Preparing For Separation And Divorce - Divorce The Smartway

ing the marriage; however, there may be no relationship to the value under the PBSA and the proper value for marriage breakdown purposes. If one or both spouses have Registered Retirement Savings Plans (RRSPs), the portion accumulated during marriage will also be subject to division. The Canada Pension Plan (CPP) also provides for the sharing of pension credits accumulated during a marriage. The plan is designed to ensure that low or non-income-earning spouses will have some pension coverage when their marriages end. You should be aware that there is more than one way to value a pension; if the amounts are significant, you should consider having an expert valuation done. Employee Benefits: In addition to retirement plans, many employers provide other fringe benefits and incentives to their employees. These benefits include yearend bonuses, accrued vacation time, accrued sick time, health insurance, life insurance, disability insurance, expense accounts, stock options, and more unusual benefits such as Phantom Stock, Stock Appreciation Rights, and Restricted Stock. addressed: Who is going to pay the expenses until the property is sold? How will the proceeds be divided? If one spouse pays the expenses, will he or she be reimbursed from the proceeds before they are divided? Debts: Generally, the person who takes the property will be expected to pay the mortgage or debt related to the property. Does this mean that the other spouse has no financial obligation for a joint debt? Absolutely not. Unless the spouse who takes the property refinances the mortgage, both spouses will still be obligated to pay the debt. The divorce decree cannot terminate your financial obligation to your creditor. For example, Bob and Amy are dividing their assets as shown in "Table One" (below). Some of these benefits may be included in your list of assets; other benefits may be included as income, and some may not be included at all. Determining if a benefit should be treated as a marital asset, income, or nothing at all can be very subjective. Different jurisdictions and judges may view the benefits differently. As a rule of thumb, if the benefit is guaranteed, then it should be included as an asset or as income. A year-end bonus could arguably be an asset, an income item, or nothing at all if it is not guaranteed. For example: Barbara and Jeremy were married for 15 years. Jeremy, the employee spouse, received a bonus every year. Barbara could certainly make a reasonable argument that it is an asset or income for purposes of calculating child and spousal support. Vested stock options would also be an asset; with the changes in the market, they may not have any value, while unvested stock options, on the other hand, may not be an asset. Personal Property: List your personal possessions, particularly those that are important to you, and note how they are going to be divided. This would include big ticket items, such as cars, boats, and motor homes, as well as items such as jewellery, furniture, photos, and personal papers. Keep the value of these assets in perspective - and recognize when it's time to give up the fight. We've all heard of those cases where parties spend thousands of dollars fighting over an asset that's worth less than 100. Each spouse should keep copies of joint tax returns. We recommend that you keep at least the past five years. In addition, you will need records to calculate the cost basis for any assets that you keep. Real Estate: Real estate includes your marital home and any other homes, vacation properties, timeshares, and rental properties, commercial and residential as well as any business property. The properties should be listed and the settlement agreement should address how they are going to be divided. If the property is going to be sold, the following issues need to be After the divorce, Bob would be liable for the car payment and Amy would be liable for the mortgage. If either neglected his or her payments, the other spouse would still be liable. But if Amy and Bob refinance after the divorce, the other spouse will no longer be liable for the debt. Requiring the other spouse to refinance after the divorce is something that should be put in the settlement agreement. They could, for instance, allow a certain time period to refinance. If the debt is not refinanced, then the asset support could be sold and the loan could be paid off with the proceeds from the sale. If only one spouse is obligated on the debt during the marriage, then the other spouse cannot be held liable. This occurs most frequently with credit card debt. However, if it is a joint debt, then just like the mortgage, if one spouse is responsible for paying the joint credit card debt pursuant to the terms of the settlement agreement, this does not mean that the other spouse is no longer responsible for the debt. Unfortunately, both spouses will remain liable to the creditor. If one spouse refuses to pay, then the other spouse will have to pay off the debt. If you can afford it, the best way to deal with credit card debt (unsecured debt) is to pay it off with liquid assets. Closely Held Business: A closely held business can be in the form of a sole proprietorship, corporation, general or limited partnership, or limited liability company. Before one spouse agrees to take a business interest, he or she has to make sure there are no restrictions on owning the interest. There could be legal or contractual restrictions on which spouse could own the business interest. If the business, for instance, is a professional corporation, then one Cut Costs Ease Stress Save Time Safeguard the Children Page 5

