Latest / Divorce Dialogues / Kelly Lise Murray on Why Smart People Make Costly Mistakes in Divorce
Transcript
- Kelly Lise Murray (00:00): Really smart people are making these mistakes, not because they're not smart, is that they don't have the information and they don't have the evidence they need. We're talking about real estate. What was the purchase price? Have you ever had a computer that started up slow? Every time you start, it takes forever and all these things pop up. I view the divorce brain like that. There's at least 20% of your brain that is distracted with the stress and the worry and the decision making and all of that so that you don't have full decision making capacity even though you are really accomplished and you are really smart. Katherine Miller (00:35): Welcome to Divorce Dialogues. I'm Katherine Miller. This is where we have honest, thoughtful conversations about divorce, emotional, financial, legal, and family questions no one prepares you for. From deciding whether to separate to navigating the process with dignity to rebuilding what comes next, divorce dialogues is here to help you find clarity, perspective, and a better way forward. One of the things that makes divorce so difficult is that people are often making major financial decisions at exactly the moment they feel and are least equipped to do so. There's so much pressure, pressure to move things forward, pressure to reach resolution, pressure to stop the uncertainty and under that kind of pressure, people tend to focus on the immediate problem that's right in front of them. But in divorce, financial decisions don't happen in isolation. The timing of on decision affects the next. Tax consequences affect liquidity and real estate decisions affect long-term cashflow. (01:43): An emotional urgency can push people into choices that make sense in the moment, but really not over time. So what this conversation is really about is learning how to slow the process down enough to think strategically, even when everything feels urgent, because sometimes the biggest financial mistake that people make isn't the decision itself. It's actually the sequence in which the decisions get made. And my guest today, Professor Kelly Leese Murray, helps people navigate exactly those kinds of high stakes financial decisions. Kelly works at the intersection of financial strategy, real estate, and advocacy, helping individuals navigate complex financial situations with greater clarity and foresight. And in this conversation, we're talking about how to avoid the kinds of financial mistakes that even very, very smart people make when timing, pressure, and competing priorities collide. Welcome, Kelly. It's a really pleasure to have you on the show. Kelly Lise Murray (02:45): Thank you so much. I'm really looking forward to this conversation. Katherine Miller (02:48): So let's start with the big picture. I talked on the introduction about a sequencing problem in divorce and I'm wondering if you could talk to us about what that is and why so many people miss it when they're actually negotiating their divorce settlements. Kelly Lise Murray (03:03): The biggest problem is that it looks like logistics, but it has financial consequences from the taxation changes based on the sequencing. If you have more than one house in the marital estate and you're deciding which one to sell first, well, what does the status quo usually mean? If it's in any age divorce, one spouse staying in the marital house with the children. If it's a great divorce and the children are adults, empty nesters, someone still usually is staying in the marital house. So which house would you sell first for a liquidity decision? We both need to pay our lawyers. We need to move the ball forward. If in the same tax year you sell more than one house and you sell them in an order that isn't protected with capital gains exclusion like a vacation house, a second home. What you've achieved is increasing your taxable income without the protection of the capital gains exclusion. (03:57): And then when you sell the second house, it actually increases your tax bill, which reduces the net. And if you ask the other side, they don't want to reduce their net. So it's actually a common ground of positivity if it's approached as a financial decision instead of a logistics only decision. All Katherine Miller (04:15): Right. Well, that was a lot of complicated tax talk for our listeners. So let's do a little bit of explanation. I think what you're saying is because there are protections on capital gains for the sale of your primary residence that you can only take advantage of in a certain period of time. So do you want to just explain a little bit what you were talking about there? Kelly Lise Murray (04:35): So the strategy is outside of divorce, anyone selling their primary residence. If it's owned by a husband and wife or it's owned by two people, you each have a $250,000 exclusion available to protect that much capital gain. And one thing we know from CoreLogic and Harvard is that we as a country have much more equity positivity. So people are equity rich or at least equity positive. And what hasn't changed is that $250,000 exclusion per person. It has not kept up with inflation. It's not going to cover your personal gain in a house that has appreciated during the marriage. If the logistics don't match up with the tax efficiency, you could end up selling a house that doesn't have any capital gains protection at all, not your primary residence. And then when you do sell your primary residents, that's going to be taxed at a higher rate also, which at the end of the day, just increases the tax bill and reduces your net and your spouse's net, which is something that is a positive for negotiation that you could actually work on together instead of fighting against each other. Katherine Miller (05:41): Yeah, that makes a whole lot of sense. I know that you work with a lot of people who are making really high stakes financial decisions under a lot of pressure. What do you think is actually happening in those moments that lead people to make really expensive and costly mistakes? Kelly Lise Murray (05:56): Well, you mentioned