When a couple divorces, the prevailing rule of thumb is to get it done quickly -- and, if possible, cheaply -- so they can move on with their lives. So, they consult lawyers and divide the family assets. He gets the house, she gets the pension. She gets the car, he gets the boat. Check, check. But what are the financial consequences of those decisions?
Take the hypothetical example of someone who we'll call Ron. When negotiating his divorce settlement, he agreed to receive $250,000 in RRSPs, earmarked to start his own company. But RRSP assets are taxable when withdrawn, and his lawyer neglected to factor that into the equation. After taxes, Ron had about $150,000 -- not enough to start that business -- and a far cry from the $250,000 his ex-wife received in a cash account.
Ron's situation is precisely why some financial advisors with divorce expertise are working with lawyers on settlements. While it's not yet the norm, more divorcing couples want to know the tax implications of their assets.
"Lawyers aren't trained in financial matters so right off the bat, they don't understand some nuances that are pretty important," explains Linda Cartier, president of the Academy of Financial Divorce Specialists. "People get a certain asset and assume the investment will last this long. Advisors can tell them for sure by projecting inflation numbers, rates of return and doing estimations for 10, 15 years or beyond."
Kathy McMillan, director, wealth management at Richardson GMP in Calgary, concurs. "Our strength is looking at the tax implications because we understand that it's not what investors own on paper, it's what they get to keep after taxes," she says. "We provide the facts and diminish the emotion the best we can and move them into a logical process."
McMillan's client Ruth (last name withheld), is currently going through divorce proceedings. The 40-year-old human-resources advisor in Calgary consulted McMillan about her options. Ruth, who had been married 16 years and has two young children, said she was an emotional wreck and probably would have made irrational decisions if not for a third-party point of view. For instance, she wanted to cancel her home insurance. After all, she and her kids were no longer living in that home.
McMillan made her see otherwise. Ruth's name was still on the title of the home. What if something happened to the house? Ruth is then liable. McMillan advised Ruth to wait until her name is off the title before cancelling anything. "It's good to have a financial professional say 'hold on and think this through,' because in the moment, you are just thinking emotionally and short term," Ruth says. "You need to rely on others sometimes to help you stop and look at the big picture."
Ruth and her husband Bill (not his real name) had difficulty deciding the best way to settle their divorce. McMillan presented them with four options.
1. Kitchen-table method: They would figure out the division of assets themselves and draft an agreement. Ruth and Bill didn't have an amiable split so they questioned whether they could come up with an equitable arrangement.
2. Send in the lawyers: They would go to two separate lawyers and each draft an agreement. In this scenario, the divorcing parties rarely communicate with each other, preferring to let the lawyers do all the legwork. "I believe the 'I'm-going-to-go-and-litigate' approach is going the way of the dinosaur," says McMillan. "People recognize that it's very costly and adversarial and doesn't feel good."
3. Mediation: Ruth and Bill would hire a facilitator who would provide a civil environment and help them build an agreement that's then given to two independent lawyers for legal opinions. Going this route ensures divorce proceedings stay out of the courts.
4. Collaborative: The flip side of an adversarial divorce proceeding. A participation agreement, signed by Ruth and Bill, the two lawyers and any other professional (i.e. financial advisor, child psychologist) brought into the process, says all parties agree to behave civilly and there will be no threat of going to court. If discussions break down, the hired professionals can no longer work with Ruth and Bill, since their mandate is about working in a collaborative fashion. All the professionals are paid by the hour, with advisors earning from $150 to $400 hourly, depending on location. This can get expensive but settlements are seen as more fair and equitable.
Ruth had a "great" lawyer in mind but his fee was $340 an hour -- pricey to retain for the long haul. Initial consultation meetings would set her back $1,500. McMillan advised Ruth and Bill to consider mediation since the costs would be a flat fee. This particular mediator, trained in financial matters, would do all of the asset division and develop an agreement. Total costs? $8,000 for both of them.
The mediator helped Ruth and Bill come to resolutions they could live with -- not an easy feat. Bill retained the house, his pension and the spousal RRSP that Ruth set up for him. Ruth got her stock options, cash savings account, RRSP and pension intact. She's relieved that housing prices have dropped in Calgary so she can afford to purchase a new home. "I feel OK with the way things got divided because I wouldn't want to be 40 and starting over and saving for my retirement. I still have a lot of working years ahead of me."
Looking for a financial advisor who specializes in divorce? Linda Cartier says about 500 professionals nationwide have either her academy's designation of financial divorce specialist, or the designation of certified financial divorce analyst conferred by the U.S.-based Institute for Divorce Financial Analysts. For more information, visit www.afds.ca and www.institutedfa.com.
