Splitting up with your ex is always a very emotional time, it’s traumatic even. Most going through the process are not thinking rationally or through business-like optics. Rather they are in a highly charged emotional state suffering loss, confusion and enormous change. Money mistakes are often made during this delicate time. Most often, with regard to financial issues during divorce, it is wise to heed the following four considerations. 1. Don’t hold onto the house as your sole and separate property unless you plan to live in it for many years to come. When you take the house as your sole and separate property, you give up the two-person exemption from capital gains taxes, which is $500,000, leaving you with the single-person exemption of $250,000. That means you will be hit with much higher capital gains taxes if you keep the house for only a short period of time. Oftentimes, the best approach is to sell the house and keep the proceeds using the $500,000 capital gains exemption. When you finally decide on where you want to live — when you decide to buy another home — you won’t be stuck with a old tax basis and won’t be stuck with excessive capital gains taxes when you eventually sell. 2. Don’t keep all of the retirement accounts, whereas your spouse gets the cash. If, and when, you take the retirement accounts, you are taking them in pre-tax format. That means that once you start to withdraw funds from those retirement accounts (401(k)s and IRAs), you will be taxed. Additionally, there may be penalties or taxes associated with changing the investment mix or for early withdrawals. If you take the “cash,” there are no taxes, no penalties, and you are free to reinvest the cash in whatever investment you choose. If you cannot convince your spouse to take the retirement accounts either, then you are both going to have to take half of each. 3. When dividing the stock account, make sure you divide each stock holding precisely in half. You probably can’t predict which of the stocks in your investment portfolio are going to do well, and which are going to do poorly; neither can your divorce attorney. It is even doubtful that your investment advisor can do so accurately. The safest way to ensure that you don’t get stuck with all the “bad” stocks is to make sure that each holding is equally divided between you and your soon-to-be-ex-spouse. 4. Watch carefully the division between spousal support and child support. Spousal support is taxable to you; child support is not. For the payor of spousal support, it is tax deductible for him or her. Many times, the payor tries to “skew” the division of support towards spousal support, so he or she can take a bigger deduction. They may even say “I’ve got the higher tax rate, so it’s better for me to take more of a deduction.” But that doesn’t change the fact that you will be paying more in taxes, and keeping less in your pocket. If he or she wants to “skew” the division of spousal and child support, insist that he or she also “gross up” the spousal support, so you are left with the same amount you would have received after you pay the higher taxes.
What you most want is to be mindful that the divorce process precludes many ex’s from making sound and practical decisions. When it comes to money and investment issues, think wisely. Don’t let your emotions cause you to make foolish decisions.