Many people want to negotiate their separation and divorce without using an attorney. The reasons typically revolve around saving money and/or the fear of evil attorneys creating an unnecessary fight.
I am all for people resolving their own disputes whenever possible. But, in divorce, there are traps waiting for people who want to do it themselves. Here is a list of 10 the most common traps:
1. Failing to account for capital gains taxes
A lot of people just divide up assets or debts without regard to this issue. This can provide a nasty surprise if capital gains taxes reduce the value of the assets that seemed “equal” when you agreed on them.
2. Failing to structure financial terms to avoid taxes
Giving money or assets to your ex-spouse can bring on tax liability. Withdrawing retirement funds can trigger tax liability. Divorce situations can be excluded from some kinds of taxes, but only if handled correctly.
3. Retirement account division
Dividing these accounts is complicated. There are federal, state and/or tax laws that must be satisfied to avoid bad surprises down the road. Special orders from a court may be required to divide up a retirement account. Also, planning for what happens if the owner of the retirement account dies after separation, but before the account is divided is complex, but crucial.
4. Small business and family business ownership
Small business and family owned businesses present special considerations for a divorcing family. Failing to properly address these issues can lead to future problems with ownership, liability on business debts and other issues impacting the business.
5. Planning for income changes in support obligations
I have talked to many people who tell me that they handled their own separation agreement and agreed to pay “x” dollars a month but now cannot pay it because they lost a job or took a pay cut. This is a great way to end up in court and financial trouble.
6. Agreeing to obligations that are not legally required
You may inadvertently agree to do things that no court could require.
7. Agreeing to things that are not enforceable
You may depend on your spouse’s agreement to do something only to later discover that you cannot actually require them to do it under the law of your state.
8. Failing to formalize your agreements properly
Creating a legally enforceable divorce settlement agreement in North Carolina is not as simple as a handshake or even a just a written signed agreement. If it is not done correctly, your agreements may fail.
9. Agreeing to numbers without budgeting or planning
Too many people agree to financial arrangements without having the slightest idea of how those arrangements play out long term, or sometimes even short term.
10. Failing to structure spousal support for tax purposes
There are very specific tax laws and state laws that apply to spousal support payments. Failing to structure spousal support payments appropriately can lead to surprising tax and legal ramifications years after you thought your divorce was put to bed.
If you are facing separation or divorce, then consider consulting a qualified family law attorney before you finalize an agreement. An ounce of prevention is often worth a pound of cure.
I am happy to announce that co-author Michael Kothakota and I have published our latest article on Collaborative Divorce in Resolved: Journal of Alternative Dispute Resolution.
Interdisciplinary Collaborative Divorce: A Process for Effective Dispute Resolution is intended to provide a brief but thorough explanation of the interdisciplinary collaborative divorce process for both practitioners and clients.
Each professional and prospective client must determine whether the ICD process is appropriate for their situation. But, our hope is that this article will provide an introduction to the process and help people make more informed decisions.
If you have questions about collaborative divorce after reading the article, then please do not hesitate to contact me to discuss the process and whether it may be right for your family or your practice.
Most people who get divorced do so without the benefit of a tax expert.
They get tax information and/or advice from their divorce attorney. However, as this Forbes article points out, divorce lawyers are not the best tax advisors.
In fact, most divorce lawyers go out of their way to disclaim any liability for tax advice in separation agreements and fee agreements.
So, if you are getting a divorce, and you can’t rely on a divorce attorney for expert tax advice, what do you do?
Collaborative attorneys figured this out a long time ago. In a collaborative divorce case, expert tax advice comes from the financial neutral.
The financial neutral provides unbiased neutral information and advice about tax issues that relate to divorce. That way, both parties get the same information at the same time. And, they are not getting in unnecessary conflicts due to differing tax advice from either their attorneys or their own individual tax advisors.
And here’s the best part about financial neutrals in collaborative divorces: A good piece of tax advice can save tens of thousands, if not more, for the couple. One small piece of information can have a huge impact on the financial futures of both clients.
On the other hand, the absence of that information can have a huge negative impact on both clients.
Tax issues are another big reason to take advantage of the collaborative process and the financial neutrals that help clients in the process.
As this article from Time Magazine points out, there are many tax issues involved in a divorce. Even parents who have never been married (and therefore never divorce) face tax issues related to sharing time with their child.
There are special tax treatments for alimony, post separation support, property division, dependency exemptions, child tax credits, head of household status and a myriad of other issues in family law.
While the five issues mentioned in the article about divorce and taxes are important, they are not the only issues involved.
I generally recommend that clients at least consult a CPA or other tax professional before and after their divorce to determine how the tax ramifications of the divorce may affect them.
A good family law attorney will understand most of the tax issues involved in divorce. But, a family lawyer is no replacement for the advice of a good tax professional.
Randolph (Tré) Morgan III is an experienced family law and collaborative divorce attorney accepting cases in Raleigh, Cary, Apex, Garner, Fuquay-Varina, Clayton, Smithfield, Wake Forest, RTP, Durham, Chapel Hill, Holly Springs and surrounding areas. He focuses his practice in divorce, child custody, alimony, child support, equitable distribution, property division, paternity, guardianship and other family related matters.