Economic Effect on Divorce Settlements
Does the economic environment affect divorce outcomes? You bet it does.
December 18, 2008
by Tracy Stewart, CPA, PFP
As a financial advisor to those in divorce, I help divorcing couples understand their financial situation and how they might want to design a financial settlement. During prosperous times, houses sell, cash-flow is positive and couples generally have optimistic attitudes, if only about moving on to their post-divorce lives, separate from their soon-to-be ex-spouse. During economic doom and gloom, separating their financial lives can be more challenging and any optimism is dampened.
The Marital Home As Albatross
For some couples, the marital home is one of the largest assets on their net worth statement. In prosperous times, the common settlement option is to quickly sell the marital home, share the net proceeds and use that money as down payments on their individual new homes. Couples are optimistic that their marital homes will sell in a fairly quick period of time and at a reasonably predictable price.
If selling the marital home does not meet their goals and interests, the couple can have the house appraised and use that value for offsetting purposes. (One party keeps the house and the other keeps an equal value of the stock portfolio.) During good economic times, couples do not readily challenge their marital home appraisals.
During difficult economic times such as these, the marital homes are simply not selling. Most divorcing couples do not want to hold onto the "marriage museum." They are looking forward to moving to a new home that is not saddled with bad memories. The marital house may be larger and more expensive to maintain than either spouse needs or wants. Recently, I saw one couple conversationally toss the house back and forth over a few months of negotiations. In one case, the couple did not want to reduce the selling price of their marital home, even though they did not have any serious buyers after a period of months. With the house languishing on the market, they eventually redirected their settlement ideas to flip the house from the wife's column to the husband's column. Neither wanted to stay in such a large home with high maintenance, but someone had to do it because they could not afford to own three homes. The question came down to which one of them could better afford the upkeep for an indefinite period of time. That person offered to move back into the house. Of course that meant the couple did not have money from sales proceeds for a down payment on the wife's new abode. They had to look elsewhere on their balance sheet for those funds. That, of course, brings up another set of problems.
Lack of Liquidity
A surprising number of couples who think the best long-term investments need to be illiquid investments. Other couples simply don't inquire about the liquidity aspects before they invest in vehicles such as real estate limited partnerships and hedge funds. Since these couples do not think about the financial impact of divorce when they make those investments, they are surprised and unhappy to learn they are prohibited from immediately removing their money from these illiquid investments. Clearly, these couples would have benefited from working with an investment advisor. Lack of liquidity can present problems when a couple is facing a divorce.
With unfortunate frequency, I have had clients who form real estate limited partnerships with a couple of their buddies. During economic boom times, these clients were not concerned with cash calls and restrictions on liquidity. They are inclined to sit back and watch their investments grow over several years unhindered by a change in the economy. However, when they end up in a divorce, they are surprised by the cash crunch. They need cash to pay the legal bills; money to support two households instead of just one; and money to buy a second set of everything for their children, who now live in two locations. The clients suddenly realize that they can't divide their share of the limited partnership because there is a clause preventing ownership by ex-spouses.
What Can Be Done to Help These Clients?
Is there anything these couples can do to reduce the pain? Aside from reconciling, they should opt for a Collaborative Divorce in which both parties can get the support, protection and guidance of their own lawyers without going to court. Additionally, Collaborative Divorce includes the benefits of communication coaches, child specialists and financial professionals all working together to help the couple negotiate a mutually-acceptable settlement without having a judge decide their future.
Even with all these professionals billing by the hour, collaborative cases often tend to be less expensive than litigated cases. The average Collaborative Divorce case is completed within 17 weeks, while the average litigated divorce takes 17 months. One of the best aspects about Collaborative Divorce is the fact that the clients are in control. By focusing on solving problems clients can work toward respectful results. This process includes full disclosure and open communication to assure the clients that they can cover all the issues in an efficient manner. Since they do not have to wait for multiple court dates as in a regular divorce, the couple can get through their divorce as rapidly (or as slowly) as they prefer.
Neutral Financial AssistanceCouples usually have "offline meetings" (separate meetings) with the non-attorneys. As the neutral financial CPA/financial advisor, you can help your clients have realistic expectations, educate them about their options and alternatives and reduce the uncertainty about their financial future. With your expertise you can provide specialized financial and tax advice concerning the impact of legal decisions on the individuals' current and future financial situation. As a CPA/personal financial advisor, your advice helps the couple arrive at an agreement using objective standards; whereas, in a litigated divorce, the couple pays two "hired gun" financial professionals to come up with diametrically opposed opinions so the judge can split the difference. As with the communications/child specialist, clients usually meet "offline" with the CPA/financial advisor, who bills at a lower hourly rate than do the attorneys. Again, the couple gets expert advice at a more efficient cost than in a litigated divorce. This becomes even more important in times of economic gloom.
Rate this article 5 (excellent) to 1 (poor).
Send your responses here.
Tracy B. Stewart, CPA/PF, CFP, CDFA specializes in family law litigation support in Houston, TX. She helps clients protect their wealth during property settlement negotiations. She is a member of the AICPA Personal Financial Planning and the Forensic and Valuation Services sections. Stewart is a board trustee for the Collaborative Law Institute of Texas as well as on the Executive Board of Texas Society of CPAs. You can contact her through www.texasdivorcecpa.com.