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Reducing the costs of a complex divorce settlement

The details of a marriage don't often come into play until the end is nearing. Divorcing Massachusetts couples often struggle with the difficult task of organizing their finances in order to reach a divorce agreement. A complex property division does not only occur when the couple owns much property and assets, but also when it is not clear what falls under the category of marital assets. Furthermore, determining how retirement assets and alimony will be treated can prolong the process. Considering equitable distribution, cost of future living, taxation and the need for financial support by one spouse often add to the complexities of dissolution.

It is true that some divorce settlements can be costly, but it is also true that the decisions that spouses make in the divorce process could make a costly divorce even more expensive. Often the parting couple will look at the present financial consequences, but there are three areas where many make oversights and cause future costly mistakes.

First, when dealing with retirement assets such as a pension, the divorcing couple might fail to account for future cost of living. A pension can be adjusted for the increase in the cost of living, but if the receiving spouse fails to address this in the divorce, they will only receive the same percentage of the pension and their monthly payments will remain the same.

Next, the valuation of retirement accounts could be improperly assessed. Those that have a 401k or IRA as their primary retirement vehicle versus a pension need to understand that this retirement asset can be divided into two parts. It can be separated into a non-marital asset and a marital asset because the portion accumulated prior to marriage is not available for equitable distribution. Although it would seem simple to just subtract this amount from the total amount to get the marital portion, this is not the proper calculation. One needs to consider active appreciation and passive appreciation when computing these amounts.

Lastly, alimony and taxation should be assessed. If a monthly spousal support payment amount is established, the divorced couple should also determine how the payments will be taxed. The tax effect on these payments can significantly alter the bottom line for both the recipient and payer. It either means the payer spouse will have to contribute additional funds for taxation purposes or that the recipient spouse will take on this role.

Considering the total picture could help make a costly divorce less costly, especially over the lifetime of the divorced couple. Those dealing with financial issues in a complex dissolution should gain advice from a professional so they can take appropriate actions and make proper adjustments in a divorce settlement.

Source: Huffington Post, "Three Costly Divorce Settlement Mistakes and How to Avoid Them," Christian Denmon, Jan 21, 2014

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