If you are diligent enough to have saved for retirement, then dividing retirement assets can be one of the trickiest parts of divorce planning. There are countless types of retirement plans, federal and state laws that apply to different kinds of plans and tax consequences that must be considered in dividing retirement accounts.
But, perhaps more important is the overall question of whether each spouse will be adequately provisioned in retirement.
It is not uncommon for one spouse to have substantially more retirement savings than the other. This is especially the case where one spouse has worked throughout the marriage while the other has not.
In some cases the spouse with the greater retirement savings resists dividing the funds. The most common reasoning for this is “I spent x years working my tail off to get that retirement. I shouldn’t have to give any of it away.” I think we can all understand why someone might feel that way. After all, sometimes retirement savings feel like the only tangible reward that you’ve got to show for decades on the hamster wheel.
Nonetheless, there is at least one important fact to consider if you have kids and your spouse is low on retirement savings: If your spouse cannot afford to support themselves in retirement, then it may well fall to your children to support them.
Children are not legally required to financially provide for parents. But, many adult children feel some obligation to financially support parents who cannot provide for themselves. At the very least it can be a significant stressor to know that a parent is not financially secure, or cannot afford the care that they need.
You may not feel a need to ensure that your ex-spouse is financially secure in retirement. You may or may not be legally required to do it. But, when considering your options and what’s important to you, you may want to take a longer view of the situation. If you and your spouse are not able to secure retirement incomes down the road, then you may simply be passing the buck to your children.
Obviously, the facts of any given case will dictate whether this is an issue. But, the point is that a decision to not provide for your or an ex-spouse’s retirement in some way can negatively impact your children. And, that is a ripple effect of divorce that few people want to create.
Many people want to negotiate their separation and divorce without using an attorney. The reasons typically revolve around saving money and/or the fear of evil attorneys creating an unnecessary fight.
I am all for people resolving their own disputes whenever possible. But, in divorce, there are traps waiting for people who want to do it themselves. Here is a list of 10 the most common traps:
1. Failing to account for capital gains taxes
A lot of people just divide up assets or debts without regard to this issue. This can provide a nasty surprise if capital gains taxes reduce the value of the assets that seemed “equal” when you agreed on them.
2. Failing to structure financial terms to avoid taxes
Giving money or assets to your ex-spouse can bring on tax liability. Withdrawing retirement funds can trigger tax liability. Divorce situations can be excluded from some kinds of taxes, but only if handled correctly.
3. Retirement account division
Dividing these accounts is complicated. There are federal, state and/or tax laws that must be satisfied to avoid bad surprises down the road. Special orders from a court may be required to divide up a retirement account. Also, planning for what happens if the owner of the retirement account dies after separation, but before the account is divided is complex, but crucial.
4. Small business and family business ownership
Small business and family owned businesses present special considerations for a divorcing family. Failing to properly address these issues can lead to future problems with ownership, liability on business debts and other issues impacting the business.
5. Planning for income changes in support obligations
I have talked to many people who tell me that they handled their own separation agreement and agreed to pay “x” dollars a month but now cannot pay it because they lost a job or took a pay cut. This is a great way to end up in court and financial trouble.
6. Agreeing to obligations that are not legally required
You may inadvertently agree to do things that no court could require.
7. Agreeing to things that are not enforceable
You may depend on your spouse’s agreement to do something only to later discover that you cannot actually require them to do it under the law of your state.
8. Failing to formalize your agreements properly
Creating a legally enforceable divorce settlement agreement in North Carolina is not as simple as a handshake or even a just a written signed agreement. If it is not done correctly, your agreements may fail.
9. Agreeing to numbers without budgeting or planning
Too many people agree to financial arrangements without having the slightest idea of how those arrangements play out long term, or sometimes even short term.
10. Failing to structure spousal support for tax purposes
There are very specific tax laws and state laws that apply to spousal support payments. Failing to structure spousal support payments appropriately can lead to surprising tax and legal ramifications years after you thought your divorce was put to bed.
If you are facing separation or divorce, then consider consulting a qualified family law attorney before you finalize an agreement. An ounce of prevention is often worth a pound of cure.
“How Do I Know if I’m Making the Right Decision?”
This is one of the most common dilemmas that people face in negotiating divorce, custody, alimony, equitable distribution and child support issues. In fact, the fear of making the wrong decision can paralyze people and prevent them from making any decisions.
In my last blog post, I talked about the negative impact of indecision. The fear of making the wrong decision is one powerful fear that feeds indecision.
However, in a divorce context or any other, making decisions in the face of uncertainty it is critical.
The fact of the matter is that there are poor, better and best decisions. But, there are rarely right and wrong decisions. There are great decisions that turn out poorly and terrible decisions that work out well. No one has a crystal ball, and even the best analysis and prediction can be laid waste by future events. Life, as they say, is uncertain.
Nonetheless, decisions must be made. The best way that I know to handle the discomfort of making difficult decisions in the face of uncertain outcomes is from the book Difficult Conversations by Douglas Stone, Bruce Patton and Sheila Heen of the Harvard Negotiation Project.
These authors give the following advice:
“Don’t spend your time looking for the one right answer about what to do. It’s not only a useless standard, it’s crippling. Instead, hold as your goal to think clearly as you take on the task of making a considered choice. That is as good as any of us can do.”
That is tremendous advice in both divorce and life.
Many divorce clients want their attorney to fight for them. That can mean a lot of things. In my experience what most people really want is an attorney that will help them obtain the best possible outcome. “Fight” is just an easy one-word way of saying that.
But, if your attorney is fighting for you, they have to fight against something. The question then becomes: What are you fighting against? How do you define your “enemy”?
