Divorce, like bankruptcy, used to be a “four-letter” word: uncommon, infrequent, shunned by society and a Scarlet Letter of sorts on those going through it. People avoided associating with “those” sorts of people probably for fear of “catching” something. If you watch Mad Men (on AMC) then you recall the first season when the “divorcee” lived in the neighborhood and no one wanted her around.
But like the show, society has become more open, accepting and frequent. In fact, the US divorce rate has nearly doubled since 1960, according to the National Marriage Project at the University of Virginia. And as the divorce rate has increased, so have the number of attorneys who practice in the area of family and matrimonial law. As important as their role and expertise are, some lawyers may be putting their clients at risk.
But there are things that your divorce lawyer may not tell you that may be dangerous to your fiscal health.
1.) I only handle a couple of divorce cases each year … if at all.
The reality is that most attorneys are generalists who practice in a range of areas including business, real estate, personal injury and estate planning. While not everyone may have a complicated income and asset profile, there certainly are nuances in the divorce laws that differ from state to state. And these nuances may make a big difference when it comes to finalizing a divorce settlement.
You may want to consider checking with the local Bar Association, Martindale’s lawyer rating service (www.Martindale.com) or the American Academy of Matrimonial Lawyers’ website (www.aaml.org) to find a professional who has the experience to help you with your type of case and understands how these nuances may affect you.
2.) I really don’t know much about finance.
Think of the Simon and Garfunkel tune here and replace “finance” for the word “history” in their song. The reality is that most attorneys lack the training or tools to do anything but the most basic financial analysis for your situation. Most attorneys come to the law with very little background in finance, taxes or financial planning. In law school, there are very few courses offered in these areas. Aside from those who may be focusing on estate planning, many may not even have taken a tax course in law school.
When it comes down to it, divorce is all about the money. And often couples go to divorce attorneys with complex asset situations or disparities in income. Complicated financial calculations may be needed such as figuring the long-term value of a pension or 401(k) or a business investment.
While some legal professionals may suggest that you seek help from a financial professional, many do not sometimes because they don’t think it will be helpful or because they don’t want to lose control of the client or feel that paying for such a service will mean there is less available for their fees.
The bottom line is this: Settlement mistakes can cost you thousands of dollars … in the form of unexpected taxes, future tax liabilities, assuming an asset that one party really can’t afford to maintain – like the house, or by way of a lower future standard of living in retirement. If a couple has children, then the impact of divorce on qualifying for college financial aid is important but often overlooked.
3.) Taxes are not my thing.
Let’s face it: The tax code is a horror show. It is complex and confusing. And a lot about divorce has to do with taxes. No one is expected to know all things about it. So this is another good reason that your attorney may need the assistance of another professional.
Just consider this: Property transfers for cash do not affect the basis in the property. This can have a big future impact to your heirs. If not structured properly, a property settlement could be reclassified as alimony and result in back taxes and penalties. If alimony does not end when the recipient dies, then payments will be considered a property settlement and eliminate any alimony deduction you had. Net operating losses, passive activity losses and tax carryforwards may have value and should be considered a marital asset.
4.) I’m dragging my feet.
There is often a direct correlation between hiring an attorney and having a long legal battle that racks up fees. Sure, this is certainly influenced by the emotions involved. Often it is a result of complicating factors: one spouse having higher income than another, children from other marriages, complex business interests, property in multiple states or countries.
For these situations, it is all the more important to have good financial analysis to help support the goal of an equitable settlement. But given the billing rates of attorneys, do you really want them crunching numbers for you? Or would you rather have the support of a financial professional who has the training, time and tools do this at a much lower cost and speedier turnaround?
5.) Once the case is closed, you’re on your own.
Divorce cases are very transactional. Too often, the wording included in an agreement can be vague or terms are not made to be completed prior to the final decree being issued. In this case, you may find joint credit cards still open resulting in possible future trouble. Or the life insurance that is required as part of the deal is not arranged or is actually too costly to support the agreement. Asset transfers may not be completed properly. Or, the most expensive mistake, not having he Qualified Domestic Relations Order (QDRO) reviewed and approved by a spouse’s qualified plan (i.e. 401k) administrator prior to the deal. This alone could cause all sorts of future tax liabilities or problems funding retirement.
The best person to look after you and your money is you. And the best that you can do is invest money and time up front with a financial professional to help guide you through the complex financial and tax issues and be a part of your team.
