Financial Risks Involved with Divorce
Key Points
  • Analyze the current and future financial risks of each element within the property settlement of a divorce.
  • The most overlooked and greatest financial risk is with the tax implications of the decisions made regarding the property settlement in a divorce.
  • Understand the financial implications of certain assets like a car, home, stocks, payment over time, and lump sum cash payouts.

There are potential financial risks, too, both present and future (if a present or former spouse defaults on a loan, commits fraud, files bankruptcy, becomes disabled or even dies). Therefore, it is important to analyze the particulars of your case so that all financial connections are thoroughly dismantled and potential risks for the future are minimized.

A Glance at Tax Implications

Perhaps the greatest risk involved is with the tax implications of the financial transactions about to be undertaken in conjunction with the divorce. On the surface, the transfer or sale of property might seem to be simple enough but in the eyes of the Internal Revenue Service, these actions may be considered a "taxable event". In short, never discount potential tax liabilities for any and all transactions. Generally speaking, the transfer of real estate in concert with divorce is non-taxable, however, any property acquired as part of a settlement will be held accountable in the future. For example, you would be held accountable for ALL GAIN (i.e., profit) on a property or asset sold from the time it was purchased JOINTLY, not from the time it was received as a result of settlement. Also, decisions with respect to how to file tax returns can be of great significance. How will the return monies or added liabilities as dictated by the IRS be divided? Perhaps the best way to protect yourself is to consult with a tax accountant or related professional who can best advise with respect to implications involving Federal Tax Return filing as well as property and asset division and the resulting tax liabilities incurable.

A Glance at Property Distribution

When reaching conclusions with respect to property and assets to be divided, generally the experts agree with respect to the old adage that goes "take the money and run". However, there are two important concepts which must be kept in mind when dealing with cash. For example, let's say that John and Suzie are going through a divorce. John has offered Suzie two main options. She can have a BMW worth $50,000 or a mutual fund worth the same amount. She also has the choice between a secured note promising $1000 dollars a month for the next ten years or a payment of $120,000 at time of settlement. These two concepts, which should dominate Suzie's decision, would be that of the time value of money and inflation. Suzie ought to take the mutual fund because, even though it is not cash, it could be converted to such readily where as the car is bound to, over time, depreciate in value and might not command the same resale price as the converted mutual fund. She also ought to opt for the lump sum payment for two specific reasons. One would be inflation; even with an inflation rate that is at its minimum, the value of the money received in the future does not have the buying power as it would today. That, and there is always the risk that John could either default, or worse, die and she would never receive those monies. It is for these reasons that it is accepted that it is better to accept cash or liquid assets now, as opposed to property or the promise of future payments.

Understanding Your Options

It is very important to analyze all aspects of any potential monetary settlement, both present and future, before reaching an major economic decisions with respect to the final settlement. For example, accepting property without accounting for future maintenance and personal lifestyle conditions could bestow an enormous and potentially unmanageable obligation to be reckoned with in the future. This would be just another reason it is potentially beneficially to seek the advice of financial and tax professionals.

Useful Online Tools

Suggested Reading
The Property Division Handbook The Property Division Handbook
This book will explain in detail the property distribution aspect of divorce and separation. It will focus on the rights each spouse has under certain laws, situations, and circumstances, and how the division of the property will be decided by the court or through negotiation.

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SPOUSES CAN DO IT -- The easiest and least expensive way for a couple to divide and distribute the marital estate is for the spouses to do it themselves. Courts approve any settlement that is fair and reasonable. When courts divide property, normally the judge grants each spouse a percentage of the total value.
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