Then There’s the Money: Avoid These 3 Big Mistakes Post-Divorce
Then there’s the Money:
Avoid these 3 Big Mistakes Post-Divorce
Pam Krueger is the founder of Wealthramp, co-host of MoneyTrack on PBS and national spokesperson for The Institute for the Fiduciary Standard.
She launched Wealthramp in 2015, offering an online solution to help consumers find qualified financial advisors who adhere to the highest fiduciary standard, and who are not commission-driven. Wealthramp uses an eHarmony-style algorithm to match individual investors to their best-fit advisors.
Pam sat down with Diane Pappas, a Certified Divorce Financial Analyst and collaborative Financial Mediator, to dig into the most expensive mistakes people make after the divorce is final. Diane is Co-President of the non-profit Divorce Center and Principal at Solutions for Divorce LLC, an independent, fee-only, divorce financial planning firm based in Boston.
There are many reasons couples choose to divorce later in life. Sometimes it’s as simple as realizing that all your energy and time has been invested into raising great kids, and now it’s just you and your spouse and your interests don’t seem to be in sync. For others, it’s much more complicated. Either way, divorce is a traumatic event for most people. Once divorce becomes the only option, it’s critical that you know exactly how those assets will be divided—especially pension plans and retirement accounts, and especially if you were the spouse who did not manage the family’s investments. And according to the U.S. Census Bureau, the divorce rate for people over age 50 has doubled in the last 25 years. If you’re close to retirement, or already there, and recently divorced, you’ll want to make sure you avoid these three costly oversights.
Most expensive mistake #1. Read your divorce agreement
After a divorce is final, it’s understandable that you may want to take the divorce papers and just stick them away in a drawer and never look at them again. But don’t do that. The very first thing someone who’s newly divorced needs to do is read through everything that’s in that divorce (or separation) agreement.
Diane Pappas puts it this way, “It blows my mind how many people do not actually know what their agreement says, and that’s just not a good thing for one reason. There are usually things you have to do post-divorce that are in that separation agreement or divorce agreement.”
Missing a critical deadline is the worst thing you can do. That’s because your ex may shock you and actually take you to court for contempt. Post-divorce, it’s critically important to go through the agreement line-by-line and understand what’s expected of you.
#2. Close all your joint bank accounts and credit cards.
It doesn’t matter if you’re currently on great terms with your ex. After you’re divorced, they shouldn’t have access to your money. Diane has seen many clients who learned this lesson the hard way and were shocked to discover that their former spouse had abused credit cards or spent money that was earmarked as savings for their kids’ benefit. If you don’t close those accounts, they will come back to bite you.
Diane recalls, “I had one client who did not close his joint checking account, didn’t even change his password and five years later, all of a sudden, he and his ex-wife had a little bit of an argument about child support. He stopped paying because he lost his job. What’d she do? She went into his account, which was still really her account because it was still in both names. She knew the password. She went in and took the money. And they were like, ‘Well, you know, you never changed it.’”
Maybe it wasn’t the right thing for her to do, but it was legal. It. This also happens with joint credit cards. Unless you actually take that step to shut those cards down, you’re still responsible even if your spouse is buying things using that card. Even after the divorce is final, that’s still technically a joint account.
#3. Follow through on dividing up retirement accounts
There are also other types of accounts that are less obvious than joint bank or credit card accounts, such as retirement accounts or life insurance policies. But dividing up what’s in those retirement accounts isn’t the only thing you need to do.
According to Diane, “You have to change the beneficiary because on most retirement plans or anything else, you usually have your spouse, but people forget to do this. And then, lo and behold, you die, and your IRA goes to your ex-husband, even though that’s not the intent. So it’s really important to change beneficiaries.”
After divorce, it’s very easy to fall into a mindset of expecting your lawyer to tell you to do all these things. The reality is that you’re the one who has stay on top of the details that require follow-through. Make the task easier by listing each account separately: 401k, IRA, insurance policy, credit card, and anything else that has anything to do with your finances. Then write down what needs to be done with each one, whether it’s dividing a retirement account or changing a beneficiary on an account that’s only in your name. In most cases, your lawyer isn’t going to keep reminding you; it’s up to you to follow up with your ex to make sure he/she does the things they need to do.
The other big issue related to people not following up with their separation agreements is the QDRO, which is a qualified domestic relations order. Basically, it’s the judgment or decree that dictates how to divide up the 401k or 403b. It takes a long time to get the QDRO, but here’s what you need to know: it usually doesn’t start until the end of the divorce process. Sometimes it’s not even done until after the divorce agreement is signed. This can cause a lot of problems. It can take weeks, months, or even years to get it all done, and if you don’t stay on top of everything, it may never get done.
The best way to do the QDRO is to have it written up and approved by the court prior to signing the agreement, but often, attorneys don’t think about this. And then they go to the QDRO attorney, and the QDRO attorney says, “It’s going to take me a few weeks to do it.” Then it has to go to the plan administrator, and they have to approve it, and then after the plan administrator approves it, it has to go to the court, the court has to approve it, and then it goes back to the plan administrator.
Diane explains a common scenario when it comes to the QDRO: “So here you are, waiting to get your share of the 401k, and your ex-spouse, if he’s the employee, he’s the one that has to initiate it, because there’s an attorney that has to be hired to draft up this QDRO.” So what happens if your spouse isn’t responding? The answer is if the ball is in your ex’s court, it often takes months for that QDRO to get processed because the spouse has to follow through and provide the information. Most people just assume their attorney will handle it. But the reality is, once that agreement is signed, the attorney is most likely already on to the next case, and he’s not going to sit there and wait for the QDRO or send reminder emails to the other attorney, or to the ex, saying, ‘You need to get this done now.’
Diane has seen QDROs take up to two years to complete. Meanwhile, if you’re the spouse waiting to receive a transfer or to be approved for a mortgage to buy out the family house, the long wait can have a big impact on your cash flow or hold up a big financial transaction.
It’s always vital to your future finances that you stay on top of everything and be as organized as you can. Keep your checklist and calendar handy so you always know what has to be done and by when, and so you can make sure nothing falls through the cracks. If possible, have a friend help you go through the divorce agreement as soon as you have it; an extra set of eyes is always helpful, especially in an emotionally-charged situation where the stakes are high, like a divorce.
You can learn more about investing after divorce and WealthRamp.com here
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