In today’s complex financial landscape, couples seeking divorce should know that working out the financial details of their divorce settlement may lie outside the expertise of their legal teams.
According to Karen Covy, a divorce attorney, life advisor and blogger, “Lawyers know the law, but they are not accountants or financial planners. If your finances are complicated, if you own multiple businesses, or have lots of different investments, you may need to consult with a divorce financial planner…”
Based on my experience, I would take that advice a step further. If you or your spouse have any of the following — retirement accounts (IRAs, 401(k)s, ROTH IRAs, etc.) or other pension plans, children’s education accounts, equity in a home or other real estate, cash and securities outside of plans, or employer provided incentives, such as restricted stock, stock options phantom shares, supplemental executive compensation plans, bonuses or supplemental executive retirement plans, you most likely will benefit from the advice of a financial expert who is trained and experienced in divorce financial planning.
And the above list is just the tip of the iceberg. Most of the aspects of divorce finances are unique to each couple and can be quite confusing when it comes to how a specific asset is divided in a divorce settlement. It’s very much like an intricate puzzle where each piece must be set into the whole once other pieces are examined and set into place. One has to understand thoroughly the characteristics of each piece and how they relate to the others, and to the individuals involved, in order to ensure a truly equitable settlement is reached.
Here are a few areas where many attorneys can fall short of fully understanding what is at stake financially in a divorce settlement:
1. Not advising clients to develop a thorough post-divorce budget and a financial plan for the future. Creating a post-divorce budget is a hassle, but important for each spouse to understand precisely what life is going to be like (and cost) living as a single. This is often a sobering, eye-opening exercise for my clients, and usually sets the groundwork for much of the negotiation that follows. Each spouse needs to understand how an income stream will work for them (or not) in the years ahead, including how much and when Social Security benefits will kick in.
2. Not making sure all financial assets are valued correctly and divided accordingly.
I often see stock option and restricted stocks divided 50/50 simply because they are so difficult to value. Unvested options and restricted stocks are actually worth nothing today. However, they may well be worth thousands of dollars in a year or more. Awarding options or restricted stock to the non-employee, if allowed by the company, requires a great deal of specific legal language in the divorce decree. Dividing these types of assets also requires the employee spouse to share any notices from the company concerning the options. In addition, he or she must exercise those options based on a vesting and expiration schedule before they expire, or they become worthless. All of the above can be problematic if the divorce has been acrimonious.
3. Not thoroughly understanding all of a couple’s financial assets or making sure the couple understands them. When it comes to dividing any tax deferred retirement accounts, for example, specific steps must be taken to ensure a Qualified Domestic Relations Order (QDRO) is prepared and submitted properly to all custodians/financial service companies to avoid significant tax complications. Each custodian/financial services company may have their own QDRO wording that must be used and followed. Often a settlement may require more than one QDRO. If the retirement accounts include IRAs, SEP IRAs, of Simple Annuities, a QDRO may not be required to divide these assets. In the case of 401(k)s, 403(b)s and pensions, QDROs are likely required. Then, there is the issue of putting a value on the Defined Benefit Plan or pension plan. This is done using a present value calculation of the expected pension over the life of the employee.
4. Not making sure their clients know the restrictions and tax implications of various components of the settlement agreement. Taxes can often affect “the actual value” of property received in a divorce — whether it’s the amount of support one receives, the capital gains incurred when one spouse decides to sell the family home years after the divorce, the penalties and taxes that will be assessed when one spouse takes distributions from retirement accounts, or when one spouse receives stock options, etc. These various assets should not be treated the same! Each spouse must understand the value and the tax implications of all settlement components before signing on the dotted line.
5. Not understanding how money can be hidden by one spouse, especially when one spouse owns a business. Reviewing and evaluating a couple’s basic financial documents may not be enough. Attorneys should ask a client if he or she suspects that the other could be hiding money. And if so, where that money might be. If there is a business in the mix of marital assets, careful expert review of the business books and financial records is usually in order. In many of these cases, a forensic accountant and a business valuation expert should be called in to ensure accuracy. These experts are trained to know how and where to look for clues that indicate whether a business is being undervalued, or whether funds are being hidden or diverted.
6. Not knowing that alimony, in the form of contractual alimony, is available in Texas.
Few spouses qualify for “alimony” under the limited parameters of “spousal maintenance or support” as outlined in Texas divorce law. However, the couple can create an agreement to allow such payments which becomes part of the divorce settlement. This is fairly common between affluent couples. Sometimes one spouse will receive more assets, called an alimony offset, to compensate for paying alimony to the other spouse. Alimony is taxable to the recipient and deductible to the payer. One spouse may also agree in the decree to keep making a house payment, for example, which can be considered alimony, allowing him or her to deduct the payments as an adjustment to income.
While every attorney strives to represent clients valiantly in divorce cases, the increasingly complicated process of valuing, understanding and ultimately dividing marital financial assets equitably requires specialized expertise. This may simply fall outside an attorney’s realm of knowledge and training.
Join Patricia Barrett at her upcoming Leisure Learning class on May 24 and July 26, 2900 Richmond, Houston. She will also be presenting at the Guide to Good Divorce seminars in Houston on May 21, July 23 and Sept. 24, 2016. For more information on divorce financial planning or divorce mediation, visit Patricia’s website, www.lifetimeplanning.cc.
Each divorce situation is unique, with its own set of circumstances and financial issues. The information in this column is meant to provide readers with general guidelines.