How to limit divorce’s financial sting


Emotions and finances don’t mix, especially in divorce. Here’s how to stay in the black though you may be seeing red.

 By Terry Savage

When a marriage fails, the biggest issues in a divorce usually come down to a question of money.

A Savage Truth: The only people who profit from a divorce are the lawyers. If you accept this premise, you will consider the legal process simply as a necessary evil in the breakup of a marriage. Whether you’re a man or a woman, the aggrieved party or the one anxious for the split, the entire process will be far less painful — emotionally and financially — if you can come to some reasonable financial agreement.

That said, part of the reason the attorneys can ring up such big bills for divorce settlements is the underlying emotion that keeps the meter running. If one party is intent on inflicting financial pain to make up for emotional loss, then no rational financial discussions can be held until the wounded party determines that the scales are in balance. Unfortunately, this process of settling the score often costs both parties, enriching only the lawyers. So the lawyers are not highly motivated to speed the process.

Consider mediation
The best solution is to turn to a professional mediator to resolve the issues that arise in a divorce situation. A mediator is trained not to “take sides” but to work out a settlement that is fair and equitable for both parties. Whether the issues are strictly financial — child support, maintenance, division of assets — or considerations such as child custody, or even the custody of a pet, these professionals are trained to work out compromises and solutions. Then, with those issues resolved, separate attorneys (required in most states) can draw up the documents to bring the agreement to court. This is a far less expensive and time-consuming process than letting the lawyers argue a settlement.

If you’re wondering how to find a professional mediator, there are some Web sites that can help. (Links to those sites are on the left.) The Mediation Information & Resource Center lets you search for an accredited mediator by name, location or type of practice. Some charge by the hour, and others charge a flat fee for their services. You’ll find information on how to select a mediator, and what to expect from the process. Or go to the American Academy of Family Mediators’ site, which provides helpful information about the process and a referral service.

Once you’ve agreed on mediation, the next step for both parties to the divorce is to outline the issues of disagreement. For purposes of this column, we’ll stick to issues related to money. Even though each state has different laws about division of property and ongoing maintenance, there are some basic principles to keep in mind. One thing is sure: Lifestyles will change, because two people living separately just can’t live as cheaply as two people living as a single unit. If children are involved, the costs escalate. Second, you must be aware of the time value of money. Even a small bit of inflation can diminish the value of future fixed payments. And finally, you must recognize that dollars are not the only measure of value.

Division of assets
The most difficult part of a divorce proceeding is the effort to agree on the division of assets. It’s not as simple as dividing everything into shares. Tax issues and liquidity issues may impact the discussion. Most divorce mediators are specifically trained in tax issues related to divorce, and to the laws of the state in which they practice. Still, each party should have good counsel from a financial planner or accountant for solutions arrived at either by mediators or by lawyers.

The first step is to make a list of financial assets that can be readily valued. They typically include the home, furnishings and art objects, jewelry, investments (including the value of the parties’ respective retirement accounts) and business interests. (It gets sticky if one of the partners has stock options, as you then may have to put a future value on them.) You’ll need to put all these assets “on the table” for valuation and division. It’s hard to divide a lifetime together, not only for emotional reasons but because not all assets can be measured equally well in terms of dollars and cents.

For example, an appraisal or two will determine the value of the family home in the current real-estate market. Its important to distinguish between occupancy and ownership. Most of the time, the custodial parent is awarded residency until the children reach adulthood or are out of college, at which time the house is sold and the proceeds split. It is here that emotion and financial realities often conflict. Even amicable couples who would like to give the children continuity would do financially better selling the old “money pit” and starting fresh. If the home is kept, be sure there is a written agreement on when it will be listed for sale.

It’s even more difficult — and expensive — to determine the value of a closely held business. And the value of a professional degree — such as a law or medical degree — is hard to quantify. Yet if one spouse worked to put the other through school, lawyers certainly have argued successfully that the spouse has a vested interest in the earnings of the professional. In fact, a recent well-publicized divorce of a top corporate executive even gave the non-working wife a greater share in the family wealth based on her contributions to his career because she entertained and maintained a home environment for the family.

Also recognize that a division based on dollar value may not create financial parity. For example, if one spouse retains the family home to raise young children, that spouse also may shoulder the burden of property taxes and repairs. The other spouse, getting the same dollar value in the form of a pension fund, has an asset that is growing in value, tax-deferred. Clearly, these are not equal assets even though their dollar value may be similar at the time of divorce.

Distribution of income
Deciding if the parties will continue to compensate each other for financial inequities by providing a stream of support is an issue that ultimately may be determined by the laws of the state. But there are tax considerations as well. Maintenance or alimony is usually taxable to the recipient and a deduction to the payer. It may be possible to structure a settlement with a large lump sum up front, and a few years of ongoing payments that are considered a “division of property” and thus subject to more favorable tax treatment.

On the other hand, if one spouse is unable to manage a lump-sum division of assets, or if the paying spouse is not trustworthy, it may be preferable to purchase a lifetime annuity at the time of the divorce. Then the payment stream will not be subject to career challenges of the paying spouse, or his or her life expectancy. In fact, payouts that depend on future earnings should be secured by a life insurance policy purchased before the divorce is granted. The spouse who is the beneficiary of the policy should also be the owner of the policy, thus preventing the paying spouse from changing the beneficiary. A large one-time premium payment can make sure the policy remains in existence for as long as necessary.

Issues related to child support bring another dimension to the issue of ongoing payments. Child support is typically neither a deduction nor income to either party. But there are additional tax considerations, such as which parent gets to claim the child as a dependent on his or her tax return. And a competent professional will make sure the agreement covers future financial issues, such as college, summer camps and even which parent’s medical insurance will cover the children, or who will pay the non-covered medical costs, such as orthodontia.

Do not, under any circumstances, rely on the terms of a will to ensure a child is cared for in these negotiations. Ex-spouses and all children can be disinherited without recourse. In most states, the final divorce decree automatically cuts you out. If either parent is covered with medical insurance at work, make sure it is agreed that the child will not be dropped from the policy.

Other financial issues
Dividing the assets, and determining future payments are the heart of divorce’s financial debate — but other questions may remain. The spouse receiving a portion of a retirement plan must make sure that this order is enforceable in court. (In some states, Qualified Domestic Relations Orders are not enforceable on pension fund trustees.) And the recipient should make sure that assets are segregated, and understand the potential impact of a worker’s decision to delay retirement.

Legal fees are another sticky issue. Of course, if you’ve used a mediator, the fees won’t be overwhelming. But spouses who change attorneys frequently might run up a big tab. Either the judge or the parties can decide who will pay. There’s nothing more wasteful than running up larger bills by letting the lawyers argue about paying legal fees.

Once a divorce is finalized, each party enters a new tax situation. The recipient of maintenance money may need to file quarterly estimated tax payments. Now, more than ever, it’s important to get good tax and investment advice based on your new financial situation. And once it’s all done, don’t forget to change your estate plan to conform to your new situation.

Averting financial ruin
The breakup of a marriage is always sad, but it doesn’t have to be a financial disaster. The results can be far less painful than the horror stories you’ve heard.

P.S. Next time around, insist on a prenuptial agreement. It sounds mercenary, but it’s a lot easier to negotiate the terms of a divorce on the front end rather than the back





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