Divorce is a highly emotional experience for most people. And the fact many important financial decisions must be made under such stressful circumstances helps explain why critical mistakes often result.

Here are some financial mistakes that people commonly make when divorcing — as well as tips for you to help your clients avoid them:

Failure to Research Legal Options
Divorcing couples have several legal options, including mediation, arbitration, the collaborative process and litigation.

“The biggest mistake people make when divorcing is choosing a lawyer before knowing what they need,” says Cathie Hurlburt, senior financial planning advisor with Assante Financial Management Ltd. in Vancouver. “Mediation is the cheapest option, but the process that best suits your circumstances is usually the most cost-effective, both emotionally and financially.”

Failure to understand the value of different assets
A 50/50 division of property isn’t necessarily a fair division, says Debbie Hartzman, an advisor with Professional Investments (Kingston) Inc. in Kingston, Ont.

“Many people want to keep the family home for emotional reasons, but in so doing they might leave pension funds on the table,” she says. “The house comes with costs, including mortgage payments, taxes and maintenance, while a pension produces income and costs nothing.”

Hartzman says the you should help clients prepare a financial plan to determine if it’s wise to tie up equity in the home or if the clients should opt for retirement funds instead.

Having Unrealistic Expectations
It’s difficult for many people who are divorcing to accept that their standard of living will probably decline. That’s why they need a budget that reflects their new economic circumstances.

“People often think they can maintain their current lifestyle on half of their former income,” says Hartzman. “They need to be realistic about what they can afford.”

That includes spending on their children, says Linda Cartier, president of Sudbury, Ont.-based Financial Decisions Inc. and the Academy of Financial Divorce Specialists. “Parents frequently try to maintain the existing level of activities for their kids when it’s not feasible financially.”

Divorce, says Cartier, forces people to re-think their retirement plans and make tough financial decisions, such as selling the house. “It’s also a time when many people get into debt and they may need help with budgeting and cash-flow projections.”

Failure to guarantee support payments with life insurance
It’s important to have an insurance policy that secures support payments in the event of the death or disability of the paying spouse, says Hartzman, adding that such payments should be made in addition to support.

Such policies are often done improperly, notes Cartier: “The person who receives the benefit should own the policy. Otherwise, it may lapse or be cancelled by the paying spouse before the recipient is informed.”

Failure to understand the tax consequences of various assets
Different assets have different tax consequences. Unfortunately, people who are divorcing often don’t understand how those assets will be treated when they are sold, which can lead to unpleasant surprises.

You should flag this as an issue, ask the client what he or she is planning to do with the assets and explain the tax consequences before the settlement agreement is finalized.

IE