What are the most common financial mistakes make in divorce negotiations? Here are five of them:
Mistake #1 – Assuming a 50-50 Property Division Is a Given
Many who divorce assume that everything should be equally divided. Doing so can be a big mistake. When a court divides property and debt, the law requires the court to split it in a “just and equitable” manner, which usually means courts disproportionately divide property and debt in favor of the “economically disadvantaged spouse.” For the 98% of divorces for which the court’s role is basically ratifying the couple’s agreements, equally dividing property can result in a suboptimal financial outcome, because that shortcut gets in the way of making sound financial decisions.
It’s usually advantageous to think of property division in divorce as a financial planning exercise for the future. The financial side of divorce is about allocating resources to meet certain goals. Examples of those goals include creating two financially-stable post-divorce households, achieving financial independence and autonomy, planning for the care of children, honoring major financial decisions made during the marriage, and recognizing each spouse’s circumstances. There can be other goals, and goals can be inconsistent. A task in divorce is to identify and prioritize the goals.
Addressing property division as part of financial planning for the future guided by goals can help identify opportunities to allocate resources so they can go the farthest, including options that otherwise might be overlooked. Doing so does mean there will be some extra work up front—such as clearly understanding and tallying expected future expenses, income, obligations, and resources. The pay-off for this work is often significant. And, instead of just hoping for the best, you will have a tangible plan in which you can be confident.
Mistake #2 – Believing there is a Formula for Spousal Maintenance
There exists no formula in Washington for spousal maintenance. Not uncommonly, I hear people assert the myth that there is 1 year of maintenance for every x years of marriage. Fill in the blank for x—I have heard everything from 1 to 10 years, depending on the desired outcome. (I have even heard this type of hogwash from some divorce lawyers, who should know better.)
When a court decides maintenance, the duration of the marriage is just one consideration that is often overshadowed by other factors. Washington law requires courts to consider all the equities when deciding spousal maintenance. If a judge decided how long spousal maintenance would last based only on the length of the marriage, its decision would violate the law and almost certainly be overturned on appeal.
For the 98% who wisely reach their own agreements instead of asking the court to decide spousal maintenance, it’s best to decide the amount and duration as part of the financial planning for divorce.
Mistake #3 – Overlooking Valuable Assets
It is easy to overlook valuable property when getting divorced. Not only can this mistake result in an unexpected windfall for one spouse, but Washington law considers overlooked property to be “undivided” – which means that it is legally still co-owned by both spouses after the divorce and can be the subject of post-divorce legal proceedings. Any item with current or potential future value has to be addressed.
While the list is potentially endless, here are some types of property that are often overlooked:
- Restricted stock and stock options. Many employers (especially in the tech industry) provide employees with restricted stock, stock options (less common nowadays), and other types of compensation besides salary. These items are property—including the unvested grants and options.
- Retirement plans. All retirement must be addressed. This includes what may be small pensions from past employers or unions. Because retirement plans can be complicated, and the values listed on employer statements can be understated, it’s best to get professional advice to assist with retirement assets.
- Trusts. Whether you established a trust or are a beneficiary of one, there’s a good chance it will need to be addressed in divorce.
- Whole life insurance policies. If there is a cash surrender value, or operates as an investment, it has value.
- Businesses. Businesses will have value—which could be small or large. The value of a business is usually the sum of its assets, its liabilities, and its goodwill. This is all determinable with professional assistance.
Be sure to carefully inventory and list all possible property and debt. It’s best to consult with a qualified divorce attorney to ensure everything that needs to be included and addressed actually is.
Mistake #4 – Stressing “Community Property” and “Separate Property”
Washington is a community property state … but not so much in divorce. Unlike some other community property states, characterizing something as “community” or “separate” property does not determine how it’s treated in divorce. Washington divorce courts frequently divide separate property (or even transfer it to the other spouse), because the law requires a judge to make a “just and equitable” division above all else. Whether property is characterized as “separate” or “community” is just something that needs to be considered.
Some divorcing people engage in expensive court battles to prove that something is separate property, only to win that point but still have that property divided in the same way as community property.
Instead of making the mistake of focusing just on whether something is “community” or “separate,” consider the full picture when working on financial arrangements.
Mistake #5 – Using the Child Support Worksheet Numbers
If you have children, you’ll complete a child support worksheet as part of your divorce. Many people stop there, which is a mistake. The number is usually wrong.
The number is usually wrong because the worksheet is chock-full of invalid assumptions. Here are a few examples:
- The worksheet assumes that the cost of housing is identical in the small Eastern Washington town of Granger as it is in Seattle. The “presumed support” in the worksheet number is identical for parents in both communities, even though housing a child in Seattle is vastly more expensive.
- Baked into the worksheet are assumptions that children have no special needs, that all parents who have similar incomes spend identically on their children, that both parents can be fully employed unencumbered by childcare duties, and more. In reality, every family is unique.
These are just a few examples; the worksheets contain many other invalid assumptions that will almost always make the presumed support number incorrect.
While the worksheet has some benefit when there is no other alternative, it’s better to decide how to cover the real and significant costs of raising children after considering the resources, income and budgets for each parental household, all current and future expected child expenses, and what is necessary so both parents can successfully raise their children into healthy and productive adults.
If you live in the Seattle/King County area and would like to learn more about which divorce process option is best for you, contact Seattle divorce attorney Mark Weiss at (206) 622-6707.