With this issue in mind, we asked The Experts: What's the biggest financial mistake divorcing couples make?
This discussion relates to the latest Wealth Management Report and formed the basis of a discussion on The Experts blog in April 2014.
Don't Let a Divorce Leave You Illiquid
TED JENKIN: Divorce can often bring about tumultuous times for a family. Sometimes they can go very smooth, and others can literally be "The War of the Roses." Either way, couples often make financial mistakes that can lead to problems down the road. The No. 1 mistake that I have seen among divorcing couples is their lack of consideration around liquidity of assets.It's pretty common after a separation that one spouse will end up with the primary residence and, in turn, the other spouse may wind up with a commensurate amount of assets between brokerage accounts, retirement accounts and savings accounts. While the math may show a true 50/50 split of the overall net worth of the couple, the reality is that one of the spouses will be stuck with a paper asset that could be tough to dispose of if cash flow becomes an issue.
This can also occur when one spouse is the owner of a closely held business as well. It can be very difficult to value the overall business, but this can also leave one spouse with an asset that may have little to no market to convert to cash while the other spouse gets liquid with the remainder of the couple's estate.
Upon a divorce, the spouse that gets stuck with the primary residence (often the wife), may not consider what will happen when child support and/or alimony runs out down the road, and there isn't enough monthly cash flow to potentially pay for the mortgage. This can leave that spouse in a difficult financial position and actually put them in a fire-sale position due to lack of liquidity.
When children are involved with a divorcing couple, considering selling a primary residence can be an extremely onerous task because the couple doesn't want to see the lives of children uprooted from friends, school, etc. The couple should consider both the short- and long-term ramifications of splitting up the assets including overall tax implications. The key mistake to avoid is having one spouse be illiquid.
Ted Jenkin (@tedjenkin) is the co-CEO and founder of oXYGen Financial, a financial advisory firm focused on the X & Y generations. He also blogs at yoursmartmoneymoves.com.
Why Speed Is Crucial in a Divorce
CHARLES ROTBLUT: What's the biggest financial mistake divorcing couples make? Not settling as quickly as is reasonably possible. I say this from having personally worked on divorce cases.My first job in finance was with a firm specializing in the valuation of closely held businesses. Since Texas is a community-property state, we were hired to give an expert assessment of what a spouse's ownership interest in a business was worth. (Under community-property laws, the assets are owned equally by the couple.) There were a few cases we saw drag on and on because one or both spouses were more concerned with fighting on principle and inflicting financial pain on the other person than simply moving on. All this served to do was to drive up the legal costs of the divorce.
I understand emotions are very strong and that one spouse may have acted in a very bad way toward the other. Yet emotions and finance don't mix well together. Though it can be very tough to do so, one of the smartest financial moves a person can make in a divorce is to reach as amicable a settlement as possible and move on. The legal expenses will be considerably lower and the process of healing, from an emotional standpoint, will start sooner.
Charles Rotblut (@charlesrotblut) is a vice president with the American Association of Individual Investors.
Two Ways Women Often Get Hurt in a Divorce
MANISHA THAKOR: The biggest financial mistake I see divorcing women make is holding on to illiquid assets. (Men make plenty of mistakes too; I'm going to speak to us ladies in my answer, since my wealth-management practice is focused on empowering women.)These illiquid assets tend to bubble up in one of two situations. The first is around the family home. Very, very often I see women want to keep the home--either so as not to disrupt the lives of children or for sentimental reasons. Alas, homes can be money pits at times. Without adequate thought being put into how much annual ongoing maintenance (mortgage payments, property tax, insurance, upkeep, etc.) will run, it's very easy to underestimate how difficult a burden the house will be to run on a post-divorce income.
The second area I see illiquid assets bubble up is around the area of splitting investments. In households where there has been enough wealth that venture capital, hedge funds and private equity has been part of the household portfolio, I have seen women get tripped up. With these asset classes, it is particularly important to make sure you have a solid understanding of both valuation and liquidity. If you receive a chunk of assets in a settlement that is locked up for a months—or years—you may find yourself in a very different financial situation than the "raw numbers" indicate. As such, particularly in high-net worth households, it's important to put your settlement under a financial planning microscope--bring in your wealth manager or CPA to discuss.
