for individualized legal advice. John Napolitano, US Financial Advisors, US Wealth Management and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.