To Be or Not To Be (Divorced)

Every once in a while, someone decides to file for divorce after a long separation and discovers a big surprise. Shannon Cavers, who writes the always-interesting Houston Divorce & Family Law Blog, had a post about the situation last Spring. In her post, Shannon mentioned a couple who had been separated for 22 years. During that time, the wife bought a house. Because the marriage had not been legally ended by divorce, the house was technically a community property asset which would be divided by the court. The wife evidently thought it was unfair that she had to share some of her house equity with the husband she had not lived with for 22 years.

In California, and perhaps other states, the values of the community estate are set at the time of separation, but that's not the case in Texas. Here in Texas, the community estate can change right up to the date that a settlement agreement is signed or the court announces its decision.

I have seen separations of 2 or 5 or 10 or more years. In each case, there are issues of potential or perceived unfairness if the court just divides everything in existence at the time of the divorce, regardless of whether the items were acquired before or after separation. In those situations, the house and retirement accounts are usually the biggest assets, but there may be investments that have grown in value or someone could have won the Lottery. The community debt situation may have drastically changed, either increasing or decreasing. If your spouse runs up a lot of credit card debt between separation and the date of divorce, you may get stuck for some it.

What can be done to avoid an unhappy result? Here are a few ideas.

• File for divorce when you separate. That's pretty obvious, but some people don't want to divorce for various reasons. Some people will stay married legally so that their spouse can keep insurance coverage. There may be other religious or moral or legal reasons to stay married.

• Sign a partition agreement. The parties can divide their assets and liabilities and cover future assets, just like a pre-nuptial agreement sometimes does. A verbal agreement won't work and writing an informal agreement between the parties probably won't stand up, either. A properly drawn partition agreement will protect both parties, but they each need to have attorneys to advise and assist them.

• Reach an agreement and rely on the honesty and dependability of your spouse. That's usually a bad idea.

My suggestion: Unless there's a need to keep the facade of a marriage, you should go ahead and get divorced. Both parties stand to lose if they just wait around.

Retirement Planning During a Divorce

Most people seem to think that divorce is just about dividing up property and debts and dealing with the parent-child issues. That very broadly describes the process, but it really only touches the surface. One of the issues everyone should seriously consider is retirement, and they should go deeper that just splitting everything equally. To get people thinking about approaches on retirement, here are three questions to examine.

1. Should all retirement assets be divided 50-50? I would suggest that there are a number of factors to consider when dividing assets.

• Big picture. It helps to look into the future to decide what is and will be important to you. Are there short-term needs, such as education and training, buying new housing, starting a new business, etc., that will need immediate funding? How is your health? Are there any special needs for you or any family members? Are there any long-term or later-in-life needs that you are expecting? Are you the beneficiary of a trust? Are you expecting a significant inheritance? Does your spouse have special needs? Is your spouse expected to be a beneficiary of a trust? Are you likely to be able to create more retirement assets, such as adding to a 401K account, after the divorce? Can your spouse create more retirement assets post divorce? You should develop the financial context for your life in great detail so you can act in your best interest.
• Tax aspects. Some assets will come tax-free and others will require payment of taxes when the payments are received. You should look at your projected cash flow and living expenses upon retirement. Taxes need to be accounted for in determining the net resources you will have available. While your tax rate should be lower after retirement, you may have trouble affording the taxes because you will probably have less income then. If, during the divorce, you have the option of choosing an asset with taxes owing vs. an asset that is non-taxable, and the values are considered the same, the you should take the no-tax item, unless there are other disadvantages with the asset, such as being very risky. That brings up another consideration.
• Risk toleration. You probably need a trained advisor to help you determine the extent of your risk toleration. Generally, the higher risk associated with an asset, the greater the possible return, and the safer the asset, the lower the return is. Financial planners often look at your age, you needs, the value and nature of your assets, and other factors, in helping you decide how risky you want to be. Many people have assets with various levels of risk. You should consider how much risk you want or need.
• Employment prospects. Another important factor is your job situation. If you are already employed, it may be fairly easy to project your income into the future. If you are unemployed and/or just rejoining the job market, your future may be less certain and much harder to predict. Even people who have had secure jobs for a long time may be less certain in the current financial crisis. If you are trying to decide on a career after being out of the work force for a long time, you may have trouble just figuring out what to do. Also, quite a few people going through a divorce also go through job changes. For various reasons, there's a lot of job uncertainty during times of family turmoil, and that makes it hard to plan.

2. How do you make decisions on retirement plans during a divorce? The best answer is to get a financial advisor. It may be expensive, but it will pay for itself in the long run. If you are in a litigated divorce, each side usually hires their own expert or experts. There might be more than one if the experts have to testify. In Collaborative cases, the two sides jointly hire a neutral financial planner who works for both parties. In either approach, your attorney should be able to help you find someone, and probably will want to decide who to bring in. While there is cost involved in using a financial advisor, you will probably save money in the long term by being able to make the best possible financial decisions for you.