P.S. Don't forget to change your beneficiaries on investment accounts and to update your estate-planning documents post-divorce as well. That's another common mistake for both genders!
Manisha Thakor (@ManishaThakor) is founder and chief executive of Santa Fe, N.M.-based MoneyZen Wealth Management LLC.
Don't Use Money as a Weapon in Divorce
ELEANOR BLAYNEY : Put strong emotions in the same cauldron as financial decisions, and you have a recipe for disaster. Unfortunately, the two ingredients are in abundance when it comes to divorce.When spouses see money as the way to exact emotional revenge for the failures of the marriage, the costs of divorce can be devastating. Finding ways to separate the fury from the finances—perhaps by agreeing to work with a mediator, seeking counseling and/or learning about the "collaborative" divorce process before resorting to the big legal guns—can protect both partners' financial futures.
One of the biggest divorce mistakes is generally made by women, particularly when they take primary custody of children. Often their first priority is to keep the house, believing that it is important to maintain lifestyle continuity for their children. Unfortunately, this can leave them with a lopsided division of assets—illiquid and debt-encumbered real estate in their corner, with more of the marketable securities going to the husband.
It's important for both partners to prepare a very detailed budget and balance sheet reflecting their lives post-divorce. It's not enough to "equalize" the wealth or income between the two: Other considerations such as liquidity, risk and deferred tax liabilities that may accompany some assets but not others must also be considered in the division.
Financial advisers should be part of the team of experts helping spouses uncouple without total financial derailment. These experts will maintain a long-term view during a difficult time when it's hard for a divorcing partner to even think about tomorrow. Most important of all, they can help keep their client from the financial fiasco of "cutting off their nose to spite their ex's face."
Eleanor Blayney (@EleanorBlayney) is consumer advocate of the Certified Financial Planner Board of Standards.
Why I Don't Like Mediators in a Divorce
GEORGE PAPADOPOULOS: Many mistakes usually occur during a divorce. It is an emotional process, and these emotions can affect the decision making. Both parties usually do want to separate in an orderly fashion, especially when children are involved. Sometimes they mistakenly think that getting a mediator involved will help them achieve the noble goal of ending the marriage in the best way possible. That is not true, as the goal of the mediator is just to achieve a settlement.Each party must get a qualified divorce attorney to be on their side and look out for their own best interests. Ideally, this attorney should specialize in "collaborative law," which has worked well with a few of my clients. Adding a qualified CPA experienced in divorces, especially when there are complicated finances to sort through, is also highly recommended.
Finally, if you are thinking of getting married, please get a prenup done!
George Papadopoulos is a fee-only wealth manager in Novi, Mich., serving affluent individuals and families. You can follow him at twitter (@feeonlyplanner), connect with him at Google+ or visit his firm's website.
Three Steps To Stay Clear-Headed in a Divorce
MICHELLE PERRY HIGGINS: Divorce is emotional, and it's best not to make any financial decisions in the heat of the moment. The decisions you make about the division of your assets may affect your financial security for the rest of your life.When couples are facing the reality that their marriage is over and emotions are running high, deciding who will get the IRA, the house or the set of china should probably wait until emotions have cooled. We want to avoid making decisions on the basis of sentiments like "He can have everything, I just want this over" or "She can have the house, since the divorce was my fault."
Here are three simple steps to help you keep a clear head about your finances during a divorce:
1. Do not rush through the divorce proceedings and/or feel pressure to make financial decisions or sign agreements. Give yourself time to move past the initial shock that your marriage is over. This may take you weeks or months, and that is OK.
2. Organize your financial, estate and personal affairs and put all the information in one location. If your spouse handled the financial affairs during the marriage, this may be a challenge for you. Don't be afraid, move forward and consider it a step toward empowering yourself financially.
3. Once you are emotionally stable and have organized your binder, meet with your financial planner and divorce attorney to discuss your options.
Michelle Perry Higgins (@RetirementMPH) is a financial planner and principal at California Financial Advisors.
No comments:
Post a Comment