Milwaukee and Waukesha Divorce Attorneys

(Permission to reprint by: WFA Asset Management Corporation )

1. I'll take the house; you keep your pension

This is the most common mistake made. Many people have such an emotional attachment to their home that they cannot fathom life in another house. The house though, usually comes with high mortgage payments, maintenance and repair bills that can devastate a person's finances. Even though the value of the house might be equal to the value of the pension, they are apples and oranges. One asset requires income to pay for repairs, maintenance, improvements, property taxes and assessments. On the other hand, a pension produces income, it doesn't cost income. A 50/50 division of assets may sound equal, and it may in fact be equal in value as of the date of divorce, but it is never equitable. You cannot sell a windowpane to put food on your table. It's important for an individual to understand the uses of their money. It's not how much we have that counts, it's what we can do with what we have that matters most.

2. Are you really covered or out in the cold? Health Insurance Coverage under COBRA

Sure, COBRA covers you as a former spouse for 36 months after the date of divorce, but who is going to be paying the premiums? If your former spouse pays for the premiums, you may be required to report those as income on your tax return. In today's health care marketplace, health insurance costs can easily exceed a monthly mortgage payment. What happens if you become uninsurable during the 36-month period? There are options, such as the Health Insurance Risk Sharing Plan (HIRSP) offered through the state, but you better not have a break in coverage. The bottom line: you should seek individual coverage as soon as possible. You may even save some valuable dollars, though probably not without reduced benefits.

3. Failure to understand tax consequences of assets

The house, stocks and bonds, annuities, mutual funds, and retirement plans: If you do not understand the tax basis and how that affects your settlement with each of these assets, you will likely be in for a surprise when you need to sell them. Furthermore, with today's financial marketplace, some investors have racked up huge losses in their investment portfolios as well as possible carry-forward losses from previous year's tax returns. A stock that originally cost $50,000 but is worthless today has approximately $12,500 in future tax savings potential.

4. Failure to understand taxable options on division of retirement plan

One of the graces afforded divorcing couples is that the tax laws are actually favorable. Under section 1041 of the Code, virtually all transfers of assets between spouses can be accomplished tax-free if properly structured. In addition, a premature distribution from a qualified plan prior to age 59½ can be facilitated without the traditional 10% federal penalty, and the 3.3% state penalty. This is very powerful tool when used to reduce expenses or to pay off debts, i.e., attorney fees and consumer debt.

5. Not planning for the tax consequences of maintenance

Many folks fail to consider their tax liabilities from the receipt of maintenance. Only at the end of the first year of divorce, when they are preparing their tax returns, do recipients of maintenance realize that they owe thousands of dollars in income taxes and underpayment penalties for which they failed to allow for in their budget. Also, maintenance received is treated like a wage for purposes of IRA contributions. Former spouses receiving maintenance are eligible to contribute $3000 ($3500 if over 50 years old) to a tax-deductible IRA account or Roth IRA even if they are not employed.

6. Not planning for a contingency such as the premature death of a former spouse

It happens frequently: a person is receiving maintenance for 15-years under the Marital Settlement Agreement; five years after the divorce the payee dies unexpectedly. Of course, if you have children at home, Social Security benefits may kick in. However, maintenance under the tax laws must cease. If you are going to be dependant on your former spouse paying maintenance for any extended period of time, it would be in your best interest to ensure that income stream. Knowing this in advance, perhaps you could get your former spouse to pay for the coverage or a portion of it. If the former spouse pays for a portion or all of the premiums, you may be required to report those as income on your tax return, as well.

7. Failure to organize personal financial affairs after divorce

After the divorce, it is imperative that you review all of your financial matters such as the named beneficiaries on your life insurance policies, 401(k) plans, annuities and the like. If children are involved, it is entirely possible that your premature death would result in your former spouse gaining control of your assets in trust that are left for the benefit of your minor children. That could be inconceivable in many divorce cases. A thorough review of your estate plans and a simple testamentary trust could be established so that you may name a person of your choice to handle the finances left behind for the benefit of your children, perhaps your brother or sister as an example. In that manner, the custodian spouse must then go to your named trustee for funds, and you assure that your children's inheritance is handled by a person you trust.

8. Recognizing marital assets from nonmarital assets

Assets brought to a marriage, as well as assets acquired during marriage, are considered marital property in Wisconsin. That doesn't automatically mean that all assets are divided equally between the partners. Assets that are gifts or inherited are not considered marital property. However, the characterization of those assets may very well turn unintended nonmarital assets into divisible marital assets. You need to know the difference and how they are accounted for in a divorce.

9. Qualified Domestic Relations Order (QDRO)

This is the most treacherous area of divorce law. In fact, it is also the largest area of legal malpractice suits brought by people around the country. Many attorneys that practice family law do not fully understand how to divide a pension, and the various ways, through a QDRO. If you don't understand things such as cost of living adjustments, supplemental benefits, lump sum distribution options, marriage coverture formula's and whether or not your spouses pension accrues linear or is based upon a formula of salary and number of years worked, you will lose!

The house and the retirement plans are likely to be the largest assets in your marriage. It would behoove you to get educated. Did you know that you could elect to commence your former spouse's pension even if they have not yet retired? What if you are 40 years old and your former spouse is 50 years old? Do you think that makes a difference? You need to know the earliest possible retirement age and why you should mark that date on your calendar. You need to find out how often the plan is valued by the administration firm. If it's once each year, if you are divorcing in the latter part of the year, what about the benefits accrued during that year? Many plans don't make their contributions to a plan until March or April of the following year for benefits earned the previous year!

Another missed opportunity is forfeitures. When an employee leaves a company and has not fully vested in their plan, the nonvested portion is shared equally with the remaining participants in the plan. When are the forfeitures added to the plan? Lastly, even though your QDRO may clearly spell out that you are to receive 50% of the accrued benefit as of the date of divorce, unless you are an actuary, that 50% is something other than what you believe it to be.

10. Failure to consult with a knowledgeable financial advisor

A Certified Divorce Planner (CDP) understands tax issues, how to value and divide property and investments equally. A properly trained and experienced advisor can show a client the short and long-term results of the various options and proposals made throughout the divorce case. This will educate the client to make much better-informed financial decisions now and in the future.

Avoid these and other mistakes that can put you in a bad position following a divorce. Contact the Waukesha and Milwaukee divorce lawyers at Brazil, Thelen, & Benske, S.C. We represent clients throughout Southeastern Wisconsin. Call (414) 744-2757 in Milwaukee or (262) 547-2757 in Waukesha, Wisconsin.