3. How do you carry out the decision? There are several possible ways to do so.

• Some retirement plans will need a Qualified Domestic Relations Order (QDRO). A QDRO is a court order that divides an existing account in a plan into two separate accounts which are independent of each other. Each of you will manage your own plan and you will separately be responsible for any taxes owed on your share.
• The terms of the agreement will be specified in the Decree of Divorce or in a separate Agreement Incident to Divorce (AID). The decree is the regular final court order that normally spells out the terms of the divorce and has the details of how the assets are divided.
• Sometimes, we use an Agreement Incident to Divorce. That is a separate document that is approved by the parties and then the court, but which is usually not filed with the court papers. It is used most often to protect the privacy of the parties and to give a little extra flexibility to the division of property. You can ask your attorney about whether it is something you would want.
• Finally, some investment accounts can be divided by the companies by the parties signing forms once the companies get a signed copy of the divorce decree. You can check with your agents to find out what they require.

Rather than making a knee-jerk response and just dividing all retirement assets 50-50 each, it would probably benefit the parties if they bring in expert help to figure out the best mix of assets to fit in with the opportunities and needs of the parties. Even if your spouse doesn't choose to think about these issues, you and your attorney should think seriously about your retirement when you are going through a divorce.

What Once Was Ethan Allen Is Now Just Sticks N Stuff

James J. Gross, in the Maryland Legal Crier blog, has another of his fine, common-sense posts about a topic most attorneys discuss often with their clients. While some items of personal property are worth fighting over, most things are not worth as much as the attorneys' fees incurred in the fight. I recommend that you read his following post and take it to heart.

"Dividing up the furniture and furnishings can be a difficult task in a divorce. But this is the tail wagging the dog. Most of the value of the marital estate is in the house and the pension. Furnishing and furniture might account for 5% or less.

Sometimes when everything else is agreed upon, folks get stuck on dividing the china, crystal, silverware, jewelry or the frequent flyer miles. Whenever this happens, and it is not logical or profitable, I usually think that they are hanging on to the marriage or the fight instead of the property.

If you want a reality check, jewelry is worth one third of what you paid for it, the minute you walk out of the store. Look at the classifieds and you can find used diamonds, which in truth are not one molecule different from new diamonds, going for as little as $500 a carrot. Gold may be selling for more than $800 an ounce, but your jewelry is measured in grams, and the pawn shop will give you around five dollars or so a gram for it.

Furniture depreciates around 20% a year, so if it is five or more years old, it is essentially worthless until it becomes an antique. And if you don’t believe me, go to an auction or a used furniture store.

The Kelley Blue Book is online to tell you what your automobile is worth. Don’t forget to subtract the car loan.

Each spouse can hire an appraiser to value the real estate at $400 or $500 each, then if they disagree they can appoint a third appraiser. Or you can ask a realtor. Or you can simply agree on the value of the house. Zillow.Com will give you a value for free. If you still want to fight about it, Zillow also gives you a range of values or you can fiddle with the assumptions and comparables to get a new value.

I mention all this so that you can weigh the value of what you are fighting for, against the legal fees that it is going to cost to get it."

It's easy to get caught up in the fight or to stand on principle or to seek "fairness", but we need to keep in mind the big picture and make intelligent decisions. It is often wise to skip some battles and instead try to balance the benefit with the cost of fighting or negotiating. You'll later be thankful you did.

The Increasing Popularity of Post Nuptial Agreements

There has recently been much discussion about post nuptial agreements in three excellent blogs (Sam Hassler's Indiana Divorce & Family Law Blog, the New Jersey Divorce and Family Law blog by Victor Medina and New York Divorce Report by Daniel Clements), as well as The New York Times. The posts and newspaper article all mention how popular and more common post nuptial agreements have become. That seems to be the case here as well.

Post nuptial agreements are contracts between husband and wife dividing up all or part of the assets they own. The agreements are also known as partition agreements. They may be done for estate planning purposes to help manage taxes and to distribute assets according to the wishes of the owners. They may be done to protect a business from personal claims or to protect personal assets from business-related claims or debts. They may also be done to preempt or minimize divorce issues. There are many legitimate purposes for preparing such an agreement. Hopefully, having such an agreement will reduce tension between the husband and wife and clearly define their financial relationship.

Under Texas law, the agreement needs to be in writing and signed by both parties. There needs to be full disclosure of the assets and liabilities. The agreement must have been voluntarily entered into with adequate time for consideration. It is not required, but it is highly advised that both parties have an attorney to review and advise. Someone signing a post nuptial agreement without an attorney is taking an enormous risk. If the agreement is valid, it will not likely be set aside, even if it turns out to be very one-sided or unfair, which seems to be different from the law in Indiana, New Jersey and New York. In Texas, it's "signer beware"!

The safest way, for both parties, is to use the Collaborative Law process to reach an agreement on the terms of a partition or post nuptial agreement. That would address all the legal requirements and would assure that both parties really understood what they were doing and fully participated in the decision-making process. Even if the parties don't agree to use the Collaborative process, they should each have their own attorney so they can complete an agreement that is workable and appropriate for their needs.