The Cost of Divorce and the Financial Risks Involved
One of the greatest misunderstandings about divorce is the concept that all will be over quickly
and that the two parties can get on with their lives as if it never happened.
Unfortunately, divorce can take longer and cost more money than imaginable. The
average divorce process requires one to two years and varies in cost from
several hundred to several thousand dollars.
Other financial issues can include a new rental or mortgage payment for a
separated spouse, as well as new alimony and/or child support payments to be
made for both the short and long-term. In general, it is best to accept the
changes that are occurring and be prepared for money to be in short supply.
Another misconception is the fact that, in concert with the marriage
dissolution, each party receives half of what was shared. Unfortunately, it is
not as simple as that. In addition to actual costs involved with a divorce,
there are future considerations. For example, spouses do not necessarily earn
the same amount of money or possess the same potential to earn money in the
future. Also, many couples are extended financially beyond their combined
means. Oftentimes, the financial structure of a given household is particularly
frail and both parties can be swept away by a powerful event such as divorce.
The costs involved in a divorce may require a change or reduction in the
quality of lifestyle. For one, attorney fees and court costs will become an
everyday part of life as might those of other divorce-related professionals and
will now cut into previously disposable income.
Recognizing the Risks
There are potential financial risks as well. For example, if a present or
former spouse in defaults on a loan, commits fraud, files bankruptcy, becomes
disabled or even dies. It's important to analyze the particulars of your case
so that all financial connections are thoroughly dismantled and potential risks
for the future minimized.
A Glance at Tax Implications
Perhaps the greatest risk involves tax implications of the financial
transactions about to be undertaken in conjunction with the divorce. On the
surface, the transfer or sale of property might seem to be simple enough but in
the eyes of the Internal Revenue Service, these actions may be considered a
"taxable event". In short, never discount potential tax liabilities
for any and all transactions. Generally speaking, the transfer of real estate
in concert with divorce is nontaxable, however, any property acquired as part
of a settlement will be held accountable in the future. For example, you would be
held accountable for ALL GAIN (i.e., profit) on a property or asset sold from
the time it was purchased JOINTLY, not from the time it was received as a
result of settlement. Also, decisions with respect to how to file tax returns
can be of great significance. How will the return monies or added liabilities
as dictated by the IRS be divided? Perhaps the best way to protect yourself is
to consult with a tax accountant or related professional who can best advise
with respect to implications involving federal tax return filing, as well as
property and asset division and the resulting tax liabilities incurable.
A Glance at Property Distribution
When reaching conclusions with respect to property and assets to be divided,
generally the experts agree with the old adage that goes "take the money
and run". For example, let's say that John and Suzie are going through a
divorce. John has offered Suzie two options. She can have a BMW worth $50,000
or a mutual fund worth the same amount. She also has the choice between a
secured note promising $1000 dollars a month for the next ten years or a
payment of $120,000 at time of settlement. The two concepts that should help
Suzie make a decision are the time value of money and inflation. Suzie ought to
take the mutual fund because it can be converted to cash, whereas the car will
depreciate in value and might not command the same resale price as the
converted mutual fund. She also ought to opt for the lump sum payment for two
specific reasons. One would be inflation; even with an inflation rate that is
at its minimum, the value of the money received in the future does not have the
buying power as it would today. There is also the risk that John could either
default, or worse, die and she would never receive those monies. It is for
these reasons that it is accepted that it is better to accept cash or liquid
assets now, as opposed to property or the promise of future payments.
Understanding Your Options
It is very important to analyze all aspects of any potential monetary settlement,
both present and future, before reaching major economic decisions with
respect to the final settlement. For example, accepting property without
accounting for future maintenance and personal lifestyle conditions could
bestow an enormous and potentially unmanageable obligation to be reckoned with
in the future. This would be just another reason it is potentially beneficially
to seek the advice of financial and tax professionals.