During the course of your marriage, you accumulated both assets and liabilities. Although there are regional differences when it comes to who gets what, basically, everything purchased, received, or saved during your marriage must be divided when you divorce. So now you’re about to sit down and negotiate a financial settlement with your ex – but are you truly ready to do so? As with any negotiation, preparation – including a thorough understanding of the situation, as well as assistance from professionals to ensure your interests are being protected – is the key to success. Here are a few questions you need to be able to answer before sitting down to negotiate your financial divorce settlement.
Your Financial Divorce Settlement: Do You Know What Your Marital Assets Are?
You can’t divide the marital assets fairly if you don’t know what’s there. The discovery process, which can be informal or formal, is important in every divorce. The informal way is to exchange lists of your assets and debts in an affidavit form. This method should only be used if you are sure that you know everything that exists in your estate; if you’re not sure, then a more formal means of discovery should be utilized.
Start by collecting statements for all your financial holdings and put together a list of your assets. Here’s an example of items you’ll need to list on an Asset Worksheet (remember to note the value of each asset, and who owns what portion of it):
- Retirement Assets
- Liquid Assets
- Real Estate
- Personal Property
- Cash Value Life Insurance
- Business Interests
As you work your way through the asset split negotiations, each asset can be moved to its appropriate column: “Husband” or “Wife”. To figure out the percentage split, divide the total for each spouse by the grand total.
What if There’s a Business or Professional Practice Involved?
A business or professional practice tends to complicate a divorce. More often than not, the value of the business becomes a focal point of contention. Couples need to seriously consider getting a professional and objective valuation of the business. The costs of a professional valuation are usually steep, but you can’t divide something fairly if you don’t know its true worth. Then comes the question of what to do with the business. There are a few options, such as:
- One spouse keeps the business and gives the other a reciprocal dollar value using other assets.
- Sell the business and split the proceeds.
- Keep ownership in the business at 50/50.
In a business-owner situation, the business is usually most or all of their net worth, so there aren’t usually enough other assets to compensate the other spouse. Even if selling the business is an option (it usually isn’t), finding a buyer to pay the right price within an acceptable time frame is practically impossible. Most divorcing couples don’t want to maintain a relationship – not even a business relationship – after the divorce. So what do you do? The only real options are a property settlement note (one spouse buys the other’s share in a series of installment payments at a market-interest rate) or a spousal support arrangement to compensate for the difference.
What About a Budget?
It is critical to determine the incomes and expenses of the parties and to try to estimate what the future expenses will be after the divorce is final. If there are children, one spouse will probably pay child support to the other, and in many marriages, one spouse will also pay spousal support (“alimony”). It is important to determine both income levels and future needs before you start negotiations. A Certified Divorce Financial Analyst (CDFA), can play a critical role in determining both a budget and cash-flow needs. They can also help to plan a course of action for the future by preparing different scenarios utilizing assumptions based on needs and projections with different income levels.
What About Pensions?
In many divorces, the most valuable assets are future benefits such as pensions. These must all be determined and considered before starting to think about a settlement. In most cases, the marital portion of these benefits – in other words, the portion of the pension or other deferred benefits that have been acquired during the marriage – is subject to division as part of the divorce settlement. A good lawyer and CDFA will help you consider these benefits as part of the overall settlement plan, making sure your future needs will be met.
What About Personal Property?
Personal property is important, but don’t spend thousands of dollars fighting over property with more sentimental than real value. Items such as collectibles, favorite home furnishings (from chairs to rugs to pots and pans), hobby equipment, and other personal property must not become the focus of your negotiations. A good lawyer and CDFA can help you gain perspective on these items and focus on the big picture when you’re getting ready to negotiate a settlement. Remember that an expensive television or computer has almost no value a few years after you made that big-ticket purchase. The courts don’t look at replacement value but the actual value of the item, which, in the case of used furniture, is often valued at garage-sale prices.
What About Your Home?
Over the years, we have seen people who were determined to stay in the marital home no matter what. In some cases, that can be a big mistake. First of all, it may be too expensive to maintain. In some situations, it’s better to sell the home and find another one that’s smaller and less expensive to pay for and maintain. As you move ahead and rebuild your life, it may be better to start fresh in another home. Aside from the financial considerations, there may be too many memories attached to the marital home to let you move forward emotionally as long as you’re still living there.
Here are the traditional options for the matrimonial home:
- One spouse stays in the house (with the children, if any) and buys the other spouse’s share by:
- Cash-out refinance
- Giving up another asset
- Property settlement note
- The spouses sell the house during or after the divorce process and split the proceeds.
In many cases, one spouse – often the wife – wants to keep the house. Though this might be emotionally satisfying, it usually makes little or no financial sense. The equity in the house is illiquid, meaning it won’t pay the bills.
If one spouse wants – and can afford – to keep the house, that spouse should pre-qualify for a mortgage before the divorce is final. Sometimes, a divorcing couple will decide that one spouse is going to keep the house. They take the other spouse’s name off the deed – and then the spouse who wants to keep the house gets turned down for a mortgage because he/she doesn’t make enough money to qualify to refinance in his/her name alone. The spouse who is leaving the marital home ends up being on the hook for the debt, has no reciprocal asset, and can’t qualify for his/her own mortgage because he/she doesn’t make enough to support both mortgages.
What Do You Want – and Why?
You must have a game plan when you enter into settlement negotiations. Do you know what you want? Do you know what you need? Are you thinking about all options? Are you being realistic in your demands? It is standard negotiating practice to ask for more than you expect to receive without going to extremes. Don’t be a doormat, but don’t be excessively greedy, either. Insoluble disagreements arise when divorcing couples are negotiating based on wants rather than needs. So take the time to objectively determine your own needs and those of your spouse before starting to negotiate. We have found over the years that if your demands are reasonable and based more on needs than wants, then the chances for a quick, fair settlement are good. There must be give-and-take as well as wiggle room in your settlement proposals; your lawyer and your financial advisor can help you strategize and come up with different game plans and scenarios as you prepare for the negotiation.
The Bottom Line
You must be well-represented and advised in order to negotiate effectively. This includes knowing the “ingredients” of the marital pie, and also how much of that pie you can realistically expect to keep as you prepare to negotiate your settlement. A team consisting of a lawyer and a Certified Divorce Financial Analyst® (CDFA®) – and perhaps a therapist if emotional issues are getting in your way – can help you understand your needs, your rights, and your true “bottom line” before you sit down with your mediator to negotiate with your spouse.
Divorce is one of the most difficult and stressful experiences you’ll ever have. During this emotional time, it can be hard to think clearly or rationally, so make sure to enlist the help of professionals who can guide you when you’ve lost your way. Remember: if both sides are somewhat unhappy with the outcome, then the negotiations went well.
Dr. Fadi Baradihi (DBA) is the former president and CEO of the Institute for Divorce Financial Analysts (IDFA). www.InstituteDFA.com.