The Financials of Divorce

A Term Life Insurance Contract offers the simplest form of an insurance product that can grow, or be “built” as the insurance professionals say, to become a very complex product.  Term Life Insurance means the consumer is contracting with an insurance company to buy a Death Benefit.  As long as premium is paid, and anybody can pay the premium, the insurance company will pay the Death Benefit, under the terms of the contract.  In so many situations, I have found Term Life Insurance a simple way to guarantee full value of awarded spousal support.  This guarantee is effective regardless of the duration of the support or whether or not the awarded support is modifiable.  The Term Life Insurance contract guarantees the payee spouse receives support in the event the payer spouse passes during the duration of the awarded spousal support.  As an example, say the award is $2,500/month for ten years.  The Death Benefit, also called the Stated Amount would  be $2,500 x 12 months = $30,000/year x 10 years = $300,000.  Please remember when completing the Insurance Application, the payee spouse, the spouse receiving the support, should be titled as the Owner as well as Primary Beneficiary of the contract.  Secondary Beneficiaries are at the discretion of the Owner.  The Insured should be the payer spouse.  Premium is typically paid directly by the Insured, the payer spouse.  Premium is not to be included as spousal support.  In the event payment is not received by the insurance company, notification will be sent to the owner of the contract.

Other solutions to guarantee the payment of Spousal Support could involve reallocating certain higher risk asset classes, such as equities, to lower risk asset classes, such as shorter term US Treasury securites.  After reallocating, these assets can be titled exclusively to the recipient spouse.  Or, perhaps title these reallocated assets to some kind of trust?  I feel confident saying most of these other solutions carry significant costs, including but not limited to legal fees, transactional fees, investment advisory fees, and taxes.  Adding these up serve to reinforce the advantage of using a term life insurance contract.  However, the Net Present Value of the reallocated assets might well offer an advantage, especially to the payer spouse.  Let’s go back to the example above, $300,000 total spousal support over ten years.  Net Present Value has to do with the current value of the future sum by adjusting for interest rates and inflation.  The payer spouse will say, “I can put away a certain amount of money today, less than the $300,00, earning a certain interest rate, that will grow over the ten year period into the full amount.”  So, the higher the interest rate the payer spouse feels can be earned, and/or the lower  inflation rate assumed, the less money needs to be allocated at the present time.  Perhaps only $200,000?  The payee spouse will usually say, “Is that truly a safe rate of return?  But what about Inflation?  What will things cost, assuming even a low rate of inflation, over the next ten years?”  These are both valid positions.  The deciding factor can initially be determined considering the age and health of the insured, the payer spouse.

Term Life Insurance offers the consumer an opportunity:  For a certain amount of money you can buy a specific Death Benefit for a period of time.  This is common sense, no need for actuarial tables:  The payer spouse, for example, is 55 years old and needs to guarantee $300,000 for the next ten years.  Of course the 55 year old is more likely to pass within the next 10 years than, say a 30 year old.  The insurance company will certainly base premium on the likelihood of the insured dying within the time frame of the contract.    Age, health. family history, high risk activities, smoking, and several other factors enter into the decision as to whether to insure, how much of a Death Benefit to offer, and how much premium to charge.  The 55 year old might not qualify for $300,000.  Or, the premium for a 10 year contract might be very high.  If this is the case for the 55 year old, clearly premium for the required death benefit should be compared  to costs associated with alternatives.  One alternative is described above, reallocating asset classes; other alternatives are available.

Caveat:  When making tax and investment decisions, including but certainly not limited to reallocating assets, financial or otherwise, please be sure to use Licensed and/or Certified highly qualified professionals.  Life Insurance, even the relatively simple Term Life contract, can become extremely complex while not being very transparent.  Again, please be sure to retain a highly qualified licensed professional, preferably a multi-line life insurance broker.  For your protection, please be sure your agent or broker carries Errors & Omissions Insurance.

