Breaking up is always hard to do. But just because your life has been upended by a divorce or separation, it doesn’t mean your finances have to suffer, too.

That’s exactly what can happen, however, if you make any number of wrong moves when you’re unwinding a relationship.

Here are seven financial mistakes you must avoid once you decide to end a marriage:

1. Thinking that a mediator will protect your financial interests.

Many of us think that all divorces inevitably devolve into epic, drawn-out battles over money and property, complete with bitter screaming matches, chronic stress, and “I’ll get you!” style threats, kind of like The War of the Roses, the 1989 film that starred Michael Douglas and Kathleen Turner.

But that’s the Hollywood version of a worst-case divorce scenario.

In real life, although lots of couples do experience very bitter divorces, it’s also true that when many people break up, one party in the relationship will try everything possible to avoid unnecessary drama. This individual attempts to “make nice” to avoid a prolonged divorce and generally aims to ratchet down any lingering tensions.

For these people, retaining a divorce mediator or arbitrator is one way to accomplish a less combative divorce. A mediator is an impartial divorce specialist who works to help couples reach an “equitable” divorce settlement.

But be warned: Hiring a mediator just for the sake of “impartiality” or in an attempt to “keep the peace” is usually a bad financial move – a really bad one – particularly if you assume that a mediator will look out for your best interests.

“The primary goal of the mediator is to get a settlement. And any settlement means the mediator has done his or her job,” says Susan Carlisle, a Los Angeles area CPA who specializes in family law. “Although the best mediators do their [best] to get the settlement as equitable as possible, it’s your job to negotiate well for what you need and want. The mediator can’t do that for you.”

That’s why the best mediators always recommend that each party in a divorce also have their own consulting attorney.

2. Hiring the “best” lawyer that money can buy

Just because you should hire an attorney to handle your divorce doesn’t mean it should cost you and arm and a leg. “People generally think that the more expensive a lawyer is, the better they must be. This is not always the case,” says Jonathan Blumenthal, a certified financial planner and senior vice president of Peak Capital Investment Services.

Others want to bring out the all-star legal power in order to get back at a spouse, prolong the process or simply “win” at all costs. “That strategy works really well for the big gun [attorney] but not well for the person getting divorced,” says Carlisle. “Unfortunately, lawyers make a living off people’s insecurity, pain and desire for revenge. But it almost never works.”

Carlisle notes that in California, where she resides, the rates for some high-end attorneys can hit $900 an hour. That may be affordable for divorcing celebrities and CEOs but not for the average person. When hiring such high-priced attorneys, Carlisle says, “the problem is, middle-class people wind up spending $50,000 on a divorce that really should have cost them $10,000.”

So what’s the best alternative to getting a mediator or hiring a high-priced attorney? The solution may lie in “collaborative law,” a process that lies somewhere between mediation and litigation. It’s where two attorneys and the couple are committed to not going to court, but you each have a lawyer that looks out for your best interests.

“I think you definitely need representation when going through a divorce,” Blumenthal says. But his advice is to take the time needed to interview several attorneys to find the right fit for you – someone qualified and affordable given your budget.

3. Keeping joint credit cards and loans

Once you call it quits in a relationship, you need to separate your finances ASAP – and try to save money during your divorce.

One reason to close joint credit cards and loans is that each of you will be 100% financially liable for debts incurred – even if the other person racked up the bills.

Additionally, says Blumenthal, “even if your divorce starts out cordial, things can change quickly when people go into survival mode.” You don’t want a cash-strapped or bitter ex-spouse to start running up credit card debt, suddenly stop paying bills, or begin incurring financial obligations for which you could be held responsible.

4. Insisting on hanging on to the family home

Hanging on to the family home can be a mistake both financially and mentally, experts say. “Financially, you better make sure you have the income to support the family bills and the household,” Blumenthal cautions. “Mentally, going through a divorce is one of the most difficult things someone can go through, and staying in the family home makes it very difficult to move on.”

Still, many divorcing people, especially women, are adamant about keeping the family home. It’s often a misguided effort to provide stability for the kids.

“But kids are flexible,” says Carlisle, who has consulted in more than 400 divorce cases. “It’s important to try to keep the kids in the neighborhood where their friends are and where their school is,” she advises. “But that doesn’t mean keeping up an expensive home you can’t afford.”