spouse may be legally restricted from maintaining an ownership interest. For instance, if Joe is a physician and Barb is an accountant, in many provinces, only Joe could own his medical practice and only Barb could own her accountancy practice. Another restriction may exist if there is a liquor license or taxicab medallion that is only transferable with government approval. A "buy-sell" agreement is an example of a contractual restriction that may preclude a transfer to a spouse. If the "non-owner" spouse is awarded the business interest in the divorce, then the spouse may be forced to sell the business interest at a substantial discount. For example: Joe owns 25% of a business that has a total value of 100,000; his share is valued at 25,000. If the buy-sell agreement requires Barb to sell her interest at 50% of the value, and if she is awarded the stock in the divorce, she would be required to sell her interest for 12,500. Property Settlement Note: A property settlement installment loan is one way to equalize the assets. Other possibilities include a cash payment or the transfer of a particular piece of property. For instance, if the wife is entitled to 50,000 for her interest in the family property, and the matrimonial home has equity of 50,000, the court could order that the home be placed in her name alone to satisfy her interest. Here's an example: Mike and Julie have the following assets (shown in "Table Two," below). To equalize the division of assets, Mike should pay Julie an additional 50,000. This can be structured as a loan payable to Julie in the amount of 50,000 at an agreed-upon interest rate. If Mike and Julie agree that the loan would be payable over five years at a 5% interest rate, then the annual principal and interest payments would be 11,549. This type of loan can have some significant drawbacks, however, including: TABLE TWO Home (Equity) Cash & Chequing Mutual Funds Value Mike Julie 40,000 3,000 3,000 7,000 150,000 Total Value 200,000 Should Mike pay interest on the loan? If the loan is unsecured, it would probably be discharged in bankruptcy. What happens if Mike dies or becomes disabled before the loan is paid in full? The settlement agreement should address who will own the existing life insurance policies. If the non-insured spouse is supposed to be the beneficiary, then the best way to protect his or her interest is to have the non-insured spouse own the policy. Using the above example, if Mike owns a policy and is the insured, and they agree that Julie should be the beneficiary, then he should transfer ownership of the policy to Julie. She should verify that she is the beneficiary of the policy. They can structure it so that he pays her the premiums as spousal support. That way, she can be sure that the payments are made and that she remains the beneficiary. Otherwise, she is at risk if he lets the policy lapse or changes the beneficiary. Other Assets: Some other assets to address in the settlement agreement include: Frequent Flyer Miles, lottery winnings or other prize winnings, club dues and annual membership fees, inheritance and gifts, and trusts naming one spouse as a current beneficiary. 7,000 150,000 150,000 50,000 Property Settlement Note ( 50,000) 50,000 Revised Total 100,000 100,000 Life Insurance: Some life insurance policies have cash value. This means that the owner could borrow money from the policy or trade the promise to pay a future sum at death for the current cash value, less any costs or charges. Other policies, such as term insurance, have no cash value. Term insurance may still be valuable though, particularly if the insured person is now uninsurable. Ken Maynard’s Divorce Survival Guide If the agreement isn't followed, it becomes another issue to fight over. What happens if Mike doesn't pay? Keep in mind the assets listed in this article are by no means exhaustive; you and your spouse may have assets in addition to these. They can make a huge difference in your post-divorce life, so take the time to list them carefully and discuss them fully before you settle things, once and for all. Δ 40,000 Mike’s Business Page 6

