When clients are going through a divorce, I find that oftentimes they are focused on getting through it and getting it over with. In other words, the urgency to get past what feels like a crisis becomes the biggest priority. While I certainly understand that mindset, I urge clients to look at the big picture; to look down the road, and try not to be so focused on today and on the short-term. Why? Because there are things often overlooked in divorce agreements as a result of “just wanting to get through the divorce.”
It’s important to make sure that your divorce agreement is well thought out and thorough, and that all the “what ifs?” are addressed in the settlement. A well thought out divorce agreement will help you avoid post-divorce litigation, which can end up costing more money, taking a lot of time, and causing significant stress when you might be trying to move on and enjoy your new life.
To talk about things often overlooked in divorce agreements, I interviewed Nancy Hetrick on the Divorce Dialogues podcast. Nancy is a Certified Divorce Financial Analyst (CDFA), who assists divorcing clients with crafting creative out-of-court settlement agreements.
Here are Four Things Often Overlooked in Divorce Agreements:
1. Tax Implications aren’t considered.
A division of assets that seems clear-cut on paper may present a different reality when taxes come into play. “Unfortunately, we often find that even though a couple may have gotten what they think is an equal 50-50 split, after taxes, it may turn out that one person’s 50 percent is a little more equal than the other person’s 50 percent,” says Hetrick.
For example, a couple has a cabin worth $100,000 and $100,000 worth of savings. They may decide that it would be fair if one person keeps the property and the other keeps the cash savings. However, if the spouse who keeps the cabin chooses to sell it later, they may have to pay significant capital gains taxes, particularly if the cabin was initially purchased for a sum much lower than $100,000. In the end, the cabin-owning spouse will wind up with significantly less wealth than the one who receives the cash.
This example is just one of the ways taxes can render a seemingly equitable division of assets inequitable. Be sure to have a tax advisor knowledgeable in divorce matters review your proposed financial settlement and explain the tax consequences of each item.
2. One or both of the divorcing spouses hold on to Real Estate They Can’t Afford
For some people, the idea of selling or giving up the family home in a divorce is too painful to contemplate. You might keep the house because you want to hang on to stability, says Hetrick. However, a few years down the road, you may realize that you really can’t afford it. If this occurs, you’ll have to deal with the selling of the house and all the associated financial and emotional costs on your own.
The prospect of selling the family home may be emotional, but you need to look at the long-term consequences of your actions. Is it realistic that you’ll be able to afford the mortgage payments and property taxes? If you unexpectedly need to repair the roof or the boiler breaks down, will you be able to shoulder those costs on your own? If the house is likely to create a financial and emotional crisis later on, you might fare better by considering options that involve letting the home go.
3. One or both of the divorcing spouses fail to Receive an Independent Valuation of Marital Assets
In a famously public and ugly divorce, Jamie McCourt reached a $131 million settlement with her husband, Frank McCourt. The agreement stated that in exchange for this sum, Jamie would give up any control over the Los Angeles Dodgers, which she claimed to co-own with her former spouse. Frank sold the Dodgers for $2.15 billion two weeks later. Jamie sued Frank for $770 million, claiming he fraudulently undervalued the team in their negotiations. He denied the claim and responded that she should have gotten an independent valuation of the team. The judge agreed with him and upheld the original settlement.
If the assets at stake in a divorce are overvalued or undervalued, the divorce settlement can be wildly imbalanced. Couples must ensure that they have conducted independent research and have a professional value of the assets to avoid unhappy financial surprises later.
4. The couple doesn’t consider the opportunity for Creative Solutions
Many couples are surprised by the kind of creative solutions that are possible in divorce settlements. For example, let’s say a parent wants to keep the children in the family home until they graduate from high school but can’t afford the mortgage on a single income. The couple might craft a divorce settlement that agrees to keep the children in the home until they graduate, then sell.
Hetrick notes that consulting a CDFA when negotiating a divorce settlement might cost upfront but can save far more money in the long run. CDFAs specialize in coming up with creative solutions that bring genuinely equitable results. “We try to get as creative as we can to maximize everything that you’ve accumulated during your marriage, so you both get more of your own money at the end of the day,” she says.
In closing, things often overlooked in divorce agreements can result in: an unhappy outcome for one or both divorcing spouses, post-divorce litigation or mediation, or an unhealthy relationship between the divorced couple because of resentment and a feeling of unfairness.
The key in not overlooking important aspects of a divorce agreement is educating and empowering yourself financially, and hiring a divorce attorney you trust, and who takes the time to consider the many, many financial aspects that go into making a divorce agreement fair and equitable. I am happy to offer you a consultation if you’d like to talk.
Katherine E. Miller is a Divorce Attorney, who is also a certified mediator and a trained collaborative divorce professional. In practice for over 30 years and personally divorced, Miller is the founder of the Miller Law Group, all women’s boutique law firm with seven divorce professionals. Miller is also the Director at the Center for Understanding in Conflict, the organization that teaches mediation, collaborative law and other conflict resolution skills, and she hosts the podcast and radio show, “Divorce Dialogues.” Additionally, Miller is the former president of the New York Association of Collaborative Professionals. She is a graduate of Vassar College and Fordham University school of Law. Learn more: Miller-law.com.
Like this article? Check out, “How to Deal with Anger and Rage During Divorce”
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