5. Trying to maintain the exact same lifestyle

Before your divorce, you may have taken regular family vacations, eaten out whenever you wanted, and had your three kids enrolled in tennis classes and soccer lessons, as well as the after-school band club.

In your post divorce, life, however, you’d be wise to accept a simple truth and break it gently to your children: You and the kids can’t do everything you previously did. “There are now two households to support,” Carlisle says, which will greatly impact the family’s finances. “Trying to maintain the status quo will only stress everyone, especially the parents.”

6. Having a weak property settlement agreement

A divorce agreement – sometimes called a property settlement agreement or a marital settlement agreement – is an all-important document that acts as a kind of blueprint to what’s going to happen in your post-divorce world financially and otherwise.

Who gets the house? Who keeps the good china? How will investments be split? And who pays alimony or child support to whom and for how long? All these things, and more, will be spelled out in your property settlement agreement.

Problems erupt, however, when your agreement fails to account for any host of potential issues that not only may arise but are almost guaranteed to come up. For instance, if there’s a “change of circumstances” – say, the kids’ needs change dramatically, or one party makes a lot more or a lot less money – in most states, either side can go back into court and ask to either receive more financial support or pay less financial support.

If your marital settlement agreement doesn’t plan ahead for such contingencies, expect to endure a lot of back-and-forth and potential legal wrangling with your ex down the road. Indeed, the ink is barely dried on many divorce agreements, says Carlisle, “before someone is back in court, demanding a change to the agreement.”

She cites an interesting case now before a New York court in which a former couple – who divorced in 2006 – equally split their sizable assets and property.

The man laid claim to millions of dollars in investments. But it turns out the funds he sought to get – and did indeed obtain – were monies invested with the notorious financial swindler Bernie Madoff. The wife, for her part, got other investments and a swanky Manhattan apartment.

Thanks to Madoff’s multibillion-dollar Ponzi scheme, the husband’s investments went up in smoke. So now the husband is back in court seeking a do-over of the divorce agreement. It remains to be seen how a judge will rule in the case.

7. Failing to change your will and insurance policies

Let’s face it: You’re breaking up for a reason. One or both of you really doesn’t want to be so intimately tied to the other person. So after a divorce, why do so many couples keep the financial purse strings attached in ways that could back to haunt them? A case in point: keeping an ex spouse as an insurance beneficiary or heir in your will.

Sometimes, people simply forget to change these documents. Other times, they think “I’ll get around to doing it later” or “What could it hurt for now?”

Well, it can cause plenty of problems if one spouse remarries – and Carlisle says divorcing men typically remarry within two years – and then that person passes away. The first wife, or previous spouse, gets all the money, and the new spouse might be left in the cold. Not exactly what most people would want to happen after their death.

“When you go through a divorce, you need to make sure you go back and change all your beneficiary information on all accounts and policies,” advises Blumenthal. “Regardless of what you have in your will, if your ex is still the beneficiary of your IRA, for example, that will supersede your updated will.”

By avoiding these seven financial mistakes after a divorce, you’ll take away some of the sting of what can be an emotionally and economically taxing experience.

Published on AOL, Jun 9th 2011 at 12:30PM

Until recently litigation has often been financed by borrowing against the equity in the parties’ residence.  Now that real estate values have plummeted, and there is little or no equity remaining in their homes, most couples cannot refinance. Instead they may be desperately negotiating short sales, staving off foreclosure, or even contemplating bankruptcy. So they are opting for mediation instead, because they have heard that it is a cheaper alternative.

Mediation may be an optimum approach for child custody and visitation issues. A sensitive attorney-mediator can usually help the couple arrange suitable and flexible scheduling for the children, because, for the most part, families do put the needs of their children first. Mental health practitioners can be brought in for more complicated child issues. Their meetings often yield excellent results, especially in special needs or move-away cases that require more experience and training.

Mediation is a superior method to use to resolve financial issues when both parties have information regarding their income and assets and the wherewithal to negotiate. However, when there is a power imbalance in the family, mediation can exacerbate the inequity of the parties and be another venue for intimidation and submission. Mediation mirrors the marriage.

