The Financial Consequences of Divorce

But taking an all-or-none approach could be costly if you bet wrong.

Rarely looked back on with fond memories, the battling and legal costs of divorce bring anger and pain.  Almost as rare is a full discussion about the financial consequences of divorce before the final decree.

Many financial issues arise in divorce proceedings.  They include:  tax consequences, insurance maintenance requirements, splitting up pensions and IRAs, dealing with family business issues and the use or sale of the family home.  Many people are so worn down by the time a settlement is near, that many compromises are made – some that may last forever.

One example is exchanging one asset for another.  Let’s say that you want the family business and he wants the home.  The appraised values may be similar, so the exchange appears to be equitable.  But  taking an all-or-none approach could be costly if you bet wrong.

A better approach is not to get emotionally attached to any particular asset and take a close look at both short- and long-term financial goals.  If your long-term goal is to have a home with no mortgage, then  receiving the home in your settlement may be helpful.  But think about whether you can afford the home and the consequences it brings.  Crunching some numbers to assess the impact of keeping or selling the home should be evaluated before signing off on the agreement, not three years later when you think of selling.

Another issue is the maintenance of life insurance 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 the premium has been paid.  In addition to keeping the policy alive, insurance policies need to be evaluated every five years or so to see if they are still on track to deliver what was promised.  If it is permanent insurance, beneficiaries may want the right to examine the policy from time to time to see if it is performing as  intended  If it is not, the beneficiary 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.  Ask attorneys how they handle the financial consequences of divorce and then seek a second opinion from someone who is a financial professional with experience in assisting with divorces.

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John P. Napolitano
U.S. Wealth Management
uswealthcompanies.com
Phone: (781) 849-9200
 
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