In separation, deadly as poison,
— Hla Stavhana (c. 50 AD),
A separation agreement is a document that lays out the terms and conditions for separation and eventually divorce between you and your partner. For the agreement to be valid, both you and your spouse must agree to it and sign it. Regardless of which path to divorce you choose, one of the best things you can do to help ensure your security is to get a good separation agreement in place as soon as you can.
I did a survey of 100 divorced persons, both men and women. Their situations ranged from no children, no property to extensive property and dependent children. Ninety-eight said that if they had to do it over again, they would get the separation agreement started as soon as possible.
There is one key to writing a good separation agreement: clarity, clarity, clarity. Be specific in your language. Any term or clause in the agreement that may be open to question will be interpreted in ways you cannot even begin to imagine. And having no agreement at all can be very costly.
Here is one person’s story:
In hindsight, it is easy to see that if Tom and Joanne had a written agreement at the time of separation saying neither one was entitled to financial support from the other, this situation would not have occurred. Tom did not think they needed one, because they had no property or children and the issue of support seemed silly at the time.
Many people delay getting a separation agreement drawn up because they believe that they must have all issues settled first. In other words, they think it must be all or nothing. This is not true. You and you spouse can create an interim or temporary separation agreement at the time at which you separate. Doing so does not mean that you have no areas of disagreement. It simply documents those issues on which you have agreed. For example, your agreement may document physical custody of the children, visitation schedules, sharing of expenses during the separation period, temporary spousal support, or a host of other issues. This agreement is built upon one issue at a time, until all the issues are resolved and the final agreement is completed and signed.
From a financial planning point of view, there are several issues discussed below that may be covered by the separation agreement with which you want to take special care.
Protection for Children
Protection for children must be addressed at two levels. The first is financial protection. However, once you have worked out your support arrangements for your children, you should also look at using life insurance as a means of protecting the children’s income stream in case of the death of the payor. Your agreement could state that for the duration of the child-support period, the paying parent will maintain a life insurance policy for an adequate amount.
It is not enough that the receiving parent be the irrevocable beneficiary (i.e., the beneficiary cannot be changed without the beneficiary’s permission) of the policy. The policy owner should be the receiving spouse as well. If the receiving spouse owns the policy, he or she will be notified if the policy is cancelled by request or due to non-payment of premiums. After the paying parent has died, it is too late to find out that the policy no longer exists.
See to it that the insurance policy is in place before the separation agreement is complete. This way, if the paying parent turns out to be uninsurable, other clauses may be added to the agreement to ensure that the estate of the paying parent will assume responsibility for child support.
Some parents do not like to designate the receiving spouse as the beneficiary of a large lump sum of money. If such is the case for you, there are two ways you might handle the issue. First, you can arrange that the death benefit from the insurance policy be paid out as an annuity. (An annuity is a fixed monthly payment for the period of time selected.) If you want to allow for more flexibility and discretion, you may set up the beneficiary as a trust for the children and name a trustee to administer the support payments.
You should also give some consideration to what might happen in case the paying parent becomes seriously ill or is disabled. Consider the example below:
Could this situation have been handled in the separation agreement? I don’t know. It may depend on the laws of your jurisdiction and it is something to discuss with your lawyer.
One issue that can become very contentious between separated or divorced couples is that of special expenses. Special expenses are those expenses that cost more than $100 per year and which are incurred on behalf of the child. These may include childcare, school trips, sports equipment, extracurricular activities, dental or other health-care costs to name only a few. Usually, the cost is shared proportionally between the parents, according to income. If both parents are making approximately the same income, the expenses will be shared fifty-fifty. Again, it is quite possible for one party or the other to use this issue as a tool for control or revenge — which is all the more reason for you to make certain things are spelled out clearly in your separation agreement. The following example illustrates the dangers of not being precise in your agreement:
In your agreement, describe in as much detail as you can under which circumstance both you and your spouse will agree to any special expenses. As best you can, list the things you would both consider extraordinary expenses. I have seen circumstances in which dad considered shoes to be covered under child support payments, but mom considered the $150 pair of Nikes to be an extraordinary expense.