What are Qualified Plans?  What are Non-Qualified Plans?  What does “Qualified” Mean?  Please keep in mind this is not an in-depth discussion, just an introduction to some concepts and terminology:

One way to look at Non-Qualified plans is to look at IRAs, Deferred Compensation, various Incentive Bonus and Stock Option Plans.  Plans without a Plan Administrator, or any plan that does not fall under ERISA regulations would be considered Non-Qualified.  But what exactly does “Qualified” mean?  Very simply, if the plan carries a Plan Administrator, that plan is going to be qualified, literally by this Plan Administrator.

For instance, say you own a 401(k) or 403(b) plan provided to you as a retirement benefit by your current employer.  That plan is required to be “Qualified” and is regulated by ERISA.  So, somebody manages or administers the 401(k) or 403(b).  Plan Managers or Administrators might include Great Western Financial,  Met Life, Fidelity, Vanguard, TIAA-CREF, among a host of others.  These managers or administrators can be looked at as having two major components, administrative and investment.  The investment managers do just that, manage the investment options.  Fees are included for their management in addition to the internal fees charged by each mutual fund or investment option offered through the plan.  The administrative component includes all overhead and administration expenses that might range from sales personnel, office space, telephones computers, to the Statements issued directly to you.  The administrative component is also responsible for compliance with regulations and providing you with what is referred to as a “Summary Plan Description.”  This SPD is a very important document provided to the owner of the 401(k) or 403(b) plan by the Plan Administrator.  This Plan Administrator is the person responsible for “Qualifying” the plan under ERISA.  This person literally signs off on the plan.  Thus the term “Qualified Plan.”

Incident to a divorce, when dividing pension plans such as 401(k) or 403(b), Qualified Plans can be divided once an equitable agreement has been reached by the divorcing couple.  To effect this division of the Qualified Plan you or your attorney must request a Domestic Relations Order (DRO) be issued by the court.  Under ERISA this DRO must be approved by the Plan Administrator.  The Plan Administrator might even be able to provide a model document in compliance with their specific Summary Plan Description.  Once approved, the DRO becomes a QDRO, a “Qualified” Domestic Relations Order.

Getting back to IRAs, a non-qualified trust, since there is no Summary Plan Description and an IRA does not fall under ERISA, you would be hard pressed to get a DRO “Qualified.”  Yet, on occasion the financial firm holding your IRA might demand a QDRO, would you believe not even realizing they act as Trustee, not as a plan administrator.  Rather than fight their policies, offer a DRO to split the IRA as needed.

We will discuss Roth IRAs and other non-qualified retirement plans in upcoming postings.

http://vimeo.com/terjes/themountain

Take a moment.  Think about your children’s future.  Think about your future with them.  Think about your parents.  Think about their grandchildren.  Think about what you say to each of them and how you say it.  Take a moment.

Who is a “Celebrity?”  How can that special person be defined?  What is different about a celebrity divorce mediation?

A celebrity might be a man, woman, or child.  Celebrity status can be achieved by an individual, nationally or internationally, across several industries, trades or crafts, political institutions, and the list goes on.

How that special person is defined would appear to depend on a few similar factors.  How many fans, voters, supporters, and so on, agree this individual is to be considered “special.”  This quantitative approach might be a simple winnowing or vetting process.  In politics, how much money can be raised in order to win votes?  In sports, what are are the stats?  Extraordinary royalties earned on book or music sales?  What is the total monetary value, and specifically in sports & entertainment, the complexity, of the contract?  How popular is an artisan as measured by income?  What can be said about the quantitative approach wraps around a length of time.  How long do these individuals remain celebrity?  Usually, given this approach, celebrity status lasts perhaps a few years?  In the entertainment industry, the artist is a celebrity until the next big hit.  In sports the athlete might remain a celebrity until an injury or a “bad” season? 