A few years ago, the typical mediation couple had a civil relationship and presented themselves at the mediator’s office to finalize some details in the parenting plan and property division and to calculate support. Their attitude demonstrated a desire to come to terms with their dissolution in a nonadversarial manner. After a few sessions of negotiating back and forth, the mediator wrote up their agreement.

Today’s couple who present themselves in mediation may have a different demeanor. Their motivation is more likely to have an inexpensive divorce, not necessarily a peaceful one. The recent financial downturn has put an extra layer of strain on the marriage. The “out-spouse” has little or no information about the business. He or she distrusts the partner’s assertion that they are suddenly poor, when only a few years ago they bought a large home in an upscale neighborhood, drove expensive cars, and took frequent vacations.

The goal of mediation is to wind up with a marital settlement agreement with input from both sides. The problem is that one spouse may have managed and controlled the couple’s finances with little or no oversight from the other spouse.  They may have come from a culture where the woman takes responsibility for the home life and lives on an allowance, while the husband is in charge of the business life. Even in American homes, true egalitarian relationships are still rare.

Typically one party has laid out a self-serving plan for asset division and support that he or she wants the mediator to write up. The more knowledgeable party comes to the meeting prepared with detailed spreadsheets and the self-confidence of someone who knows exactly how much money has come in to and out of the accounts for all the years of the marriage. He or she may have glossed over some of the less than stellar investments that were made or even some transfers that benefitted his or her separate property. The stronger party is armed with rationalizations that support his or her position. The object is to get the weaker one to agree—often to less than half the property and to low or no support. The less knowledgeable party looks at those spreadsheets in confusion and disbelief. He or she makes an effort to understand what appears to be a foreign language or responds by throwing out unsubstantiated accusations. “By the way, how much did you spend on that girlfriend/boyfriend?” or “It’s your fault we lost $200,000 in the stock market.”

When there is a power imbalance, the stronger member gets his or her way by overt or covert intimidation. Good mediators work hard to move the parties toward an equitable settlement; however, they cannot reverse a pattern of control and surrender that has persisted for years. Sometimes consulting attorneys are invited to attend the mediation. They commonly align with their own client while adding substantially to the cost of each meeting.  After several sessions consisting of one spouse stubbornly demanding a more favorable agreement, even the most experienced, celebrity mediator takes the weaker party aside in caucus and says, “Take this deal or you’re going to court.”

Except that now there is no money left to retain a litigator.

If you have a couple that exhibits an apparent power imbalance, please urge your clients to consider an alternative to mediation known as collaborative law. It offers legal protection along with keeping the costs down in three major ways:

1)       Both attorneys are focused on an equitable settlement, and they are committed to staying out of court without posturing and playing games. They will give the more controlling spouse a reality check while giving more support to the weaker spouse. They will demand full disclosure up front. They will schedule civil, productive meetings instead of mini melodramas full of sturm und drang.
2)       The parties hire one neutral CPA for financial issues and business valuations. The CPA can interview the couple to make recommendations regarding the family’s realistic needs balanced by an ability to pay. He or she can create a set of various options for property division for the attorneys to negotiate with their clients.
3)       The couple’s emotional issues and child-centered details are discussed with experienced mental health professionals at their lower hourly rates. More time can be allocated to create specific schedules to suit the needs of the children instead of cookie-cutter parenting plans. The mental health professionals can give invaluable coaching to the party who is having difficulty accepting the dissolution. This will help the attorneys move the case forward.

If you have a new couple who want to mediate only because they cannot afford litigation, or a client who is unfamiliar with the family’s finances or has been walking on egg shells during the marriage, urge them to consider collaborative law.

These days, if there is no business or professional practice involved, the two largest assets are the residence and the retirement plans.

Retirement Plans

Although some people hold an emotional attachment to their stocks and mutual funds, after spending a considerable amount of time selecting and revising their investments, others would rather have their cash in hand immediately, and ask their spouses to liquidate the retirement plans in the property settlement.

Any transfer between spouses pursuant to a divorce would be tax-free as long as the funds went from one retirement account to another. However, if they should decide to cash out early, I admonish them regarding the taxes and penalties that might be assessed. There are some ways to withdraw pension funds without paying the early withdrawal penalties, if the documents are filed properly in a QDRO. In a financial mediation, I always reduce the value of the retirement account by the potential tax bill that would be due in the future.

