September 28, 2016. By Matt Okaty:
Most people know at least one person that has gone through a divorce and so have probably heard that few things go as planned. We hear this often in speaking with clients and trusted business professionals. Regardless of all the rules and guidelines in place, something always seems to go wrong causing delays, stress, and additional attorneys’ fees. Despite the aggravation that is paired with missteps, the parties can finally begin to move forward leaving the past behind once the divorce is final. When mistakes or issues go undetected until after the divorce, however, that unfortunately is when Murphy’s Law (“whatever can go wrong, will go wrong”) is most dangerous; by then it is too late.
In Massachusetts, a contested divorce generally takes 9 months or longer. In theory this would seem to be a more than sufficient amount of time to complete all the planning needed to reach a financially equitable agreement. In reality, however, a lot of that time gets wasted. All too often the parties are left scrambling at the last minute, deliberating in the corridors of the courthouse trying to hash out an agreement in order to avoid trial. The intense stress of it all, and wishing for the process to come to a close, can hasten planning and lead to years of living with a poor agreement. Jennifer Wolfsberg, Managing Principal and Certified Divorce Financial Analyst (“CDFA”), concurs with the idea that settlements are never easy and are not always equitable.
“The level of stress endured by families during the divorce process is often so intense many individuals agree to settlements that are not in their best interest in hopes of ending all conflict. The challenge is they are then forced for many years to live with these financial consequences.”
-Jennifer Wolfsberg, Managing Principal Centerpoint Advisors, CDFA
While an agreement may appear equal on the surface, it may not be equitable and the long-term consequences are seldom thought through sufficiently. The long-term effects of these agreements can have very adverse outcomes and consequences from what was previous desired at the time the agreement was signed.
Consider this simple yet common example: The parties jointly own two sizable investment accounts, and since the accounts hold a nearly identical market value, the parties decide to each take separate individual ownership, i.e. one account per former spouse. On the surface this sounds like a fair way to decide the assets, since essentially each will have an “equal” amount of funds. The parties, however, have not considered the tax consequences or the nature of the assets held within them. Although the accounts may be of equal value, one account may have a much higher capital gains liability, and this may not get discovered until years later when the assets are actually sold. The party holding this account will incur a much greater tax liability, thus decreasing the eventual worth of the account. If the spouse had agreed to a smaller amount of alimony in return for a greater share of the investment accounts, with the intention of selling off the investments to use as income, the unexpected capital gains liability might make it difficult for him or her to meet basic living expenses. As demonstrated in this example, it is thus critical that a cost basis analysis be performed by a qualified professional prior to dividing the assets in order to avoid this unfortunate result.
This same equal v. equitable issue holds true when a home is integrated into an agreement, especially when one spouse wants to maintain the home in lieu of liquid assets. Again this arrangement appears equal on paper, however it is not equitable when a non-working spouse is trying to operate the home with restricted cash flow and without access to liquidity. Any faulty assumptions made about one asset can thus have a ripple effect and cause unintended consequences in other areas of the agreement.
With many other variables possibly involved – life insurance, pensions, stock options, private equity, trusts, home ownership, rental property, family businesses, anticipated inheritance, educational costs, debts and liabilities, etc. – you can see how long-term planning becomes all the more crucial. A lot is at stake, and it should not be assumed that the attorneys handling the divorce can also be experts in all the financial intricacies. While there is obviously some overlap, law and finance are separate fields and good attorneys will seek further expertise, such as that of a CDFA or financial advisor, during this rigorous process.