Divorce: Weigh Short and Long-term Financial Decisions

Suzanna de Baca -- Expert Business Source, 4/25/2008 5:44:00 AM

In my financial practice, I have worked with numerous individuals who are going through divorces. The emotional turmoil and the intense amount of work involved in dividing assets often create a dynamic where people employ very skewed or irrational thinking about their money. While it is difficult to separate the psychological issues from the financial matters, an individual in the middle of a divorce can benefit by thinking about both their short term and long-term financial health and goals when negotiating the settlement.

“I just wanted out!” said one client, bemoaning the fact that she let her ex have more of the cash than she should have, simply because she didn’t want to fight. She took the house, and was crippled by the mortgage payments.

“I was sick of fighting, so I let her have the house,” said a friend, in contrast, describing how he basically handed over the deed to a property that appreciated significantly, a decision he later regretted.

There are not necessarily right and wrong financial decisions in a divorce; unfortunately, there are often hasty decisions that individuals later lament. Money is a complicated topic that is often used as a manipulative tool in divorce. In some instances, money and assets are used as controlling mechanisms; people use assets as a way to send messages to the other person that they may be unable to say directly. In other cases, people are quite able to say exactly what they feel and also use the money to reinforce hurt, betrayal, greed, or control.

A good divorce lawyer can help guide a client to an extent, but if an individual is eager to reach a conclusion, they can easily dismiss the wisdom of an experienced attorney. This is a big mistake. Your attorney has probably seen people leave assets on the table time and time again, simply because they lack perspective about the consequences of their decisions. They are there to act in your best interest, so listen to their advice.

If you are going through a divorce, here are a few items to consider when dividing assets:

Your house may be an illiquid asset. Your home may be valuable in the long run, but it you have a mortgage, it may be a cash drain. Unless you want to sell your home and recoup the assets, you may actually be ending up with a liability. Consider your cash flow, property taxes, and ability to keep up with maintenance and repairs before insisting on the house.

Retirement accounts are not immediately accessible. If you are dividing 401(k)s, IRAs or other retirement accounts, that can be great for the long term. It can be a smart move taking these tax deferred accounts.  However, in the short-term, you can’t access these accounts without penalty unless you’re over 59 ½. Again, if you need cash, retirement accounts won’t help.

Is it income you need, or hard assets? You can have a healthy net worth, but if those assets don’t generate cash and you don’t have sufficient income to maintain your lifestyle, those assets are not really doing you any good in the short run. Weigh your need for cash flow with your desire for assets that may appreciate in the future.

Who are your beneficiaries? Be sure to take the time to change your beneficiary forms on life insurance, retirement accounts or other assets, so that if something happens to you those assets go to the individual of your choice. Generally, in a divorce, that person is not your ex.

Are you making a statement, or will an item really benefit you? Sometimes individuals in a divorce dig in stubbornly, insisting on certain items or pieces of property that they know have sentimental value to the other person.  Vacation homes, collectables, cars, sports equipment, or jewelry are common examples. Try to separate yourself from those feelings, weighing each asset in terms of what it might mean to you financially in the future. Does it use up cash? Generate cash? Might it appreciate? Are there tax consequences? Do you really want your ex’s golf clubs? Do you really want your ex-wife’s mink coat?

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.