The Residence

Then we come to the house. As a financial advisor, I look at the house as a real estate investment. I want to know about the location, the interest on the trust deeds, the property taxes, and the maintenance costs. Since it’s our mission as divorce professionals to help couples make the transition from one family unit to two, it’s often the house that’s the issue where the financial considerations collide head on with the emotional agendas.

Just one generation ago, a split up meant that the children stayed at home with the mother, while the father found alternate living accommodations. You may recall the “Odd Couple,” where Felix shared an apartment with Oscar after his wife asked him to leave the house and never return. Then along came inflation in the real estate market. Concurrently, the tax laws encouraged people to sell their homes at a profit and rollover the proceeds within two years after the sale. So a common scenario in the seventies and eighties was for the family home to be sold, and each party bought their own place with the cash they received out of escrow.

Until 1997, the tax laws put pressure on the couple to sell the house within two years of the divorce, because, otherwise, the spouse who moved out lost the benefit of the rollover provision. Now, finally, the tax laws have given us the relief we needed.

First of all, anyone is eligible to earn $250,000 in gain on the sale of a principal residence without paying capital gains tax every two years; a couple filing jointly can earn up to $500,000. A person must have lived in the house two out of the previous five years to qualify for this exclusion. Now, for the first time, a husband or wife who moves out and gives the ex-husband or wife exclusive use of the house under a divorce decree, can still qualify for the exclusion as if he or she continued to live there. Further, even if you are compelled to sell the house in less than two years from the date of purchase because of an unforeseen divorce, each spouse can claim a percentage of the $250,000 exclusion.

The government’s rules are no longer an impediment to making a rational decision regarding the residence. Yet we’re still faced with emotional attachments that often prevent or preclude a rational decision.

Emotional Attachment to the Residence

These days, attorneys are advising their clients not to move out of the house. So instead of the home being a respite and an oasis from the trials and tribulations of the outside world, it can become a seething cauldron of unresolved issues or an undeclared war zone, with both parties refusing to surrender and leave.

A woman was referred to me, ostensibly because she and her husband were having religious differences, and she was considering divorce. At the first phone call I learned that there was over a decade long history of emotional and physical abuse, that more recently the husband lashed out at the youngest son, using the young man’s new-found religious practice as an excuse to belittle him. A few months earlier the teenager was beaten severely. More recently, he attempted suicide. Yet there was no resolution, because, as the woman explained, her husband refused to leave the house, and she insisted that she and her children had to stay there, as well.

Sometimes one party –often the woman, but not always–has an emotional attachment to the house. Some men bolster their image by leasing sports cars and dating physically attractive women in an attempt to appear more successful to others. A parallel may exist with women and their homes. Large, well-decorated houses with pools in upscale neighborhoods are their badges of success. If an advisor should recommend moving elsewhere, they put up a great deal of resistance to what they perceive as a step down in status.

Ginita Wall, a financial planner in the San Diego area, describes the house as a “marital museum,” representing the hopes and dreams of the couple during the marriage. It becomes a memorial to what was lost, and the ex-wife maintains it even though she can’t afford it. She sees this as a way of punishing her ex-husband for leaving the family unit, because she expects him to feel bad each time he visits his old house. Her attorney goes along with her, because he thinks he’s zealously representing her interests. In a negotiation, she’s willing to trade away a portion of her retirement or other assets that may be more beneficial to her and the children, just so that she can stay in the house. She’ll give you a whole host of rationalizations: the kids can’t handle the move after all the stress they’ve been through; their friends are all in the neighborhood and at the local school; she runs her small business out of the home; her church group gathers there on Sunday afternoons. A few years later, when she realizes the unnecessary burden she’s carrying and ultimately sells the house, she is faced with having to bear tens of thousands of dollars in closing costs.