really smart people and that's what I'm seeing. Really smart people are making these mistakes, not because they're not smart, is that they don't have the information and they don't have the evidence they need. All of this is documentation of we're talking about real estate, so documentation of what was the purchase price? Is there any capital improvements? Those will increase what's called your tax basis. And then when you sell it, that reduces what you could possibly be taxed on. But if you don't have that information available, you're not making a fully informed financial decision. The other piece of that I see is have you ever had a computer that started up slow? Every time you start, it takes forever and all these things pop up. I view the divorce brain like that. There's at least 20% of your brain that is distracted with the stress and the worry and the decision making and all of that so that you don't have full decision making capacity, even though you are really accomplished and you are really smart. (06:57): And at some point when the divorce is over and the dust settles and you get your full brain back, you'll think, "Why did I say or do that and why did I not say or not do something else?" And that's why this message is so important that you can build a team that can help you make these decisions with more information. Katherine Miller (07:15): I think what you're saying, Kelly, is that there are really two things that are happening for people. And one is that there seems to be a sort of pressure to make these decisions and get this thing behind you. And oftentimes people talk to me about how can we get this over with really quickly because it's really uncomfortable, but there's a problem with that. And one problem is external information. One problem is that in order to educate yourself about all these things that are going on with real estate or basically anything, you need some time to get that taken care of. And another thing is what's happening in your brain and that is that your brain is not 100% online because of the stress. And it's a little counterintuitive that slowing things down might actually allow you to get the information, which might actually reduce the stress and allow you to process the feelings that are going on. (08:07): So taking a moment to breathe and ask and consult is something that could really help. Kelly Lise Murray (08:15): Absolutely. And the team, because it's collaborative, we're talking about real estate, but this means you need real estate information, you need financial information, you need tax information, which may not be the same thing as your financial planner. And then you need all of that with a licensed lawyer because it's legal advice is not just paperwork. It actually does involve facts and figures applied to the law that's going to dictate the outcome. Katherine Miller (08:42): Yeah. And there's this conflict between this emotional desire to get things over. And also, I mean, if you happen to be litigating, there's a schedule set by the court that this needs to happen by this time and that needs to happen by the other time. And it can feel like, "Oh my God, I got to get this stuff done." So is there anything else that you think that where there's conflict between the divorce timeline and the financial timeline? Kelly Lise Murray (09:07): The biggest conflict is the tax year. Divorce can take years. When you start the divorce, that may not be the year that you actually finish the divorce. Some states have very lengthy waiting periods. In a state like North Carolina, you cannot get divorced in less than a year. In other states, it can be very short. California, six months, it could be 20 days in certain states. So how quickly can you get divorced even if you had everything together? Sometimes that's not a quick answer depending on your state. But the other piece is during the divorce process, then the year the divorce is final, then the years after divorce, those could be separate tax years. And the tax efficiency approach is which assets are being sold in a single tax year. We were talking about real estate, but real estate on top of other investment assets because you and your spouse are looking at liquidity needs can boost your taxable income because our tax rate's progressive. (10:02): So a single year that turns out to be a tax year that crosses the divorce milestones could actually end up costing you and your spouse more in tax than you need to pay. If, like you were saying, slowing it down, planning it out and identifying which assets have a better opportunity for tax efficiency. Those are decisions that could be more cooperative with the other side. They don't have to be combative. Katherine Miller (10:28): So how do you think that these emotional drivers of wanting closure we talked about earlier and also the sense that people need liquidity because it can feel that in order to, say, purchase another home or sell this one and buy two new homes, because the house or real estate is often, as you said earlier, a major holder, people have a lot of equity built in there and they need cash. And so how do you think that those pressures of the emotions and then the needing to move on and wanting to establish themselves in a new living situation can impact their financial decision making? I mean, other than I think making silly decisions, like thinking, "Okay, I don't want to live in a rental. I want to buy something." I mean, my clients say that all the time, right? I want to buy something. I don't want to move twice, those kinds of things. (11:20): And so that can be really hard. Kelly Lise Murray (11:21): It is absolutely one of the difficulties of divorce because buying before you are divorced creates additional legal complications because even if you have a formal written separation, buying anything and not being divorced involves your spouse and signatures are needed and you may have to get them to sign up more than once if you're buying and the divorce isn't final yet. And that's why some folks default into keeping the marital house for that status quo and courts will approve the status quo because the status quo makes the most sense emotionally and