3 Tricks to Watch Out for in Your Divorce Settlement

Divorce is never easy. It can be a highly charged, emotional time. Two people go from being a team to working against each other to get “what’s fair.”

The problem is that getting what’s fair isn’t always clear. It’s important to not only know what an asset is worth today, but, what it will be worth to you in the future. As each partner goes their separate way after a marriage, they will find that they have new financial goals – or even new financial problems. Getting what you need to succeed out of the marriage is top priority.

Sometimes during a split, one of the partners is much more financially savvy than the other and can truly hurt their ex when dividing the family fortune. Since most divorces are settled by negotiation between the spouses (through their lawyers, of course) don’t hesitate to call in a financial expert along the way.

Here are three, particularly underhanded tricks, that may give you insight into dividing your assets.

Mistake #1: Not understanding how to value your assets

When two people decide to call it quits on the marriage, they need to determine the best way to divide the estate. This requires three steps: determining what is a marital asset and what isn’t, valuing the marital assets, and, then determining how best to split the assets.

In a recent case I was privy to, the couple, rightly, agreed that their brokerage account was a marital asset. They then agreed that it would be, effectively “frozen” as of the date that they decided to get a divorce – this is called the Date of Separation. By frozen, they meant that there would be no withdrawals or additions and that for all future discussions the amount that was in there on the Date of Separation would be the amount split between the two. Then they began haggling, for the next few years, over what percentage should go to each partner (as well as other things, of course).

By the time the actual divorce was finalized (the Date of Divorce or Court Date) several years later, the market had had tremendous returns, but, since the two had decided to value the brokerage account at the Date of Separation, the wife was only awarded 55% of the value of the account 2 years ago. She missed out on 2 years of market growth.

This is a clear case of misunderstanding an Active vs. Passive Asset. An Active Asset is one which you must put effort forth to make it grow – possibly a business venture or an investment account that you are buying and selling from constantly. It’s appropriate to value an Active Asset at the Separation Date and then assign any growth after that date to the spouse who is “actively” growing it. A Passive Asset, on the other hand, grows (or shrinks) through outside forces – in this case the financial markets. Since neither family member was working to grow this asset, both should have shared in its appreciation, equally – meaning, it should have been valued at what it was worth on the Court Date.

Mistake #2. Not moving quickly to carry out the Court Orders

During the marriage, the investment account discussed above was in the husband’s name only, so, once the Court handed down its order, he needed to hand over 55% of the assets to his ex-wife. The week after the court date when nothing had happened, wife called husband to release the assets to her. He let her know that the brokerage company required several signed documents and sent them to her. First, he sent the wrong documents. Then, she followed-up and he sent her the right documents with the wrong numbers…This went on for months – with each new set of documents he sent her, she would have her lawyer review them (time consuming and costly) only to find there was another error.

By the time all of the documents were correct, he moved the agreed upon dollar amount to her, which don’t forget, was a percentage of the assets on the Date of Separation. Now, not only had she missed out on all of the growth in the account between the Date of Separation and Court Date, she had missed out on several months of solid appreciation after the Court Date.

Approaching a new lawyer, she confirmed that she had lost thousands of dollars of appreciation during the preceding months, but, of course, trying to go after him for it would cost thousands in lawyer fees…

Mistake #3. Not being specific enough

If the above two mistakes don’t seem bad enough, this one seems particularly malicious. The court order stated that husband was to move a certain percentage of the account to wife. The account was invested in several mutual funds and individual stocks and the court was clear that the money moved had to be the same percentage of each holding (e.g. 55% of each mutual fund/stock). Sounds very specific, right? Wrong. The husband directed his investment company to move the amount as shown in the proper percentages, but, to give the wife the oldest lots first. This effectively moved a tremendous amount of capital gains tax from him to her. Knowing that these investments would soon need to be liquidated for living expenses by the wife, he moved the most unfavorable shares to her.

The fact is that sometimes, no matter how hard you try, someone may still find a way to win the arms race that is divorce, but, protect yourself as much as you can. Find a lawyer that shares your values, spends time understanding your needs and has handled similar cases. Then, add a Financial Planner to your team who can work with your lawyer to review the asset split and help you plan for the divorce and your future.

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