Case Study

A year and a half ago an attractive, intelligent, woman was referred to me by a family law attorney. She arrived at my office in tears clutching a large, red business checkbook like a mother holds an infant. She was a victim who was alternately angry and depressed. Her abusive husband had left her twenty years after they emigrated together from Europe as two young dentists. Their marriage produced two children and what was once a thriving dental practice and a 5,000 square foot home in the Valley with two expensive foreign cars in the garage. Her husband had been in complete control of the finances, the business, and the credit cards. She had never even written checks before. He was currently living with his girlfriend, who was previously her best friend; their house was in foreclosure; the dental practice was months behind on the bills; the landlord was threatening eviction; $200,000 in payroll taxes were two years late; $50,000 in income taxes were overdue; and the employees were threatening to quit over their bounced paychecks. With the assistance of some cooperative doctors from the old country, the ex-husband claimed he was totally disabled and conveniently walked away from the disaster he created.

She came to me for business advice and to learn how to use the checkbook. I organized the bills and installed an accounting system at the dental office. A consulting group stepped in and taught her how to run the million dollar dental practice that included five dentists and six other employees. What I was not prepared for was the transformation that occurred in my client.

Each week she would arrive at my office with the bills. We prioritized them and talked about the dental practice for twenty minutes. For the remaining forty minutes we talked about her life. I realize now that I should have insisted that she contact a psychotherapist, but she would not leave my office until she told me about each week’s events, and I didn’t have the heart to send her away. Each time she would describe what terrible things her ex-husband was doing. Each week I asked her to stop focusing on his behavior and to look forward, to think about the life she wanted for herself and the kids. I knew that her family had persevered intense persecutions in Europe, and that she had succeeded in the transition to a new life. I guessed that she was actually very courageous, not the passive and powerless woman she presented herself to be.

A year and a half later, she is a competent manager, able to meet the challenges of providing services in a managed care environment. She no longer requires the hands-on assistance of the business consultants, the bills are being paid on time, and she’s earning $100,000 a year running the dental practice. By my working closely with her attorney, and as a result of her turning the business around, the judge awarded her sole control of the dental practice, and now her ex-husband is demanding that she pay him alimony.

Unfortunately, there is still a problem left to resolve with the situation. Before he left, her ex-husband had borrowed all the equity out of their residence, leaving payments of $5,500 a month. She and the two kids don’t need a 5,000 square foot mini-mansion, but she refuses to sell the house.

In the cooperative divorce model, I give financial advice while simultaneously allowing the clients to make their own decisions. I focus on avoiding control and exacerbating the clients’ hostility and defensiveness. Because I have no training as a psychotherapist, I look to a coach to guide the couple through their emotional issues, so that they can make rational decisions regarding their finances.

I have urged divorcing couples to seek counseling for themselves and their children, but they often refuse to acknowledge the need, or they cite cost as a prohibition. Yet they spend tens of thousands on adversarial attorneys arguing in and out of viagra over minutiae.

As an accountant and as a human being, I abhor the tremendous waste of financial and emotional resources on the interminable divorce wars that benefit no one in the family. I have witnessed firsthand that the cooperative divorce model does work, so that people can recover from the breakup of their relationships, heal and start again.

The professionals involved in the divorce process – the attorneys, the accountants, and the therapists — may be able to assist them in honoring that friendship as they go through the steps necessary to obtain a legal divorce.

The family law accountant may meet with the couple as a neutral third party– with or without their attorneys present—in order to outline the financial issues. The meeting can take place at the accountant’s office or in the couple’s home at the kitchen table. The accountant needs to become familiar with their lifestyle in order to help them forge a plan for the future. There are several financial issues that need to be addressed in a straightforward manner with input from both of them. It’s beneficial that each of them be able to express their hopes and fears, so that a reasonable and equitable plan may result from the discussions.

The typical issues are discussed in broad strokes at the first meeting, with subsequent meetings designed to focus on the details of one or more of the issues. It’s crucial to create a list of the issues without becoming mired in controversy. The overriding concern is to maintain the friendship: keep them talking about the things they love, not the points that divide them. Insist on maintaining respect and civility in the meeting. Call on them to refrain from accusatory and belittling remarks, and when the negativity creeps in to the conversation, remind them that it’s not productive. The stronger they are emotionally while going through the process, the more likely they will greet the tough decisions with equanimity and in the spirit of compromise.

