7 Common Financial Mistakes to Avoid in Pennsylvania Divorce
1. Not Considering Alternative Dispute Resolution
Many people fail to consider alternative dispute resolution processes when they contemplate divorce. Mediation, Arbitration, and Collaborative Law are all process choices that can help alleviate the cost and stress associated with divorce and custody matters. Alternative dispute resolution processes result in a legally binding and durable resolution just as if the case were litigated. The benefits of alternative dispute resolution are many. It can be more efficient and less expensive than traditional litigation. It allows the parties to control the pace and timing of the process and will allow the parties to privately address all their issues. Because Mediation, Arbitration, and Collaborative Law are voluntary processes, each party must agree to the process.
2. Skipping the Separation Agreement
In some cases, divorcing couples decide to skip a written separation agreement (often referred to as a Marital Settlement Agreement, Property Settlement Agreement, or Postnuptial Agreement) in order to save time and cost. While this might seem like a reasonable approach, the failure to have the agreement in writing can cause many problems in the future including the purchase of real estate, the refinance of real estate, re-titling of accounts, changes to beneficiaries, and many more. Divorcing couples may believe that they are in agreement as to the items that need to be resolved as part of their divorce and as a result, they have no need for a written agreement. However, a written agreement provides certainty and clarity as to the specific terms of the agreement and can, in some instances, illuminate areas where the parties don’t really agree. The written agreement also provides a mechanism for enforcement if one of the parties fails to follow through on their obligations within the agreement.
3. Not Considering the Liquidity of Assets and Splitting 50/50
Not all assets are the same. $1 in a bank account is not the same as $1 in equity in a home. Divorcing couples need to consider their future needs when evaluating a potential settlement. Is cash needed for the purchase of a home? Are there future tax consequences associated with the assets a spouse is receiving like defined benefit plans (i.e. pensions) or defined contribution plans (i.e. 401(k) or 403(b) plans)? In addition, individuals should consider whether the asset or class of assets they are receiving in exchange for other marital assets are depreciating or appreciating assets. A car worth $30,000 today will not be worth $30,000 five years from now while a $30,000 investment account (if properly managed) is certainly likely to be worth more five years from now than today.
4. Not Understanding Tax Liabilities of Marital Property Division
As discussed above, some assets that are received in divorce will have a tax consequence associated with it. Whether ordinary income in the case of tax deferred retirement accounts or capital gains on assets, it is important to understand the future tax ramifications of the assets received in divorce. Careful planning with a tax professional and your divorce lawyer will help identify the tax issues and allow you to develop a plan to minimize them.
5. Ignoring Retirement Funds, Investments and Potential Hidden Assets
Obtaining a complete understanding of the total financial picture is critical for divorcing individuals. It can be easy to overlook items of significant value (collections, antiques, artwork, guns, and tools are a few examples). Other often overlooked assets can include the present value of defined benefit retirement plans (pensions) or the value of the survivor benefit associated with those plans. In Pennsylvania, an ownership interest in a business may have marital value that must be accounted for in divorce.
6. Not Thinking Long-term About Child Support
Divorcing parents often look to bargain away the support for their minor children in whole or in part. While this is against public policy and is unenforceable in Pennsylvania, some individuals invent creative ways to sidestep this public policy. It is important to take the long view and understand that an individual’s financial situation may be solid today (“I don’t need or want their child support money”), no one knows what the future holds and how circumstances may change. Child support in Pennsylvania is always modifiable and with good reason. Any plan to permanently eliminate or reduce the child support available should be analyzed very carefully to prevent future financial hardship for the custodial parent and the children.
7. Underestimating Your Expenses
Divorcing spouses must make every effort to understand their forward-looking expenses. This is difficult to do – especially if you were not the spouse that handled the finances during the marriage. However, this step is critical when considering settlement options. There is likely to be some degree of estimating needed when creating a future budget. Oftentimes, a divorcing individual is moving into a new home and may not have actual knowledge of utility costs, maintenance costs, and other expenses associated with their new home. It is also important to consider all monthly costs and expenses – not just the big ones. Diligently track your spending for several months to see where your money goes. This helps to identify spending habit that you might need or want to curb, but also will allow you to identify your true monthly cash flow needs.
How Colgan and Associates Can Help You
Our team of trusted Pennsylvania divorce attorneys at Colgan & Associates stand ready to assist with your marital property division, alimony and child support matters. We proudly offer free phone consultations to individuals seeking for the best resolution for their divorce, custody or support case. If you or someone you know is going through a divorce or custody case in Pennsylvania, please reach out to us today at (717) 502-5000