Marriage breakups are rarely easy and once the decisions surrounding child custody and access has been agreed upon, focus turns to the financial issues of asset splitting, debt ownership and family maintenance. In such a highly charged environment, emotions tend to run high which is why having a Financial Planner involved before final agreement, can prove invaluable, either as a neutral party to the breakup process, or as an adviser to one side. In many cases, either party may be unaware of the true extent of the expenses incurred, the loans agreed or the assets held. From our experience, here’s a quick checklist of what to watch out for:
Don’t underestimate household expenses. Leaving aside divorce proceedings which are stressful in their own right, most people usually misjudge what they spend. They either underestimate the true level of what they spend on items that they know about or they overlook annual or less frequent items. All divorce cases require both parties to submit detailed lists of expenses. If you are the one who is now only dealing with some expenses for the first time following an interim breakup you might need to double check what you are likely to spend in the immediate future. At the same time you will need to possibly rein in your expectations on future lifestyle especially where the same income, post divorce, must now maintain two households.
Not securing spousal/child support with insurance or other means. Divorcing spouses often assume that once a judgment or agreement has been made for spousal or child support, that such payments are guaranteed for at least the minimum term, if not for life. In some situations these payments may either be reduced or cease entirely as in situations that might arise on death, disability, or unemployment. If you are the recipient of such payments it is vital to ensure that you have arranged life assurance, disability insurance or specified illness on your ex-spouse prior to the divorce being finalised.
Disregarding tax consequences. An often overlooked matter is that of taxation on spousal maintenance which is generally subject to income taxes – generally child support payments are not considered income. Don’t get caught at tax time with a big tax bill when you find out you owe taxes. Likewise it is important that any asset transfers between spouses occur before the divorce is finalised otherwise they will be subject to capital acquisitions tax in the hands of the recipient.
Emotional attachment to assets. While the parent with the main residential responsibility for the children may wish to stay in the original family home, sometimes financial circumstances might work against it. With the possibility of either two family mortgages or a new rental agreement for the non remaining spouse there may be limited resources available to cover all the expenses of mortgage/rent, taxes, insurance, repairs, and maintenance. However unpalatable it might be, in many cases it makes more sense to sell the primary residence and downsize to either two smaller dwellings or move to an area that is less expensive to buy a home in.
Not securing affordable health insurance prior to divorce. With the ever increasing cost of medical care, it is vital that this type of cover is not overlooked. While health insurers are used to providing continuity cover on separating or divorcing couples it is imperative that both parties fully understand the level of cover which they had prior to the breakup as well as any possible changes that might now be needed as part of a potential cost cutting process. Unless you work with the health insurer from the start of the breakup, it is possible that you might find yourself off cover and then subject to the completion of a new application which will take into account recent medical issues. In the worst case scenario, future cover might not be possible if you have spent some time without any continuity cover. As such it is important to research coverage prior to finalising a divorce so that ongoing adequate coverage is in place.
Don’t forget pensions from previous employments. While a lot of attention may focus on current pension values that have grown under, usually, self owned businesses a blindspot quite often occurs with regard to previous employments where even the other spouse may have genuinely overlooked their existence. Depending on the amount of time in the previous employment or the quality of the pension funding, sometimes such paid up pensions or deferred benefits might give rise to a tidy sum which can then also be taken into the final assessment.
Get advice from an experienced financial planner. There are subtleties in all financial products and it is best to get advice from someone who has experience in a broad range of both the type of products and the product providers. That way, it is less likely that something important might be overlooked in finalising the divorce settlement, especially if it might affect future values, after tax payments and personal protection.
I would stress that all of these items do not form an exhaustive list of financial mistakes in divorce but they do represent the more frequent issues we come across. It is good to remember that financial decisions made during a divorce can rarely be reversed and even then only under unusual circumstances following extensive and expensive legal proceedings. So if you find yourself in such circumstances make sure that you are also talking to a financial planner with good experience in the area of divorce. The time spent with such an individual will most often be well worth it for your financial future.