Beware of Cash Traps in Divorce Settlements

Rose was sure she came out $50,000 ahead in her divorce property settlement. She got the couple's $500,000 house (with a $300,000 mortgage) and almost $100,000 in her husband's 401K money transferred to her IRA. - a total net property settlement of $300,000. Don got the rest of his 401K ($50,000) and $200,000 in the couple's brokerage account.

One year later, Don (her ex) is living well with over $18,000 a year in added cash from the liquid investments, plus gaining appreciation.

Rose has had to withdraw over $30,000 from her IRA to make the mortgage payments, and pay property taxes and insurance on the house. She will pay a 10% penalty plus income taxes on the IRA withdrawals - about $9,000, while Don pays no taxes at all on money he takes from the brokerage account.

Although desperate to sell the house, so far there have been no takers, even at a reduced price of $400,000. Even if she sells the house, instead of gaining the $200,000 equity the divorce projected, she will be lucky to get $65,000 after commissions, fees and costs, and possibly may even need to pay taxes on the "gain" she didn't actually realize.

What happened here?

Rose focused her efforts on getting her fair share of assets based on their "fair" value. Don took a little less "value," but skimmed off the cash positive and liquid assets that were also mostly free of any built-in tax liabilities

When approaching a divorce property settlement, the spouses need to understand that assets have more characteristics that effect their desirability than just the value. These include liquidity, cash generating/consuming capacity, and taxability. If not, what appears to be a fair settlement may be anything but.

The easiest way to avoid these types of problems is to insist that your attorney have a financial expert on your divorce team to protect your financial interests - much as the attorney is protecting your legal interests. That expert should not only understand valuations, but the intricacies of divorce.

Who are the financial experts?

CPA - The most common type of financial expert in divorce cases is the CPA. A Certified Public Accountant is licensed and regulated by each state. CPAs must meet significant educational requirements, pass a nationally administered test, and keep up-to-date through continuing education requirements. Most states have licensing and complaint information online for review. If you opt for a CPA, be sure they are experienced in litigation support and divorce. More info: http://www.aicpa.org/yellow/ypsboa.htm

CDFA - A Certified Divorce Financial Analyst has met the requirements of the Institute for Divorce Financial Analysts, including education and training specifically in the financial issues of divorce. Ongoing continuing education is also required. More info: https://www.institutedfa.com/

CFE - If fraud is suspected, a Certified Fraud Examiner may be helpful. These individuals have met the training and experience requirements of the Association of Certified Fraud Examiners specifically in the area of fraud investigation. Many are in law enforcement or employed by major corporations, but there are also some in private practice and available to work with attorneys in divorce actions. More info: http://www.acfe.com/

CFP - A Certified Financial Planner may be helpful if the couple has significant investable assets. CFPs have met the requirements of the Certified Financial Planner Board of Standards including training specifically in the area of financial planning. Some are also licensed to sell various financial products such as insurance and stocks. More info: http://www.cfp.net/

What next?

You have worked hard to accumulate your marital assets. Spending some money during your divorce to get a qualified financial expert on your team to protect your financial interests can pay big dividends in the future.

An appropriately selected financial expert can contribute by developing fair asset valuations, determining tax consequences, locating hidden assets, projecting future cash flow from proposed settlements, spending analyses, tracing of marital and non-marital assets, and many other areas.

Don't be trapped in the past. A divorce, although painful at the time, can be the start of building a better future for you.