How I Helped One Couple How a I Helped One Couple: Let's look at an example on how it all fits in. John and Jane are 40 years old and have two children. They own a home worth 365,000 with net equity of 77,500. Their retirement accounts total 165,500 in value. John earns 90,000 a year and has takehome pay of 67,429 a year. Jane has never worked outside the home and has no job skills, but she hopes to get a job eaning 22,500 a year. The following settlement has been suggested. After the divorce, Jane and the children will live in the marital home, which will be deeded to her. She will also receive 44,000 of the retirement money and John will receive 121,500, thus dividing the assets equally. John will pay Jane spousal support of 250 per month for five years and child support of 225 per month per child. He will also pay college costs, which start in four years. John's expenses include his normal living expenses, child support, spousal support, and college costs. Jane's expenses include support for the children and are reduced when each child leaves home. This appears to be a reasonably fair settlement. However, an analysis creates the financial future illustrated in Graph #1 (below). Jane's assets will be completely depleted within seven years while John's investments will grow dramatically. The reason is that, soon after the divorce is final, she will need to tap into her assets to make ends meet. As an experienced Divorce Financial Specialist I anticipated this situation and suggested an alternative settlement that would work for both John and Jane. To improve Jane's financial future, the settlement could provide her with increased spousal support of 471 per month for 10 years. After all, a major consideration for determining spousal support is the need of one spouse and the other's ability to pay. Both numbers are a result of income minus expenses. The correct child support, according to the Child Support Guidelines in their province, is 1,293 per month for two children for a couple with their income. Jane could also be awarded an additional 24,300 from the retirement plans. She may also need to cut her expenses by 10%. These changes in the original settlement will produce the results illustrated in Graph #2. John will still have a surplus, which he can add to his investments. If John stays within his budget and invests all of his extra income, his investments have the capacity to grow to 2.5 million by the time he is 60. This sample case illustrates the value of preparation and analysis as a means of reaching a more financially equitable divorce settlement. If the separating couple’s intent is to treat both parties in a separation as equitable as possible, it is essential to analyze the marriage as if it were a financial contract, with tangible investment into it by both parties. Without preparation, they wouldn't have been able to make an informed decisions for more spousal support or an uneven split of assets. Cut Costs Ease Stress Save Time Safeguard the Children Page 7

Move Forward to Settlement When you're negotiating your divorce settlement, preparation is the key to success. Getting ready to negotiate. During the course of your marriage, you accumulated both assets and liabilities. Although there are regional differences when it comes to who gets what, basically everything purchased, received, or saved during your marriage must be divided when you divorce. So now you're about to sit down and negotiate a financial settlement with your ex but are you truly ready to do so? Then comes the question of what to do with the business. There are a few options, such as: In a business-owner situation, the business is usually most or all of their net worth, so there aren't enough other assets to compensate the other spouse. Even if selling the business is an option (it usually isn't), finding a buyer to pay the right price within an As with any negotiation, preparation, including a thorough understanding of the situation, as well as assistance from professionals to ensure your interests are being expressed is the key to success. Here are a few questions you need to be able to answer before sitting down to negotiate. Know what your marital assets are You can't divide the marital assets fairly if you don't know what's there. The disclosure process, which can be informal or formal, is important in every divorce. The informal way is to exchange lists of your assets and debts in an affidavit form. This method should only be used if you are sure that you know everything that exists in your estate. If you're not sure, then a more formal means of discovery should be utilized. What if there's a business or professional practice involved? A business or professional practice tends to complicate a divorce. More often than not, the value of the business becomes a focal point of contention. Couples need to seriously consider getting a professional and objective valuation of the business. The costs of a professional valuation are usually steep, but you can't divide something fairly if you don't know its true worth. Ken Maynard’s Divorce Survival Guide One spouse keeps the business and gives the other a reciprocal dollar value using other assets. Sell the business and split the proceeds. Keep ownership in the business at 50/50. acceptable timeframe is practically impossible. Most divorcing couples don't want to maintain a relationship, not even a business relationship, after the divorce. So what do you do? The only real options are a property settlement note (one spouse buys the other's share in a series of installment payments at a market-interest rate) or a spousal support arrangement to compensate for the difference. What about a budget? It is critical to determine the incomes and expenses of the parties and to try to estimate what the future expenses will be after the divorce is final. If there are children, one Page 8