Many agreements do not include any clauses stating when special expenses must be paid or whether or not there is a penalty for not paying special expenses promptly. Such a situation means that the receiving parent may have to resort to getting a lawyer to “encourage” the other party to pay — a costly procedure — or may not collect at all. Since one parent is incurring the cost and having to carry the other parent’s share until the other parent pays, it is wise to lay out in your agreement a reasonable time frame for the reimbursement of special expenses. You and your spouse should also agree on an appropriate penalty for late payment; for example, interest on the cost of the expense. Make sure, though, that your agreement states clearly if, when, and how much interest may be appropriate.
One of the things that sometimes falls through the cracks of a separation agreement is the funding for the children’s postsecondary education. Your agreement should specify who is responsible for which educational expense, and should also deal with the disposition of any funds meant but not used for educational purposes.
Ensure also that your agreement is exact regarding financial responsibility for adult children still attending school full time. At what point should such responsibility terminate? Of course, if either parent wishes to continue supporting his or her children after the specified date, he or she may certainly do so. However, it is in your interest to have a stipulated date.
Once you have had children together, and if you love your children and intend to be involved in their lives, co-parenting is something you will share with your ex-spouse for the rest of both of your lives. This partnership will never end. Therefore, it is in the best interest of the children and both parents to develop a parenting plan. This can provide your children with the emotional security they need, which is reassurance they are still loved by both parents. Parenting does not end when the children go off to college or get married. Parents become grandparents; they are involved in all the triumphs and tragedies of their children’s lives to the day they die.
Aparenting plan allows you to discuss how you will handle discipline problems, family problems, sharing of economic help that may be needed by the children, and many other issues. While not directly a financial planning issue, access is often an area of major conflict that can result in significant financial hardship owing to legal costs. You can avoid this trouble by ensuring that your parenting plan and your agreement defines your arrangements regarding your children on weekends, school holidays, vacations, birthdays, religious holidays, or any other days that have significance to either of you. It should also clearly state who will pick up the children and drop them off. In addition, it should detail what both you and your ex-spouse consider a reasonable time frame for giving notice that you want to negotiate varying these arrangements.
The separation agreement also contains the details of property division and spousal support.
It should contain any formulas or actual numbers for the division of assets and liabilities. It should detail dates by which assets must be transferred to the other spouse, and liabilities paid off or assumed.
If there is going to be spousal support, then the separation agreement would describe the terms of conditions under which the support will be paid, as well as the amount and duration of the payments.
Besides financial protection, any terms relating to personal safety will also be written into this document.
The separation agreement is the key to the divorce process. A well-crafted agreement may make the difference between a civilized or a nightmare experience after the divorce. It and the parenting plan live on long after the marriage is over. If both you and your spouse sign an agreement clearly stating your expectations and the consequences of various actions, there will be little room left for interpretation. Should a conflict arise, your chances for a simpler, less costly resolution will be all the greater.
If one of the parties does not live up to his or her obligations in the agreement or divorce decree, then the other party has some options. For example, many states and provinces have agencies that will help receiving parents enforce child support payments. Some agencies will also help enforce spousal support, but it is quite likely the couple may end up in court over this issue. If personal circumstances change for either party, they may apply to the courts to change the terms and conditions of the agreement or the decree.
Again I stress that you do not have to agree on all the issues before you create a separation agreement. You can draw up an interim agreement that includes the issues on which you have agreed, and you can keep updating the agreement as you resolve other issues.
Akeela Davis is an Investment Advisor with TD Waterhouse in Vancouver. This article has been excerpted with permission from her book, Divorce Dollars: Get Your Fair Share, 2nd edition (Self Counsel Press, 2006).