| An eNews Update to our Quarterly Newsletter |
August 2008
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There are many decisions to make during a divorce. There are emotional, legal and financial issues vying for attention. While many try to deal with each separately, those issues are truly intertwined. Legal and financial decisions often are delayed due to emotional issues blocking the resolution. The time frame to work through emotional decisions is different for everyone and this cannot be rushed. However, there are professionals who can separate the emotional issues from the legal and financial. Once the decision has been made to separate and divorce most know to contact an attorney for legal issues and a therapist for emotional support. It is important to know there are also professionals who can assist in making sound financial decisions. Accountants are the experts to consult to understand one’s tax liabilities or to conduct a valuation of a business. However, another financial question that people struggle with concerns the asset split being proposed. They need to know if they will be financially secure down the road. The only way to definitively answer that question is to project an asset split for each spouse showing how each will fare into the future. Many questions need answering in the allocation of assets. For example, what are the anticipated monthly expenses for each spouse? Coming up with a clear budget is imperative, but often difficult. In our professional experience most people do not know what they spend. This occurs in the absence of a realistic budget. This budget needs to be first created, then analyzed, and modified where necessary. Also, each spouse’s earning potential directly impacts the eventual outcome. This is one of the hardest areas to evaluate if you do not project each situation into the longer term, and that means through to retirement. If one spouse remains home to raise the children and the other spouse progresses in their career, this has to be considered in an “equitable” settlement. The only way to truly do this is by projecting each spouse’s budget, expected income and asset split all at the same time. And, it is important to note that “equitable” does not necessarily mean “equal.” A major consideration and decision regards keeping the family home. This is both an emotional and a financial decision. Many times one of the parties wishes to remain in the home so the children do not have to move. He or she feels that there will be enough upheaval for the children without removing them from familiar surroundings. However, the problem is that the equity in the house tends to be a large part of asset splits, and this equity is very illiquid and non-income producing. Keeping too large or expensive a house can also mean unmanageable monthly expenses. The only way to take the emotionalism out of this decision is to project it as part of the receiving spouse’s situation into the future. Another often overlooked, but potentially serious, consideration is the tax consequence of assets received in the split. An example is the receipt of retirement funds. If you will depend on that asset to provide income, the current taxation and potential penalty for early withdrawal will significantly decrease the money available for use. Also, if one party receives stock options in the asset split, the tax consequences of exercising those options will have the same detrimental taxable effect. So the stock option value upon which your asset split was originally calculated was, in fact, illusory. Pensions are another difficult subject. A pension is an asset when used to calculate an equitable split. The future income stream is not material in that calculation. Thus, this asset needs to be “present valued”. That means the future monthly benefits and the life expectancy of the recipient are calculated as a lump sum equivalent in today’s dollars. This is important because all splits are viewed in present dollars. All of these areas must be scrutinized as an integrated whole to determine if both spouses will be secure going forward. If the projection shows one spouse doing much better into the future while the other is doing poorly, the settlement is not equitable. Then the settlement needs to be revised. It is critical to know this before you agree to a settlement because, once you sign, it is hard to revisit and revise it. A Certified Divorce Financial Analyst (CDFA) is able to walk you through all of the financial questions explained above. Members bearing this designation work along side your attorney, CPA, therapist and mediator. They are able to take all of the information for both spouses and project their situations into the future. That way each spouse is able to feel more confident in his or her decisions. And many times, these projections can help shorten the divorce process. Once the future finances are understood, the difficult emotional issues can be worked through more quickly. This article is for informational purposes
only and not intended as financial advice. Consult your financial
advisor to determine what is appropriate for your situation. If you have any comments, questions or suggestions concerning this
electronic newsletter, please email us at fgi@fragassoadvisors.com.
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