March 30, 2010
Splitting Assets in a Divorce
All marital assets are not equal! Even if the goal is to try to “split down the middle”, asset valuation prior to making a final division is critical. If for example the family home and a pension/retirement plan are both worth $400,000 today, the home is a non-liquid asset requiring cash-flow to support it, while a retirement account grows tax deferred with no cash input required. Retirement assets can be reallocated with changing economic factors, and thus can more easily rebound from market fluctuations.
Before waiving rights to a retirement plan that is a marital asset, be certain you will be able meet your own retirement needs. When assets are tied up in the equity in the family home, the only way to access that equity is with an equity line (interest is charged to access your money/equity) or by selling your home. The tax liability should be understood beforehand, and you will still need housing!
Taxable accounts differ from a tax-sheltered account for the same reasons, as earnings will be taxable each year. The age of the couple at the time of the division (ie, the number of years to rebuild retirement assets) must be weighed. An experienced financial planner and a CPA can determine the true value of marital assets, and suggest the best possible long term strategy for you. Thinking beyond today’s value is extremely important in reaching a fair settlement.
Earnings Potential: One spouse often earns a lesser percentage of the household income, or has minimized a career in order to raise children. In this situation, they may need help to pay for additional career training or education, as well as to meet the children’s needs during the time that additional training or education is being obtained. A house cleaning service or childcare may be needed for this to be realistic and successful. Short term assistance may result in greater long-term financial independence. Providing the financial means for the spouse who now needs to boost their earnings, or return to the workforce, for career counseling, or personal and career coaching, may help move the family along the path of healthy divorce recovery. Think of it as similar to career outplacement services in the corporate world. Facilitating a smooth and successful transition ultimately financially stabilizes and benefits both the children as well as both former spouses.
QDRO: A spouse who receives part of his or her spouse’s qualified retirement accounts will need a court order called a “Qualified Domestic Relations Order.”(QDRO). Your attorney should be made aware of ALL retirement accounts and the QDRO rules are for each plan. To expedite the QDRO, your attorney needs to obtain pre-approval from each plan before the settlement is final. The court must sign the order before an account can be divided. Be sure the order is sent to the retirement plan sponsor and is approved early in the divorce process. If not completed before the divorce is final, you will have to return to court later, incurring more legal expenses and risking the loss of assets in the account. Include survivor benefits in the QDRO. If you will be receiving retirement benefits from your former spouse’s pension, be sure the QDRO includes survivor’s benefits, if the plan allows them. Otherwise, those benefits could stop if your spouse dies before you do.
Also, understand your Social Security benefits. If your spouse earns more money than you do and you were married ten years or more, you will be eligible for Social Security benefits based on your spouse’s work history. That may mean higher benefits than if you have to rely on your own work history, and does not impact the benefits of the ex-spouse at their retirement time.
Tax Implications: Access to expert tax advice plays a critical role in determining the structure of a property settlement. Say it’s proposed that one spouse keeps a $150,000 individual retirement account and the other keeps a $150,000 taxable investment account. Sounds fair, but it’s not. A traditional IRA grows tax-free, and is then taxed when their money is withdrawn, while the non-retirement account is taxed on annual earnings along the way. So the two accounts are not truly equal in value, and sound assumptions of the projected net values are needed. Also, be sure the parties taking tax benefits are clearly spelled out, as well as how taxes will be filed and paid, for any partial year of marriage.
Life Insurance: If you rely on an ex-spouse for child support, retirement benefits, spousal support, or other financial benefits such as a commitment to pay for the children’s college education, purchase a life insurance policy on your spouse to ensure the money will be there. You should own the policy, and purchase it before the settlement is final so you know whether your spouse is insurable.
Sometimes people fail to consider the financial impact of the death of a non-working or part-time employed parent who is caring for children. The cost to replace all the contributions of that individual in order that the surviving parent may continue with job security and income production needs to be calculated and also covered in a life insurance plan. Some estimates are as high as $160,000 a year to outsource the services that custodial parents provide. The option to continue existing coverage and transferring those responsibilities along with updated beneficiary forms should be explored. This includes any current coverage of minor children.
Protecting Your Own Credit: When it comes to your credit, both spouses are liable for debt incurred on jointly held loans and credit cards during a marriage. Even when the divorce decree states that one spouse should pay certain bills and the second spouse pay others, both spouses are legally responsible, and creditors will pursue both parties in debt collection. It is important to request duplicate statements from creditors, close jointly held accounts, and immediately begin establishing credit in your own name. Working collaboratively on establishing separate credit is advised as during the time you are doing so, both parties’ credit scores are impacted by all of the joint credit and debt from the marriage. This can delay approvals and impact credit limits approved, as well as the ability of the individuals to refinance mortgages and car loans. Order and review reports from the primary credit monitoring agencies. This is recommended prior to finalizing the asset allocation agreement because there may be errors that need to be identified and addressed by the divorcing couple jointly. Re-check credit reports before signing final documents to be sure there are no “hidden”, new, or forgotten debts that may surface after the divorce is final.
