The Cost of Divorce and the Financial Risks

Emotionally speaking, divorce is often a painful process. Whereas you once thought you had a love to last a lifetime, you now realize this is no longer the case. Added to these struggles are the fiscal aspects involved with the legal dissolution of a marriage. These aspects are multiple, sometimes complex, and have a variety of lasting consequences for both parties involved.

The Cost of Divorce

One of the greatest misunderstandings about divorce is the seemingly universal 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 anticipated.  There are many financial and custody issues that add months, if not years, to the time a divorce takes to resolve. The fact is, the average divorce process requires one to two years and costs several thousand to tens of thousands of dollars. Utah has attempted to decrease the time a divorce takes by shortening the time required for initial disclosures and discovery. However, this does not really shorten a divorce that has highly contested matters, as a party may seek and is generally granted extensions for this discovery period. Further, the use of professionals, such as custody evaluators and financial valuators, will also increase the time and cost of a divorce.

Other financial ramifications involved could 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 that change is on the horizon and act accordingly. In other words, be prepared for money to suddenly be in short supply.

Another misconception is that, in concert with the marriage dissolution, each party receives half of what was shared. Unfortunately, it is not as simple as that. Not only are there actual costs involved with a divorce, but down the road there are financial considerations, as spouses do not necessarily earn the same amount of money or possess the same potential to earn money in the future. Also, in many cases, couples are extended financially beyond their combined means, let alone singularly. 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.

There are very real factors to keep in mind after the decision to divorce has been reached. The costs involved often 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, which will cut into previously disposable income.

Recognizing the Risk

There are potential financial risks, both present and future. For example, if a present or former spouse defaults on a loan, commits fraud, files bankruptcy, becomes disabled or even dies. Clearly, it is important to analyze the particulars of your case so that all financial connections are thoroughly dismantled and potential risks for the future are minimized.

A Glance at Tax Implications

There are tax implications for 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 non-taxable, 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, there are two important concepts which must be kept in mind. For example, let’s say that John and Suzie are going through a divorce. John has offered Suzie two main 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 $1,000 dollars a month for the next ten years or a payment of $120,000 at time of settlement. These two concepts, which should dominate Suzie’s decision, would be that of the time value of money and inflation. Suzie ought to take the mutual fund because, even though it is not cash, it could be converted to such readily whereas the car is bound to, over time, 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. That, and there is always 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 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 beneficial to seek the advice of financial and tax professionals.