Working with a Financial Professional
A competent /financial advisor can be an invaluable resource – both for the client and for other professionals on the client’s “divorce team.”
Securing a satisfactory settlement, while minimizing financial and emotional costs for the client, is more likely to be achieved when a team of competent advisors is assembled who can:
- Determine and articulate legal entitlement
- Translate this into dollars
- Clearly analyze and explain issues
- Evaluate alternatives.
A lawyer will be the central person on the team and the chief negotiator. Additional team members are needed for non-legal issues to support clients in making the best-informed decisions that they will be comfortable with now and in the future.
In theory, financial issues can be explained quite simply and clearly. However, in practice, they often become complicated. An experienced accountant/financial advisor can deal with these complexities, explain the issues, and evaluate the alternatives in an understandable manner.
Financial issues generally are composed of two parts, support (child and spousal) and division of property.
State and provincial Child Support Guidelines determine most child-support obligations. In addition, other expenses for special activities, unusual medical/dental bills, private and post-secondary education, and other special items can be negotiated. Adjustments for inflation or changes in circumstances may also be addressed.
Spousal support is more difficult to determine. For some, it can be for a relatively short period until the receiving spouse can prepare him or herself and have the time to become more self-sufficient: for instance, going back to school or retraining so he/he can get a (better) job. For others, it can be for a longer period (perhaps even permanent) to reflect an obligation to maintain someone (often older) in a customary lifestyle. This is especially true in long-term marriages where it may not be realistic to expect the spouse to become self-supporting as he/she approaches retirement age.
Lawyers can negotiate what is fair and reasonable, and accountants/financial advisors can demonstrate the impact of a proposed settlement to both parties with projections of yearly cash flows and net worth for a 20-year period as an important component for clients to be comfortable with their decisions.
PROPERTY DIVISION IN CANADA
In Canada, the division of property is dealt with under provincial law; in Ontario, for example, it provides that increases in the net family assets from the date of marriage to date of separation should be split or equalized. Some assets can be excluded due to prenuptial agreements and other special situations, but otherwise, it is straightforward.
The objective is to create or ensure a proposal that equalizes the increase in the after-tax values of the net family assets from the date of marriage to the date of separation.
However, there are a number of issues that can complicate matters, and often, individuals are presented with proposals that are difficult to comprehend. An accountant/financial advisor can prepare a clear analysis for an informed decision to be made.
The first issue is to be satisfied that all assets are being disclosed. An experienced accountant/financial advisor can help. For more serious situations, forensic accountants can be retained.
The second issue is to ensure that a fair valuation is put on each asset.
- Cash, marketable securities, and other publicly traded assets are easy to value.
- Real estate is more difficult and may require the expertise of one or more valuators.
- Business interests can be very difficult to value and may necessitate a professional business valuator.
- Pensions can be one of the largest assets involved, and the basis for valuation and assumptions used can vary the valuation quite significantly. It is important that someone on the team understands the issues to ensure a fair valuation for the client.
The third issue is to bring all these valuations into “net after-tax” values. All assets must consider disposal costs and accrued tax liabilities.
- A dollar in a bank account is worth a dollar.
- A dollar in a principal residence is probably worth 90 cents plus, after considering disposal costs (real-estate commission, legal fees, etc.) and the exemption of any capital-gains taxes on disposal.
- A dollar in registered investments might be worth 55 cents. The ACB (Adjusted Cost Base) or tax cost is always zero, and the value of the investment is reduced by disposal costs and income taxes at full personal rates.
- Non-registered investments are more difficult. If the ACB is lower than the market value, there will be unrealized Capital Gains. Differences in marginal tax rates of the two parties can provide for some win-win opportunities.
Utilizing a team approach to negotiations can keep clients focused, grounded, and well supported to achieve a realistic settlement with least amount of financial and emotional energy. Lawyers can determine “legal entitlement” and accountants/financial advisors can use this entitlement in evaluating or preparing proposals.
Understanding legal entitlement and having it translated into dollars can help clients make the best decision for themselves and their children now and for the future. It can also reduce the stress and agony of making uninformed decisions and second-guessing themselves for years to come.
PROPERTY DIVISION IN THE USA
In the USA, property is also dealt with under state law. Every state has its own rules regarding what constitutes marital vs. separate assets, and how marital assets will be divided on divorce. So courts in California, Illinois, New York, and Texas will follow different rules when it comes to dividing the assets. Even though all states have their own unique rules, all states fall into two general categories: “equitable distribution” and “community property”. Here’s the general distinction between the two: equitable distribution states divide marital property equitably, based on a variety of factors, while community property states divide marital property 50-50. The majority of states follow equitable distribution rules.
Property division during divorce can be extremely complicated; ask your lawyer which rules your state follows, and what to expect when it comes to dividing your property.
A final financial issue deals with protection in the event that any of the parties die, become disabled, or suffer a critical illness. This area of risk assessment and protection for the surviving spouse, and especially any under-age children, must also be addressed. An accountant/financial advisor can also assist in this important area.
Douglas D. Lamb, CA, CFP, MBA has been providing trusted financial advice for over 30 years and is president of Spera Financial Inc., an independent firm providing financial and investment solutions to individuals undergoing separation and divorce. Originally posted here in 2006, this article was updated in 2014.