Divorce can often bring about tumultuous times for a family. Sometimes they can go very smooth and others can literally be the ‘War Of The Roses’. In the midst of being between the lawyers, couples often make financial mistakes that can lead to problems down the road. The number one mistake that I have seen amongst divorcing couples is their lack of consideration around liquidity of assets.
It’s pretty common after a separation that one spouse will end up with the primary residence and in turn the other spouse may wind up with a commensurate amount of assets between brokerage accounts, retirement accounts, and savings accounts. While the math may show a true 50/50 split of the overall net worth of the couple, the reality is that one of the spouses will be stuck with a paper asset that could be tough to dispose of if cash flow becomes an issue.
This can also occur when one spouse is the owner of a closely held business as well. It can be very difficult to value the overall business, and this can also leave one spouse with an asset that may have little to no market to convert to cash while the other spouse gets liquidity with the remainder of the couple’s estate.
Upon a divorce, the spouse that gets stuck with the primary residence (often the wife), may not consider what will happen when child support and/or alimony runs out down the road and there isn’t enough monthly cash flow to potentially pay for the mortgage. This can leave that spouse in a difficult financial position and actually put them in a fire sale position due to the lack of liquidity.
When children are involved with a divorcing couple, considering selling a primary residence can be an extremely onerous task because the couple doesn’t want to see the lives of their children uprooted from friends, school, etc. The couple should consider both the short and long term ramifications of splitting up the assets including overall tax implications. The key mistake to avoid is having one spouse be illiquid.
Written by: Ted Jenkin
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