structurally, but it may not make the most sense financially if your focus is the net. And that's one thing I would like everyone to focus on. We always look at the gross number, go online, "What's my house worth? What's my vacation house worth?" And you're looking at it an AVM, a generated number that isn't verified and can be manipulated by just changing how many bedrooms and other features that aren't locked. (12:17): But your net is what you keep and that's really the discussion we're having in terms of the difference between an emotional decision and an informed decision. If you are asking everyone, your team and the other side when they proposing something to you, what is my net and what is your net, meaning the other side, what are you proposing and what is your net? These tax consequences are major financial decisions that are often not addressed or not addresed in depth to give you the choices of the timing that could really save on significant taxes in a single tax year that can increase your net by 100,000 or more, which is a substantial number for anyone. Katherine Miller (13:00): Yeah. And it's not just taxes because when you sell a piece of real estate, there are a lot of other expenses that go into it. There's your broker and that's a big chunk. I mean, it might seem like, oh, it's three or four or five or 6%. Oh, that doesn't sound like a lot. But when you're talking about a very high end house, it's going to take a significant chunk out of your take home, out of your net to use your word, right? Kelly Lise Murray (13:24): Well, and total closing costs could be, you should be thinking 8% to 15% because it's not just the real estate agent fees, it's the other costs. And when you're looking at these, so that net number is so important, not just for the order of sale, but for all of the assets you're thinking of selling, what do you keep? What does the other side keep? What is being sold for liquidity? What is the net? You need to be looking at that net number and that alone is a major improvement in information seeking and it can help slow down the process enough because you're asking a very valid question that even a court would agree, "Well, she's asking about the net. You can't withhold the net. You have to show her what that is. " And so that's how I look at it and that's what I'm not seeing others doing regularly enough. Katherine Miller (14:14): And what's really interesting, Kelly, is that in New York, I don't know how this is in other states, but courts will take into account tax consequences for capital gains consequences, but they will not take into account things like real estate brokers fees. So if you're comparing apples to oranges and you're saying, well, one person is keeping the real estate and another person is keeping a brokerage account, the actual sell it all and see what you've got sort of after your sort of net, net, net, then basically that some expenses are and costs in doing that liquidation, which would be stupid to do, but are taken to account by courts and some are not because of this idea of speculation. So that maybe you'll sell your house yourself and you won't pay a broker's fee. So that's different than capital gains, which were like the things that we know for sure are death and taxes. (15:08): And yeah, if you're going to stay in your house for years to come, okay, no big deal. But if you're going to stay in the house for another two years, maybe this is a really big deal and something to consider in terms of what the closing costs are. Now, of course in negotiation, you can take those things into account, but there's nothing to force you to do it because a court wouldn't do it. Kelly Lise Murray (15:29): Right. And so that's the key to mediation. You can agree to things. So long as they're not illegal and against your state's public policy, you can agree to things in mediation a court can't give you. And it is not unreasonable, that's such a lawyer speak. It is very reasonable to say to the other side, let's look at both of our nets. This is a collaborative approach. Let's look at both of our nets. Let's maximize our net. If that would help you counter something they're suggesting that would just reduce the liquidated net. And you mentioned that if you keep the house, what I'm seeing is someone who didn't understand what keeping the house would cost and that's the audience I really worry about. Keeping the house without all the information, it's too big, too costly and selling it in less than two years gives you what I call the triple whammy. (16:19): So selling in less than two years, you've given up equity. I'm seeing on social media people saying, "We'll help you keep the house and trade retirement assets." So if you've given up the retirement assets because you didn't qualify to refinance the marital mortgage, you've kept the house. You realize within two years it's too much and you need liquidity and you can right size and actually have a better budget for yourself. So you go, you're selling solo and now all of those divorce decisions are working against you selling solo in less than two years because you gave up retirement assets, you only have 250,000 exemption to protect, but you're stuck with the original appreciation, you're stuck with the original purchase price of the house and capital improvements. You don't get to shield 500,000. You can only shield 250,000. So you may have significant house appreciation, you can only shield 250,000, which increases your capital gains tax bill. (17:17): Losing that other 250,000 if you and your spouse sold it together could be up to $95,000 in additional taxes for you. Then you have all the cost of sale yourself, 100% of those, 8% to 15% or more. You have the repairs. Does it have to be repainted or does it need significant structural repairs before you can sell it? You have all of those costs and now the math, it's not equal what everyone thought at the mediation table is lopsided within two years if that scenario hits. Katherine Miller (17:50): Divorce dialogues is brought to you by Miller Law Group. We believe divorce isn't just a legal process, it's a human transition. At Miller Law Group, we help people navigate