Clearly, this approach to the divorce process is most successful with cooperative couples. For those with power and information imbalances, each of them will require separate meetings with the accountant, attorney, and/or therapist. If there are custody or visitation issues, the couple should consult therapists or attorneys first.

The following is a typical list of issues to be discussed at the first meeting. Some of them will have already been decided by the couple by the time the accountant arrives. Some will be points of contention. Others may be new challenges that the couple has yet to consider:

1)       Who stays in the family residence? How is the equity divided and when? Can the party who wants to stay in the house afford to? Can the house be refinanced and, if so, under what terms? If the house is to be sold, when? If the house belonged to one of the parties before marriage, how much credit does he or she get?
2)       What is a fair estimate of the income of both of the parties? If one of them is not currently in the workforce, can we reasonably expect that to change? If so, when? If one of them needs education or training, how will it be financed?
3)       How much support will be required to maintain the status quo for a short time? How long will this temporary support last?
4)       If there’s a business or professional practice, what information do we need to gather to come up with a valuation?
5)       How long do they expect to remain in the workforce? What retirement programs are already in place? How do they go about collecting more information about the amount of retirement income they can each expect? How much can they expect to collect from Social Security and at what age? How do we go about dividing the retirement plans –IRAs, Roth IRAs, pensions, etc.?
6)       If there are children about to go to college or are currently in college, how will they fund these expenses? If there are non self-supporting young adults at home, who will be responsible for their maintenance? How much should be allocated and for how long?
7)       If there are parents currently in need of custodial care or assisted living, who will be responsible for their expenses and for how long?
8)       How do we go about dividing the brokerage accounts and savings accounts? If some of funds came from inheritance, how do we divide those equitably?
9)       If there are wills and trusts in place, when should they be changed? How much life insurance should be maintained and who should be the owner and/or beneficiary? What about their plans for the grandchildren?
10)       If they have jewelry, antiques or other collectibles, how are they to be divided?

I recommend regularly scheduled meetings, two or three weeks apart, in which we consistently work on the issues we have outlined, maintaining a fair and conciliatory attitude throughout. After the couple leaves my office, I draft a letter to each of them that has the same list of issues each time. Sometimes new issues are added. Within each category, I specify the agreements that were made during the meeting.

When the couple is satisfied that they have agreement on most of the issues, they take a copy of my letters to their collaborative (or consulting) attorneys for review and comment. They may return to my office with their attorneys’ concerns for another meeting, or I may have a telephone conversation with both attorneys on the line. In either case, the couple is usually well on their way to a final agreement by that time.

The next time I hear from them, hopefully, is because they are asking me to review some tax ramifications of the agreement and, by the way, to learn about the great visit they just had together with their grandchildren.

Welcome to Susan Carlisle, CPA. We understand that resolving the financial issues in a divorce can be complicated and overwhelming. But it doesn’t have to be hell on earth.

It’s advantageous to enlist advisors who work toward agreement instead of dragging your family through the time-consuming, aggravating, and costly court system. People who once cared for each other, and perhaps raised children together, may find it beneficial to negotiate for the worthwhile goal of arriving at an equitable settlement.

Even if you or your spouse have already started down the road to expensive litigation, we can guide you in finding ways to mitigate the damage and to keep the hostility to a minimum.

Here are some of the things we, as litigation, mediation, and collaborative law CPA experts, can do to help.

We offer confidential financial services to individuals and couples, at reasonable rates, whether they are in mediation, collaborative law or litigation. We educate clients with regard to their family’s financial needs and the parties’ ability to pay child support, alimony and the fair division of separate and community property.

As forensic accountants, we review tax returns, QuickBooks records and financial statements to determine the business owner’s income available for support and perquisites.

We offer tracing of separate and community property, business valuations and Moore-Marsden calculations, as well as consulting regarding the tax ramifications of various options for dividing community property.

We work with attorneys and mediators to settle all financial issues amicably as jointly retained accountants or 730 (court witness) experts.  If necessary, we are available to testify if you are unable to negotiate an equitable agreement.

Click on “Our Services” to learn more about our divorce litigation, mediation, and collaborative law services.

We realize that the divorce process can be both stressful and expensive. We are committed to saving you time and money. Contact us now to discuss your next best move.