Divorce is often a costly process that can be exacerbated by wrong assumptions and misinformation. Below are some of the top five financial mistakes to avoid when facing a separation or divorce. While you may feel comfortable dealing with some issues yourself, obtaining advice from a qualified professional is crucial.
Mistake 1 – Understand Tax Credits and Deductions
Confusion around the CRA and Family Law definitions of divorce, shared parenting, and the separation date can often lead to divorce financial mistakes and surprises down the road when it’s time to pay taxes. When drawing up the separation agreement, ensure both spouses fully understand the tax implications resulting from the division of assets and support payments. What may seem fair on the surface may not be the case once tax credits and deductions are applied – and by that time, it is often too late to make changes.
Mistake 2 – Account for Capital Gains or Losses
The settlement often requires transferring assets between spouses. It’s important to be aware that there are financial consequences of cashing in an asset which are known as notional disposition costs. For example, there are real estate fees when selling a home, and capital gains or losses when selling an investment property. Therefore, when calculating the division of property, using the actual value of your assets often overstates their value, which is why you should deduct notional disposition costs from the value of your assets.
Mistake 3 Protect Your Credit
You and your spouse are equally responsible for joint debt, whether it’s you or your spouse spending the money. To protect your credit rating, take an inventory of all joint accounts (including those with no money), and close them as soon as possible. Remember that you will soon be applying for financing and credit as a single person and any form of negative credit history will surely create financial challenges for you in the future.
Mistake 4 Don’t Cancel Life Insurance
Many people cancel life insurance once a marriage ends. Whether the decision is emotionally or financially motivated, it is not a good idea. The majority of separation agreements require that the Payor have adequate life insurance to protect spousal and child support payments. Should you cancel insurance, you may be unable to reinstate your coverage at the same cost as before. In fact, the new cost may even be higher due to your age, health and other factors. In a worst-case scenario, you may not qualify for life insurance at all.
Mistake 5 Keeping the Home
Fighting to keep the matrimonial home can end up being a financially devastating mistake if you are unable to cover the expenses to upkeep the house and maintain mortgage payments. This can be exacerbated if you’re forced to sell in haste and receive a lower value for the home than what was defined in your settlement. While keeping the family home can work for many couples facing divorce, this decision requires an honest and thorough review of what it will cost and how this can be financed given your new circumstances.