divorce with dignity, clarity, and respect, focusing on conversations that lead to better outcomes for families. Learn more at miller-law.com Yeah, that's a lot to think about. And so for our listeners, Kelly, who are thinking, "Well, why should I start thinking about this? What's too late?" I mean, if they're in the middle of the process nearing the end, is it too late and what would ideally be the best time to start thinking about these things? Kelly Lise Murray (18:27): Mediation is too late. Most, and you know this, most property issues are mediated, many settle at mediation and mediation can create a binding contract that even the judge can't change. Mediators are trained to identify the easiest yeses to build momentum towards some more complicated issues. And if one spouse has already decided to keep the marital house and stay in the marital house, that's the easiest yes. So what I have seen over 18 years of reading these cases, thousands of cases across many states is that the decision to keep the house is expedient and in the moment it looks easy. This is easier, but it's actually the riskier choice without the information in advance. So you want to take your time before the mediation addresses key assets like the house. Katherine Miller (19:19): Yeah. Kelly, I think we should talk a little bit about what easier means, right? Because the way that you're describing it from a financial perspective, keeping the house is not easier, but what's easier is the sense of not moving, not disrupting your children if you have it, not disrupting yourself or one person, not thinking about the broader picture. And that can feel, I think, for people really overwhelming. So the sense is that we just want to stay put at least for a couple of years. And as I listen to you talk, I'm thinking, well, a couple of years is the worst scenario. Change it now or change it really in the future, but don't change it in a couple of years unless you put into place a strategy to deal with these kinds of tax issues and other issues, like co-own it for that period of time or something like that so that you are really thinking through the overall strategy from all perspectives. (20:24): And you might decide, listen, keeping it for a couple of years is worth it, right? It's worth the taxes or it's worth the risk and all of that sort of stuff, but without understanding what that is, that really isn't much of a decision. Kelly Lise Murray (20:37): Absolutely. And the other thing you can do is pay less to equalize keeping the house. When you show the other side, I'm keeping the house, I am paying the full capital gains after my 250 because your 250,000 exclusion once you transfer it to me is gone. So we would either jointly own it or if you want to be divested from the house and not be part of this house and we want to be financially divorced, then these are consequences and that gives you leverage based on numbers, based on financial evidence and the tax consequences. Those aren't emotional. Those are really powerful when you and your team have them in place before you start negotiating. Katherine Miller (21:19): So it seems like the divorce agreement is also a financial strategy, whether or not that's explicit or just implicit. So can you talk a little bit more about how that works on a broader plane? Kelly Lise Murray (21:33): The one thing I want everyone to lock in on to use current speak is this. The divorce property division, whether it was agreed at mediation or ordered by the court is permanent. There is generally no do- over unlike support. It's not easy to modify support, but it's possible. Property division is permanent, which is why I've been so interested in what do people sue about after divorce regarding property division, knowing they're unlikely to prevail. They're going to spend two years on appeal and they're going to spend tens of thousands of dollars more in costs to attempt to change something that they could have prevented but now is unlikely to succeed on appeal and most of those appeals don't prevail. That's the key thing. Knowing that it's permanent, you need to get the information so that you can avoid these mistakes that aren't easy to fix or aren't inexpensive to fix. Katherine Miller (22:24): Yeah. And I didn't know is not a reason to change something. I want to be really clear in the post Bernie Madoff era here in New York, there were a lot of people who said, "Well, wait one second. I got the Madoff funds and you got everything else." And it turned out that the Madoff funds were worthless or worse than worthless and you got everything else. And of course were like, too bad. You made that choice, you made that bed, now you're going to sleep in it regardless of the fact that this guy was a fraudster and a crook. If the Bernie Madoff situation does not move a court to change something about the settlement and you could think about from a court's perspective, have they have to renow open all of these settlement agreements and have all these people. So why would they do that? (23:12): But still the fact that I didn't understand the taxes, I didn't realize the house needed a new boiler. I didn't know what I didn't know that that is not something that any court wants to hear about, at least in my experience. Kelly Lise Murray (23:26): 100%. And I'm seeing it in multiple states. That's how it resolves on appeal. It's trial courts affirmed because it was not an abuse of discretion. And the other piece I found to be true, trial court is not there to save you from your own bad divorce deal. That's not what the court is there to even do. And again, that I didn't know if what you thought was a good deal turns out to be bad because of the asset you chose to keep the risk you accepted without fully knowing what you were risking. The court won't change it mainly because it can't, but also that's not what it's there for. Katherine Miller (24:00): So for somebody listening who feels totally overwhelmed and a lot of people do feel really overwhelmed by numbers and overwhelmed by taxes and overwhelmed by money. So for that person, what are some key questions that they should be asking their lawyer, mediator, financial advisor, someone