In the traditional, adversarial, litigation based divorce process the enemy is typically defined as your spouse. Therefore, you fight your spouse. Your time, money, energy and emotion are spent fighting your spouse. And, your spouse’s time, money, energy and emotion are spent fighting you. (And what happens to the kids in the midst of all that fighting?)
The adversarial way of handling a divorce assumes that dumping all of these resources into fighting each other will produce a “fair” result. And, fair generally means equally bad for both of you. In fact, divorce attorneys love to say, “A good result is one that everybody is equally unhappy with.”
In contrast, the Collaborative Divorce Process does not make your spouse the enemy. Instead, for each spouse, the enemy is the set of challenges and practical issues that can make divorce so difficult for you and your family.
Instead of using your resources to fight against the mother or father of your children, collaborative divorces use the combined resources of both spouses to fight against the practical problems that frequently come with divorce. These issues (and others) are most often the real enemies to a divorcing couple:
- Insufficient money to support two households
- Emotions that derail effective decision making
- Practical difficulties in co-parenting children from two households
- Differing parenting styles in two households
- Complicated valuation issues for assets or debts
- Overwhelming debt that cripples each party financially
- Blending new relationships into the family
- Paying for college and meeting financial needs of family
- Planning for retirement while meeting financial needs of family
The adversarial process most often produces a result that is equally bad for each party without solving any of these problems.
The Collaborative Process most often produces a result that is beneficial for both parties (and their kids) and solves many, if not all, of the issues in that list.
In divorce, the reality is that the enemy is not really your spouse; the enemy is the set of problems that come with divorcing your spouse. So, it makes sense to choose a process that recognizes the real enemy and focuses your resources on defeating those issues, instead of trying to defeat each other. Collaborative Divorce is that process.
(Special thanks to Michael Kothakota of Wolfbridge Financial, a combat veteran, for introducing the concept of “defining the enemy” to me.)
I am happy to announce that co-author Michael Kothakota and I have published our latest article on Collaborative Divorce in Resolved: Journal of Alternative Dispute Resolution.
Interdisciplinary Collaborative Divorce: A Process for Effective Dispute Resolution is intended to provide a brief but thorough explanation of the interdisciplinary collaborative divorce process for both practitioners and clients.
Each professional and prospective client must determine whether the ICD process is appropriate for their situation. But, our hope is that this article will provide an introduction to the process and help people make more informed decisions.
If you have questions about collaborative divorce after reading the article, then please do not hesitate to contact me to discuss the process and whether it may be right for your family or your practice.
Most people who get divorced do so without the benefit of a tax expert.
They get tax information and/or advice from their divorce attorney. However, as this Forbes article points out, divorce lawyers are not the best tax advisors.
In fact, most divorce lawyers go out of their way to disclaim any liability for tax advice in separation agreements and fee agreements.
So, if you are getting a divorce, and you can’t rely on a divorce attorney for expert tax advice, what do you do?
Collaborative attorneys figured this out a long time ago. In a collaborative divorce case, expert tax advice comes from the financial neutral.
The financial neutral provides unbiased neutral information and advice about tax issues that relate to divorce. That way, both parties get the same information at the same time. And, they are not getting in unnecessary conflicts due to differing tax advice from either their attorneys or their own individual tax advisors.
And here’s the best part about financial neutrals in collaborative divorces: A good piece of tax advice can save tens of thousands, if not more, for the couple. One small piece of information can have a huge impact on the financial futures of both clients.
On the other hand, the absence of that information can have a huge negative impact on both clients.
Tax issues are another big reason to take advantage of the collaborative process and the financial neutrals that help clients in the process.
Alimony has always been of the most unpredictable issues for spouses and attorneys. The chair of the Family Law Section of the American Bar Association indicated in a recent article “Divorce law is one of the most discretion filled areas of the law…”
In many states, including North Carolina, judges have wide discretion in awarding alimony, both in amount and duration. Compare this to child support awards that are largely determined by a formula in North Carolina.
A recent article in the February 2012 issue of the American Bar Association’s Journal highlights national efforts to create more predictable alimony awards.
The article states, “Many agree that divorcing spouses deserve more predictable outcomes” and that the current alimony process in court “has been attacked as antiquated, unbalanced and unfair.”
Here are some of the proposals and efforts that have been undertaken by other states or legal groups according to the article:
- In 2011 Massachusetts passed the Alimony Reform Act. The new law created a formula for calculating alimony awards. The law also ends alimony when the paying party reaches retirement. Further there is now a 12-year limit on alimony payments in that state.
- Oklahoma is trying to reduce a party’s ability to get military retirement pay as alimony.
- Rhode Island generally limits alimony payments to five years.
- In 2004, a Florida lobbying group tried to end alimony in that state forever.
- The American Academy of Matrimonial lawyers suggests the following formula:
- 30% of the paying party’s gross income minus 20% of the receiving party’s gross income
- The receiving party should not receive more than 40% of the couples’ total combined gross income
- For example: If one spouse makes $100,000 and the other makes $50,000, the numbers look like this: $100,000 x 30% = $30,0000; $30,000 minus $50,000 x 20% ($10,000) = $20,000. So, the receiving spouse would get $20,000 a year in alimony.
- And, the duration would be calculated by multiplying the length of the marriage by a fraction.
These efforts clearly indicate that there is a big problem for divorcing couples using the courts to determine alimony awards.
Their outcomes are highly discretionary and therefore very difficult to predict. Of course, couples always have the option to opt out of the unpredictable alimony system currently in place. They are free to resolve alimony issues in whatever way they choose in processes such as collaborative divorce and mediation.
As the current alimony system comes under further attack, wise couples may elect to do just that.