Common Mistakes

Common financial pitfalls in divorce settlements that a CFDA can assist a client and attorney with include:

Believing the myth: A 50/50 split of property is the same as a fair division of property: Each spouse getting the same dollar amount of dissimilar assets is rarely an equitable settlement. What was paid for the house, the investments, or the business and its improvements (basis) affects the tax impact of the asset if it is sold. If a certain asset generates income, the income on this asset may be taxed differently than income or gains on another asset of equal value. The timing of the asset sale or future receipt of income will also affect the present value of the transaction (the value in today's dollars). During a settlement, it is important to compare apples-to-apples. Without knowing the basis of each asset and its tax impact, an apples-to-apples comparison is not possible, so net dollars received could be less than anticipated.

Not insuring alimony and/or child support: A clients ability to collect alimony and child support after the divorce is only as good as the ex-spouses ability to pay. If the unexpected happens (death or disability), there are several methods of insuring alimony and child support, but these aspects must be explored and addressed BEFORE the unexpected occurs.

Not taking into account all of the retirement plan considerations: Retirement plans, whether they are pension plans offering a monthly benefit, or defined contribution plans such as 401(k)s or 403(b)s, must be valued and evaluated under the plans vesting and eligibility rules. Each plan can have both federal and employer rules governing its division and distribution options. In addition, many plans have very specific guidelines regarding what language will be accepted in the Qualified Domestic Relations Order (QDRO). It is important to obtain this information and explore its ramifications before the settlement is finalized.

Believing another myth: Spending retirement assets before age 59 1/2 will always result in a 10% IRS penalty. There are specific IRS rules that allow the withdrawal of certain monies coming from a qualified retirement plan to the non-employee spouse, without incurring the 10% penalty, even if this person is under the age of 59 1/2. However, it is critical to understand the rules and follow them exactly.

Deciding financial issues one at a time instead of understanding how they affect each other: By looking at each asset or source of income separately, the interaction of taxes, capital gains, investment losses, timing issues, inflation, and other aspects are missed. A truly equitable settlement can only be achieved by looking at a comprehensive picture of a clients finances and then determining suitable courses of action.  

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