for help with? Kelly Lise Murray (24:19): I go back to the net concept as the simplest takeaway. What is my net on the assets I'm keeping? So the net tax consequences, if I sold it the costs of sale, which unless it's ordered or agreed to be sold as part of the divorce, will not reduce what you pay the other side to equalize. So you want to know the net there. You want to know, for example, if it's retirement assets, who is paying for the qualified domestic relations order? Those are expensive to prepare. How many do you need? So the retirement asset exchange could have additional costs. And then of course, if it's the real estate, you're looking at those capital gains and that sequencing, what order are we selling property and can we be tax efficient and meet our liquidity goals? So just keep coming back to the net and you're going to be probing your team and the other side's team for real answers that can really help you. Katherine Miller (25:16): Yeah. I think as I'm listening to you speak that it's really the cost of implementation. It's one thing to talk about what it's going to be and what feels, and I'm going to put air quotes around this fair in the moment and then what is it going to cost to implement? And that includes taxes. So like that question of from between now and liquidation now and two years from now, now and dividing these retirement assets, how much will that cost me and what's involved in doing that? Because it's not just the money, there's time as well, right? Like you mentioned a QDRO, which is a acronym for qualified domestic relations order, QDRO. And that's the document that we need to use in order to transfer 401ks, 403Bs and other qualified under ERISA retirement plans. And without doing that, we create a tax event by transferring the money. (26:12): And so we need to do this and it needs to be prepared by a specialist. It needs to be signed by the judge. So you can see that there's some fees that are involved and they're not insignificant. It may not compare to what you paid your lawyer, but it's not insignificant. Kelly Lise Murray (26:24): It will change your net. It will definitely change your net. Katherine Miller (26:28): It might not be in what you budgeted for what you left. So coming to the end of our time together, I have just a few more questions. So what is one misconception that people have about dividing assets in divorce that you wish that you could waive your magic wand and correct? Kelly Lise Murray (26:44): My biggest wish is the permanence. And I already mentioned it, so I know that's not the best answer. The property division being permanent is the biggest misunderstanding. People don't fully realize what that means. And what I'm seeing after divorce is too many smart people asking very smart questions when it's too late to change what they already agreed to. And I would like to see that the other way around much earlier in the process before mediation. Katherine Miller (27:14): Yeah. And I think that it does come to this idea of fairness because what feels emotionally fair is maybe not financially smart. Yeah. All right. I have two more questions that I really like to ask at the end. The first one I call the reframe. So in the reframe, what for you is one shift in thinking that could really help someone approach financial decisions and divorce with more clarity and less reactivity Kelly Lise Murray (27:40): The timelines, understanding, looking at the divorce milestones compared to the tax years that will be involved, those are different timelines and they will affect your net depending on how the asset transfers or asset sales are structured. So really keeping in mind that the tax year is different during the divorce, the year the divorce is final, the last year you can choose to file taxes together and then years after divorce where you're definitely filing separate from each other, but you could still have joint taxable consequences. Katherine Miller (28:17): Yeah. And I want to point out that in some jurisdictions, New York City being one of them in New York State, lower New York State, there is a difference between the time that you file the divorce papers and the time the judge signs the divorce papers. In New York City, it can approach a year, one year for the filing to the signing. And in that period of time, it's almost always going to go into another tax year. So you could have signed in June and still be married on December 31st, which is the day of reckoning. Whether or not you're married on that day or not married on that day is what the taxing authorities count as meaning you're married, you're not married for tax purposes. And so that is something that's really interesting too and there are even some further complications. It also needs to be entered and between the time the judge signs it and it's entered, could be weeks, months even. (29:15): And while that is really a shame and it shouldn't be like that, it is that way. And that is something really that you need to understand and include in the planning for your taxing and other budgetary concerns, your net question. All right, last question. Kelly, what is it that has surprised you most about how people make financial decisions during divorce and all the work that you've been doing these years? Kelly Lise Murray (29:42): What surprises me about really smart people in divorce is giving up their voice. Your voice isn't being the loudest. The voice is the most informed about aspects of property division that really aren't arguable like the tax consequences, like the costs of sale, like the costs to prepare for the sale. All of those things could be common ground and whoever is the better prepared has the stronger voice and more leverage to improve your financial outcome. Katherine Miller (30:15): All right. Thank you so much, Kelly Lees Murphy. It has been my pleasure to have you on the show. Kelly Lise Murray (30:20): Thank you so much. Katherine Miller (30:28): If this conversation was helpful, share it with someone who might need it. And if you're navigating Divorce yourself, you'll find more resources and episodes at miller-law.com. Make sure to subscribe wherever you get your podcasts.