Setting emotions aside during divorce proceedings is easier said than done. Making key decisions when you are hurt, angry, sad and stressed is never ideal as it will have long-term financial consequences. Here are some financial mistakes to avoid when going through a divorce.
Not using an experienced divorce attorney
While you may think your divorce is relatively simple and may be tempted to tackle a DIY divorce, this may not be the wisest step financially. Dividing assets, especially where retirement funds and annuities are involved, can be complicated and is best undertaken by a divorce attorney. Further, the matrimonial property regime under which you are married has financial consequences when it comes to what you are entitled to upon the dissolution of your marriage, and if you don’t fully understand your rights you may financially compromise yourself.
For instance, if you are married in community of property, you may be able to bring a claim in terms of the Divorce Act for a forfeiture of benefits where you believe your spouse would unduly benefit by receiving a half share of the joint estate. In bringing such a claim, you would need to provide the grounds on which the claim is based and demonstrate to the court that your spouse stands to benefit unduly from an equal division of assets. A failure to contribute financially is a major factor in determining whether your spouse should forfeit part or all of his share of the estate.
If you were married out of community of property prior to 1 November 1984, you may be able to claim a redistribution of assets in terms of Section 7 (3) of the Divorce Act if the court is satisfied that it is just and equitable to do so. This provision was specifically introduced to assist women who could be financially prejudiced by the divorce, especially where they did not work and were therefore unable to build their own wealth during the course of the marriage – bearing in mind that those married prior to 1 November 2020 did not have the option of the accrual system. When seeking a redistribution order, you will need to show that you contributed directly or indirectly to the maintenance or increase in your spouse’s estate during the marriage.
If your spouse contributes to a retirement fund, bear in mind that you may be entitled to a share of the pension interest as part of the divorce settlement. However, this is a particularly complex area of divorce law and many claims for a share of a member spouse’s pension interest fail as a result of incorrectly worded divorce orders. There are a number of strict criteria that must be met when claiming a share of your spouse’s pension interest and it is always advisable to seek expert advice. In particularly acrimonious divorces, it is not unheard of for partners to hide assets in sham trusts or even cryptocurrencies, and you might do well to seek the advice of an expert to ensure that you receive an equitable share in your divorce settlement.
Not involving your financial planner in divorce settlement
While divorce attorneys may be experts on the divorce process, many do not have an in-depth understanding of financial planning, especially when it comes to the tax and CGT implications of realising or disposing of certain assets. While your divorce attorney will work to achieve an equitable division of assets, your financial adviser is able to focus on the long-term financial effects of the proposed divorce settlement. While the proposed division of assets may appear equitable on the face of it, your financial adviser is better positioned to analyse your tax and CGT liabilities, the implications of withdrawing your pension interest, your options for preserving capital, any penalties payable on the cancellation of old-styled policies, and to what extent the proposed settlement will provide for your needs going forward. Your adviser can also assist in the correct structuring of life insurance cover on the life of the maintenance payer to ensure that future maintenance payments are protected in the event of his death and/or disability, something that is often overlooked. At the same time, your adviser can assist you with changing the beneficiary nomination on your various policies and investments and amending your Will to align with how you would like your assets to be distributed.
Not opting for mediation
It is common knowledge that acrimonious, contested divorces can cost a fortune and can have a serious impact on the finances of the divorcing couple. The quickest and least expensive option is an uncontested divorce, although this is often unrealistic given the circumstances of the divorce. An uncontested divorce requires that the couple works together to agree to the terms of the divorce in respect of how their assets will be divided, how their children will be cared for, and what maintenance will be paid, if any. In uncomplicated divorces, an uncontested divorce can cost as little as R10 000 and can be resolved within weeks. However, it is somewhat unrealistic to expect divorcing couples to easily reach agreement on the terms of the divorce, which is why mediation should always be considered. Without the assistance of an experienced divorce mediator, the divorce can turn into a fully contested feud spanning years of litigation and wasting hundreds of thousands of Rands, not to mention the emotional damage caused.
While going through the emotional trauma of divorce, many couples are simply not equipped to negotiate issues relating to their children, the division of assets, and maintenance. As such, an experienced divorce mediator works alongside both parties to find workable solutions rather than handing the matter to opposing teams of lawyers to litigate. The mediator’s role is to remain impartial while reducing conflict and finding options for settlement. Generally speaking, mediation sessions are around 90 minutes and, depending on the matter, may take up to 6 sessions to achieve agreement. The aim of mediation is to avoid confrontation, reduce unnecessary delays, and to limit costs. Many divorce mediation firms offer fixed-rate package deals for mediation which includes the cost of the legal process. Depending on the complexity of the case, divorce mediation can cost between R10 000 and R25 000 and take around eight weeks to finalise. The alternative is a lengthy, contested divorce which can take years to resolve – which could cost a couple in excess of R500 000 in legal fees.
Withdrawing pension interest
Another common mistake made is withdrawing the pension interest that has been awarded as part of the divorce settlement. Many non-member spouses view a pension interest award as a financial windfall whereas nothing could be further from the truth. If you’ve been awarded a share of your spouse’s pension interest, don’t lose sight of the fact that your divorce is likely to have set both of you back in terms of your retirement funding. It’s much easier to save for a joint retirement than it is to save for a retirement all on your own, so rather view any pension interest award as a stark reminder of the need to preserve this capital. Bear in mind that any withdrawals you make will be subject to tax and will also impact on future withdrawals. If you choose to transfer your pension interest to a preservation fund, no tax is payable, and you will still have the option to make a once-off full or partial withdrawal at any stage in the future. If you intend withdrawing the pension interest to purchase property, think very carefully before doing so. Not only will your withdrawal be taxed, but you will also be liable for transfer duty and all the costs associated with purchasing property – all of which will only serve to diminish the value of the asset. Further, money housed in a preservation fund will have the opportunity to grow over time whereas property, on the other hand, requires ongoing maintenance and upkeep, which can eat away at your finances.
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