When considering an evaluative approach, we think of a panel of peers deciding and making public that this specific person is special, a celebrity in his or her own right:  A Star.  Critics in the media offer their share of pronouncements.  On the other hand, an obvious and somewhat garrish example can be  found in the entertainment industry:  Hollywood Boulevard and the Walk of Fame.  Literally a Star set in concrete for a celebrity as determined by some peer group.  Being set in concrete is used here as a metaphor for the ”eternal” duration of celebrity and Star status.  Other examples might be inclusion in a sports “Hall of Fame,” statues in wax or bronze, ships, buildings or streets named after the celebrity.  The inference is that achieving Star status is something enduring, beyond quantification.    

For the purpose of a Divorce Mediation, as a Divorce Mediator involved in a celebrity divorce, the quantitative approach is first considered.  Then the couple must decide if they wish to and can capitalize on the results of an evaluative approach.  The approach to valuation in this area is quite similar and yet quite different than quantifying business good will.  

This brief article is the first of five that will be offered over the next several months, illustrating and delineating some of the differences when mediating a celebrity divorce.  Future topics will discuss such issues as 1. Security, Privacy & Safety, 2. Interaction with The Media & Press Coverage,  3. Agents, Handlers, & Other Interested Parties, 4. Working with the Celebrity’s Attorneys, and 5. A Special Status for the Celebrity Spouse?   

Over the holidays I read a thought provoking and refreshing new book by Diana Mercer and Katie Jane Wennechuk,  MAKING DIVORCE WORK: 8 Essential Keys to Resolving Conflict and Rebuilding Your Life (A Perigee Book/Penguin Group, © 2010.  240 pp plus Index, ppb $15.00 US  ).  On the one side, this title is cast against a back drop of so many “how to”  self-help books on making a marriage work.  On the other side, so many of the divorce book genre tend to be psychological or spiritual survival guides.  Located some place between these two genres are also  found the obligatory titles on parenting,  ”how to” get a fair property settlement or chose an attorney, anger management techniques, and so forth.  MAKING DIVORCE WORK  offers a fourth and very important option, guidance as  steps along the way or “keys” to a reconciliation either within the existing marriage or to the formulation of a new post-divorce family. 

What is so thought provoking about MAKING DIVORCE WORK?  The first seven chapters, out of eleven, can be used to improve an existing marriage or form the basis for a reconciliation.  This book is written to be optimistic, positive and forward looking.  The caveat for the Attorney/Mediator, or Divorce Mediator Practitioner, now becomes, “Don’t for a minute assume the marriage is necessarily over.”   The terms might be changed; the marriage might be redefined.  The question is transformed to, “How do we, the couple and mediator(s), know the marriage is truly over, irreconcilable?”  And, if the marriage is truly over, the divorcing couple can then use the “keys” to offer the new post-divorce family a chance to succeed.  In either case, whether being reconciled within the existing marriage, or creating a new family out of the divorce, the last four chapters of MAKING DIVORCE WORK make the point:  Grieving the Loss of Your Marriage, Forgiveness and Acceptance, Negotiating Your Settlement, and New Beginnings.

What is so refreshing about MAKING DIVORCE WORK?  Common sense and simplicity is presented to offset the confusion, anger, doubt, and guilt. This book does offer shelter from the storm.

I highly recommend MAKING DIVORCE WORK. 

How do you speak with your children about divorce?  When you first tell your children that mom and dad are getting a divorce do you use a script?  Do you, together as mom and dad, tell the children?  What kind of language might best be used?  An important point to emphasize is that mom and dad are divorcing to make life better.  What that exactly means, how that will be interpreted, will vary for each child.  Please remember, what the child hears, just as what anybody hears, will be accepted or rejected partly on the basis of your language and tone.  Are you being sincere in what you are saying?   What does your body language say?  Are mom and dad treating each other with respect?  Are mom and dad being civil?

After speaking with the children about divorce, how can you help them to adjust? 

I invite you as mom and dad, to please sit back and listen to this very informative audio: ”Talking to Children About Divorce.”  As you each listen, independently perform a forward-looking self-evaluation.  Mom and dad, separately write down you comments.  If you can, then share.  One of the questions to ask yourselves:  Can I do better for my children?  Am I working to make a better life for them?  From listening to this brief lecture, what can I incorporate into my conversations with the children, and how?

