The Five Biggest Financial Mistakes Divorcing Couples Make and How to Avoid Them

Financial Mistakes Divorce

1. Home

Leaving the marital residence prior to or during the divorce does not constitute a legal abandonment of your property interest in the home, however, you must ensure that all financial obligations associated with maintaining the property, namely, mortgage, taxes and insurance are fulfilled. Similarly, when deciding to retain the marital home consequent to a divorce, you should make a well informed decision based on the realities of your budget.

The home where both spouses live prior to a divorce is often referred to as the Marital Residence. It’s often a very emotional decision whether to keep the family home, especially when children are involved. Like all property acquired during the marriage, both parties have an interest in the real estate, regardless of how the property was acquired or who is (or is not) on the title. Leaving the marital residence prior to or during the divorce does not constitute a legal abandonment of the property interest in the home. Couples often separate geographically during a divorce; however, the real estate investment remains a joint legal obligation as well as an asset. By continuing to pay the mortgage (or a share of it pursuant to your agreement with your spouse), ensures that this investment is protected and the departing spouse remains an “interested” party. During the dissolution process your attorney mediator will guide you through the correct and proper ways to sever the two legal relationships associated with the real-estate asset, specifically the Title and Debt. For some spouses, while it would be nice to remain where you’re comfortable and avoid the hassles of moving, staying in the marital home might not be the best financial decision. No matter how attached we are to our current house, it is very important to have a realistic sense of one’s budget and affordability. A home, after all, is where you will be most comfortable emotionally and financially.

2. Retirement Assets

Some spouses incorrectly believe that they are not entitled to receive a share of the benefit if a retirement asset such as a defined contribution plan or a defined benefit is not in their name.

Defined contribution plans (401-(k), 403 (b)) and defined benefit plans (such as pensions) are considered marital assets and are subject to a division in a dissolution of marriage, regardless of whose name the asset is in at the time of dissolution. The retirement asset can be considered a marital asset by the Court and a portion or the entire benefit can be assigned to the other spouse. The assignment is done via a Qualified Domestic Relations Orders ("QDRO's") and are typically ordered by the court in connection with the final decree of dissolution. A Qualified Domestic Relations Order (QDRO) is a legal document that reflects how you and your spouse have decided to divide a defined contribution plan (eg., 401(k), 403(b), and 457 plans) or a pension plan. A QDRO also orders the plan administrator to pay the non-employee spouse his or her agreed-upon or court-ordered share. The plan administrator cannot make such payments without a valid QDRO in place. Even if you're dealing with a pension that may not be payable for several years, it’s crucial that you get the QDRO in place as part of your divorce or you may lose important pension rights. Transfers made by way of QDRO incident to a divorce are free of taxes or penalties unless the spouse receives the benefit and decides to liquidate the asset. Unvested Pensions are subject to a division in a divorce.

3. Unvested Pensions and Stocks

Some divorcing spouses are under the incorrect assumption that if a Pension for example is not vested, or Stock Awards are not fully vested at the time of dissolution, there is $0 value, and hence they are not entitled to a share of the pension or distribution of the unvested portion.

Unvested stocks are marital assets and can be assigned to the other spouse in a dissolution. The same applies to unvested retirement assets such as unvested pensions. In Bender v. Bender, 258 Conn. 141 (2001), the Supreme Court ruled that unvested pensions are considered marital property and can be subject to division. A pension valuation may be in order and spouses should carefully consider the value of such pension and vesting dates. A skilled attorney mediator or a Pension Attorney can help guide the spouses to an equitable distribution. As a reminder, the court looks at multiple factors and all the facts and circumstances when deciding whether an award be shared with a spouse. Similarly, one may want to read Lopiano v. Lopiano, 247 Conn. 356 (1998).

4. SS Benefits

"If my spouse collects Social Security benefits based on my income, my benefits will be reduced." This statement is not correct.

There is no impact on the benefits of the spouse against whose account the divorced spouse collects benefits. You can collect social security based upon your divorced spouse's income if (1) you were married for at least 10 years; (2) you have been divorced for two years; and (3) your divorced spouse is eligible to receive benefits. The two-year waiting period does not apply if the divorced spouse was receiving benefits prior to the date of divorce. The right to spousal benefits is lost if you remarry. For up-to-date rules and information visit http://www.ssa.gov/

5. Failing to secure spousal support (alimony) and child support payments with insurance

Your ability to collect alimony and child support is only as good as your spouse’s ability to pay. Many things can happen in the future, loss of jobs, sickness, relocations, etc. If the focus is only on the immediate task of splitting assets and getting alimony and child support, without understanding how things might look in 5, 10 or 20 years spouses can be faced with financial turmoil later on. You can request that your spouse obtain disability and or life insurance policies (or modify existing policies) to ensure child support and alimony payments will continue in the event of your spouse’s disability or death. Be sure to review the policies to make sure your spouse has made the proper designation(s). Spouses can give one another authorization to obtain confirmation of continuity of life insurance or disability coverage beyond divorce. Understand that these policies won’t help you in the event of your spouse’s voluntary decision to stop paying. To enforce your rights in this situation, you will need to go back to court and ask for an Order that your spouse make the appropriate payments.