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Avoid the most common financial pitfalls in divorce

Illinois courts use an equitable division of property statute when ordering a divorce settlement in cases where couples could not agree. This might be risky because equitable does not mean an even split. It means the courts will attempt to decide what is fair, which could leave one or both spouses without the marital property he or she wanted most. Negotiating out of court seems a more attractive option, but this could also leave room for mistakes that could cost individuals in the long run.

One of the biggest errors divorcing spouses can make is not considering tax ramifications. Some assets might be worth significantly less after one pays income taxes or other taxes. Some assets that will not lose value are Roth 401(k)s and Roth IRAs because these accounts are funded with income that was already taxed. Employer-sponsored retirement account benefits could also be transferred once without taxes using a court decree called a qualified domestic relations order. Some assets might even lower one's taxes, such as donations given to charity. After considering tax implications, spouses might change their mind on which assets they really want.

Another consideration that might change a divorcing spouse's mind is cash flow. People who need money quickly to live off of will not have as much use for illiquid assets, but assets like stocks and bonds that can easily be converted to cash may be more useful. Finally, digital assets should not be forgotten, even if they are not worth much.

Since going to court requires giving up complete control in the outcome of a divorce settlement, some couples might find it useful to ask an attorney for help with mediation or negotiations. It can be challenging for spouses going through the emotional issues brought up by divorce to work together without assistance from a third party. When litigation is unavoidable, an attorney could employ personalized strategies to fight for the marital property of most benefit to their client.

Source: Market Watch, "Divorce? The 6 worst money mistakes", Leslie Thompson, September 23, 2014

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