With the emotional strain and financial complexities of divorce, a comprehensive, integrated, and coordinated approach is the best way to assure a fair and equitable distribution of assets. Everyone benefits when both parties have the support, guidance and means to move forward with their lives and children are the biggest winners when parents work together for their benefit.
If you’re contemplating a divorce and have specific questions about what you might be entitled to as part of a divorce settlement, please don’t hesitate to contact me for a free confidential initial consultation.
January 12, 2010
Considering a Divorce?
The good news is that even though many couples who seek legal advice on divorce regard this as the final step to separation, this is often not the case.
In my experience, a surprisingly high number of those spouses who seek legal advice regarding commencing divorce proceedings, manage to work out their differences and avoid the whole painful process. So don’t be afraid to seek advice on a divorce. It doesn’t mean that a divorce will eventuate and it may work as a catalyst for you and your spouse to get back into communication with each other and really sort out any marital difficulties that you may be having.
However, for those who really feel it is time to take the plunge, I can offer advice on how to reduce the trauma of divorce.
Here is some general advice on the subject of divorce:
·As the popular saying goes; it takes two to tango. It also takes two to create a breakdown in a marriage, so one party shouldn’t burden themselves with all the guilt.
· Don’t use children as pawns or to score points off each other. In the long term you are far more likely to damage your own relationship with your children than your ex’s.
· Use a family law attorney who can offer you a choice of different processes to help you resolve your dispute. Only some cases are ultimately resolved by contested court proceedings. You may be interested in mediation whereby the two of you work with a mediator to reach a mutually acceptable solution to all your issues, thus reducing the amount of money you have to spend on separate attorneys.
· You may want to talk to an attorney trained in the practice of collaborative law. This is a relatively new way of dealing with family disputes in which all negotiations are done in four way meetings of both parties and their attorneys.
· Choose your attorney carefully. Going for the cheapest deal may not be the best course of action in the long run. Make sure your attorney is someone you can work with and can fully trust.
· Be prepared to compromise. Sorting out arrangements for finances, housing and children can be very expensive. It is never, ever, worth arguing over the TV; you will pay more in the costs of so doing than it will cost you to buy a new one.
· However raw you are feeling, try and take the drama out of divorce and act with dignity. If you do this, you are far more likely to emerge from it feeling positive rather than broken.
Every case is different, if you have further questions, I offer a free initial consultation where I can go over your options in confidence.
November 15, 2009
Tips for Avoiding an Unhealthy Divorce Agreement
I’ve often been asked for some quick tips on how to avoid some of the uncertainties when you’re in the final stages of a divorce negotiation. While there is no handy check-list that will protect you against any unforeseen circumstances, it’s important to remember that this agreement will be legally binding for you and your soon to be Ex for many years into the future. So it’s worthwhile considering these main factors:
Watch out for Ambiguous Terminology.
A common example of ambiguous terminology that can cause future difficulties is- “the ability of the parties to pay.” Your ex-spouse may claim poverty or loss of employment just before the college tuition or camp bill is due. If they have no liquid assets to help pay these expenses, you may be forced to pay the entire bill! Be specific when it comes to how medical bills or extra curricular activities should be shared. Use percentages and dollar limits so that precise calculations can be made.
Clearly Define Emancipation.
What age do your children have to reach before child support payments end? Should there be payment adjustments for children attending college or not living with the custodial parent? Do you need to look at extended payments for children with special needs?
What Expenses do Child Support Payments Cover?
Generally, they apply to the “big three”- food, clothing and shelter. Camp, child care, braces, unreimbursed medical expenses, special religious celebrations, weddings, vacations-all are just a few of the many expenses that fall outside the “big three”. If you do not address these other expenses, you may quickly find yourself paying for things you never expected.
How Do You Defend Your Agreements?
Often, once legally binding agreements are made one party may end up not living up to what they agreed. What will you do to enforce your agreement when your ex-spouse refuses to reimburse you for a few thousand dollars of medical expenses? Filing legal motions are costly, time consuming, and usually invite counter claims. Having your agreements state that the “non-complying party” bear all legal costs relating to the enforcement of your agreement may prove very effective in convincing your ex to live up to his/her responsibilities.
I’ll take the time to make sure you fully understand the agreement before you sign off on it. I always like to discuss my clients’ life style and expectations. I understand that your children’s needs change from year to year and usually require more cash outlays as they get older. The hot topics outlined above can help assist you in avoiding an “unhealthy divorce agreement.”
LA Family Law 