Going through a divorce is hard enough without needlessly making things more difficult. Yet many people parting ways with their spouses do things – or fail to do things – that inevitably cause them major headaches. Sometimes, mistakes are made out of emotion. Sadness, grief, or anger can prompt an individual to take actions he or she is likely to regret later. Lack of attention to details can prove equally damaging.
In this article, we’ll explore four common mistakes many divorcing couples make while legally going their separate ways. Our goal is to help you to identify them so you’ll avoid making the same errors. If you find that you’ve already made some of them, now is the time to correct them.
#1 – Failing To Consider Taxes
Taxes can take a much bigger bite out of a divorcing couple’s pocketbook than the divorce itself. From child support and spousal support payments to the capital gains realized on the sale of the family home, tax consequences can quickly send a person’s finances into a tailspin.
Consider the family home. In many cases, the home is a marital asset that needs to be divided between the divorcing parties. When neither spouse has the available funds to buy out the other person – or the willingness to do so – the property must be sold. If it is sold for a higher price than it was purchased for, the sale results in a capital gain.
Capital gains are taxable, which can result in a significant tax bill for both spouses. Years ago, the federal government passed legislation giving an exclusion of $250,000 to each spouse on the capital gains realized from the sale of a primary residence. If the sale of the home generates a capital gain that exceeds the exclusion, taxes will need to be paid. Failing to take this into account can cause a financial nightmare.
#2 – Letting Anger Hamper Communication
It’s natural to feel angry during the divorce process. Both parties may feel as if they have been betrayed or abandoned by the other person. If infidelity played a role, there are likely to be feelings of hurt and grief. Moreover, both parties will be forced to endure a number of changes down the road, many of which are difficult to plan for.
Anger is a natural component of splitting up. But it is important to take steps to ensure it does not become an obstacle that impedes communication. If the divorcing spouses are unable to talk to one another, they will need to rely on their attorneys to pass along messages and act as “go-betweens.” This needlessly increases the cost of their divorce.
#3 – Neglecting To Separate Jointly-Held Accounts
Most husbands and wives share at least one – and sometimes several – finance-related accounts. For example, they might have a checking account on which both of their names are listed. Both parties can sign checks and withdraw funds. They might also have credit card accounts held in both names. Both spouses can use the cards to charge purchases.
When it becomes clear that divorce is the inevitable outcome, the divorcing couple should separate their jointly-held accounts. In the case of checking and savings accounts, this is often as simple as removing one person from the accounts and splitting the balances between both parties. By contrast, credit card companies often require existing joint accounts to be closed and new individual accounts to be opened.
If both spouses’ names remain on jointly-held accounts, one party can drain the other party’s assets or ruin his or her credit – intentionally or otherwise.
#4 – Forgetting To Change Beneficiaries
It is common for spouses to list each other, along with their children, as beneficiaries on IRAs, pensions, life insurance policies, and various other retirement accounts. When couples divorce, they should review the beneficiary information on such accounts, and determine whether changes are necessary. If no changes are made, the people listed as beneficiaries will receive the proceeds.
Many couples neglect to change the beneficiary details on their retirement and insurance accounts when seeking a divorce. Oftentimes, years pass before the oversight is noticed. On occasions where one spouse dies, his or her surviving family may be left without funds.
Going through divorce is an emotionally-exhausting experience. Feelings of guilt, shame, anger, and regret can easily cloud one’s judgment and make rational decision-making difficult. Having said that, it is critical to avoid making mistakes that cause future problems, especially with regard to taxes and finances. Avoiding such mistakes will make it easier to get back on your feet and say goodbye to your spouse.