Getting a divorce is stressful, emotional, and can take an enormous toll on your energy level. The reason is because the experience is filled with uncertainty. Will the settlement you negotiate with your spouse allow you to continue your current lifestyle? If not, what changes will you need to make? Will you need to find another place to live? Will you receive – or have to pay – spousal support? If you will be seeking custody of your children, how much in child support payments can you expect to receive? How much will you need to pay in child support if your spouse wins custody?
These are but a few of the many questions that are likely going through your head. Although you won’t know the answers to the majority of them upfront, you can prepare yourself by focusing on the key money issues. The more you learn now, the better prepared you’ll be when the time comes to negotiate the settlement.
#1 – Not All Investments Are Equal
Dividing investments is a task filled with hidden traps for those who lack savvy about return rates and their corresponding risk levels. Too often, spouses look only at the current value of their investments and neglect to consider whether that value is stable.
For example, consider a money market fund. The risk of losing your money is minimal. You can count on the fund’s value increasing gradually with time. Now consider the stock of a small gold mining company. The risk is substantial. You could lose a majority of your investment if the venture proves to be a bust. Or, if the company hits a large gold deposit, your position may end up being worth several times its current value.
When dividing investments between you and your spouse, consider their respective levels of volatility. Don’t rely only on their current valuations.
#2 – Take A Realistic Look At The Family Home
One of the most contentious issues in a divorce involves what to do with the family home. It’s easy to become emotional about it since the home holds so many memories for the couple. That makes it tempting to hold onto it.
The problem is, maintaining a home requires substantial funds, time, and effort. The spouse who continues living in it will need to obtain a new mortgage that is under his or her name only. Even if the person qualifies, there is no guarantee that he or she will be able to make the monthly payments.
In addition, houses require regular maintenance and upkeep. The lawns need to be mowed. The interior needs to cleaned. Utilities need to be paid and miscellaneous repairs will need to be addressed. Property taxes and homeowner association fees add to the burden.
Keeping the family home can be a viable option. But the spouse who stays in it must be able to afford the mortgage and other expenses, and willing to handle the accompanying work.
#3 – Splitting Assets Evenly Is Sometimes Unfair
Initially, it might seem as if splitting everything down the middle is the best way to divide the marital assets. But depending on how a couple splits their assets, it can turn out badly for one of the spouses.
For example, suppose you and your spouse have a stock portfolio worth $200,000 and cash worth $200,000. At first, having one party take the stocks while the other party takes the cash might seem to be an equitable split. The problem is, the split neglects taxes. When stocks in the portfolio are sold, a taxable event is triggered. Depending on how long they were held, their cost basis, and your personal income tax rate, you may have to pay up to 40% in capital gains taxes.
Bottom line: an even split is not always equitable.
#4 – Watch For Tax Consequences
As we implied above, taxes can create a major headache for couples seeking a divorce. Take the time to learn how various assets and components of your settlement agreement are taxed. For example, learn about the capital gain exclusion clause applies when you sell your family home. Learn how selling other assets, such as investments, can trigger a taxable event. Also, keep in mind that payments for spousal support are taxed as income while payments for child support are not taxable.
Taxes are a complex matter. For this reason, it is recommended that you speak with an accountant who has experience in handling taxes for couples getting a divorce.
Dealing with financial issues while seeking a divorce is unpleasant. You’re already stressed, tired, and emotionally exhausted. But taking steps to educate yourself will help you to make better decisions when the time comes to negotiate your settlement.