Please let us know how you have done it right as well as any mistakes you might have made.  Let us know how it turned out as time passed.  Let’s share information through a good story….

John is approaching 20 years as an Engineer with the Federal Government:  Great Benefits, Interesting Travel, Pays Well, Reasonably Short Commute.  Mary is a housewife and mother of two pre-teens, one special needs child takes medications to control aggression.  The family shares a lovely home; even in these poor financial times, they have significant equity in the house.

Over the years the couple had been in and out of marriage counseling; over the years the bickering, fighting, being unable to agree on issues regarding the children have intensified.  John has been sleeping in the basement for two years; the couple is ready for a formal separation.  Mary went to consult with an attorney who referred her to mediation. 

Telling me her husband was in China for the week, Mary & I first met in my offices without her husband present.  Intake was a productive if uneventful hour or so; I explained the mediation process and she told her story and that of the children.  At the present time Mary was deeply committed to a federally sponsored Special Education teacher’s certification program, allowing her to hopefully get a job in a year or so that might pay in the $50,000 per year range.  Mary was sure this would allow her the financial independence she would need after the final divorce.  Mary also shared that, based on the advice of her divorced friends, about six months ago she had moved the $100,000 cash jointly held in a money market account into an account in her name only.  The couple had no other liquid assets.  Mary said that when she told John, he reacted well saying that he did not want a divorce.  I stopped the session at that point asking Mary to please ask John if he would be willing to make an appointment and meet with me.  I heard from John some two weeks later.

John, Mary and I met at my offices.  I again explained the mediation process as well as what Mary and I had discussed; John told me his story with Mary present.  John and Mary decided to commit to mediation and work openly toward a Parenting Plan, Property Settlement, and Separation Agreement.  Over the next meeting their Parenting Plan smoothly developed; the parties agreed to shared custody.  The property settlement was another matter.  John and Mary went back and forth on the issue of a second residence.  John refused to rent a place; he wanted to buy a second substantial home.  Mary held back the money in her money market account that  John needed for a down payment.  Mary said this money is the only money she has.  John was convinced that Mary would get that $50,000 per year job after achieving her certifications and wouldn’t need additional funds.  John understood the reality that he could not afford two homes without Mary earning that $50,000 per year.  Back and forth.  I thought perhaps this was an impasse.  And then I realized….

The point of the story is what Mary said to me at the very onset, during intake:  John does not want to get a divorce.  During our several meetings John acted as if he wanted a divorce.  He even agreed to get a divorce; but, I never asked him to his face if he wanted one.  Lesson learned.   

This is real and illustrates how rich and wonderful Collaborative Divorce Mediation can actually be:

Times are very busy right now, but very, very good. A. moved a while back, kids have transitioned well – thriving, actually. A & I continue to work respectfully with one another. As for me, I have never in my life been more happy, and the best is yet to come, I’m sure. I got a job that I am excited about (to the extent I can be excited about working) – as a Sr. DNA Analyst at a diagnostics co in G. I start this month. Working on refinancing the house… And, my art is flourishing and I’m going on my first work mission to Africa this summer. Life couldn’t be better.

Thank you for your interest and concern.

Barry was the Financial Co-Mediator, Steve was the Attorney Co-Mediator, and a different Steve was the Child Care Specialist. Please contact us if you are curious about timeframes and/or the cost.

Note: We cannot guarantee or promise these kinds of results in each and every case. However, this is the result we do strive to achieve.

I found this very interestesting article citing a Minnesota divorce case addressing issues surrounding stock options that vest after the marriage is disolved:

“Unvested stock options have both marital and nonmarital aspects which must be apportioned. There is a marital value to the options since the options were granted during the marriage. There is also a non-marital element since they are likely to vest after the marriage has been dissolved”  However:

Does anyone take into account the tax implications, perhaps assign a discount or adjustment for a possible AMT?   Is treatment different for ISO or NQ stock options?   Your comments are welcome.