spouse will probably pay child support to the other, and in many marriages, one spouse will also pay spousal support (‘alimony’). It is important to determine income levels and future needs before you start negotiations. A Divorce Financial Specialist such as a Certified Divorce Financial Analyst (CDFA) can play a critical role in determining both a budget and cash-flow needs. A Divorce Financial Specialist can also help map a course of action for the future by preparing different scenarios based upon anticipated changes in needs and income levels. ture needs will be met. What about your home? Over the years, we have seen people who were determined to stay in the marital home no matter what. In some cases, that can be a big mistake. First of all, it may be too expensive to maintain. In some situations, it's better to sell the home and find another one that's smaller and less expensive to pay for and maintain. As you move ahead and rebuild your life, it may be better to start fresh in another home. Aside from the financial considerations, there may be too many memories attached to the marital home to let you move forward emotionally as long as you're still living there. There are several ways to handle a marital home: What do you want and why? You must have a game plan when you enter into settlement negotiations. Do you know what you want? Do you know what you need? Are you thinking about all options? Are you being realistic in your demands? It is standard ne- What about personal property? Personal property is important, but don't spend thousands of dollars fighting over property with more sentimental than real value. Items such as collectibles, favourite home furnishings (from chairs to rugs to pots and pans), hobby equipment, and other personal property must not become the focus of your negotiations. A divorce financial specialist mediator can help you gain perspective on these items and focus on the big picture when you're getting ready to negotiate a settlement. Remember that an expensive television or computer has almost no value a few years after you made that big-ticket purchase. The courts don't look at replacement value but rather the actual value of the item, which, in the case of used furniture, is often a garage sale price. What about pensions? In many divorces, the most valuable assets are future benefits such as pensions. These must all be determined and considered before starting to think about a settlement. In most cases, the marital portion of these benefits, in other words the portion of the pension or other deferred benefits that have been acquired during the marriage are subject to division as part of the divorce settlement. A divorce financial specialist will help you consider these benefits as part of the overall settlement plan, making sure your fu- It can be sold immediately. One spouse can buy the other out by refinancing the home or by trading the home for other property. Both parties can hold it jointly for a number of years for instance, until the parent who has custody of the children remarries, or the children reach a certain age after which the home is sold and the proceeds divided in some fashion. In many cases, the party who remains in the home pays the mortgage and taxes and gets credit for any reduction in principal on the mortgage from the date of the divorce until the date that the home is sold or one party buys the other out. Major repairs are often divided between the parties with the person who advances the money for repairs being repaid at the time of the closing on the sale or buyout of the home. gotiating practice to ask for more than you expect to receive without going to extremes. Don't be a doormat, but don't be excessively greedy either. Insoluble disagreements arise when divorcthis article continues on page 10 Cut Costs Ease Stress Save Time Safeguard the Children Page 9

Forward to Settlement, continued from page 9 ing couples are negotiating based on wants rather than needs. Take the time to objectively determine your own needs and those of your spouse before starting to negotiate. ‘Be prepared to trade your Wants, for your Needs’ We have found over the years that if your demands are reasonable and based more on needs than wants, then the chances for a quick, fair settlement are good. There must be give-and-take and wiggle-room in your settlement proposals; your lawyer and financial advisor can help you strategize and come up with different game plan

Separation and Divorce Ken Maynard's Divorce Survival Guide. Ken Maynard's Divorce Survival Guide Page 2 Contemplating separation/divorce, most people put themselves under undue stress worrying about their financial well-being. Much of that stress is due to the fear of the unknown. So what