Category Archives: divorce

What’s his, what’s hers

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When divorcing partners divide their assets, the split isn’t always as fair as it first appears. Here’s what you need to know.

Two weeks after his divorce, Phil Doughty received a blunt letter from his ex-wife’s lawyer. It informed him he’d contravened his settlement by not giving his ex her $100,000 share of his pension within 10 days of the divorce.

“It was a knockdown punch,” says the retired teacher from Montreal. “I had no idea I had to pay her right away, or that the money would come directly out of my pension fund.” Doughty thought his ex would simply get a share of his benefit after he stopped working. “I’d never heard of a company taking money out of a pension eight years before retirement.”

With his pension fund depleted, Doughty’s monthly cheques were reduced by over a third when he eventually retired, yet he was still required to pay spousal support from what remained, leaving him strapped. “I had to find another lawyer to help me get out of those support payments I couldn’t afford anymore.”

Doughty (we’ve changed his name, and those of all the featured subjects in this article) believes his pension arrangement should have been handled differently—at the very least it should have been explained to him properly. “I guess it was just something the lawyers worked out between them,” he says. “My lawyer and I never really talked about the pension.”

It seems hard to believe a lawyer would not talk to a client about how such an important asset would be divided, but Doughty insists he would have remembered such a conversation. His situation is just one example of how partners frequently get divorced without understanding all the financial implications.

“Divorce changes a person’s financial situation dramatically and often there is no planning for it,” says Debbie Hartzman, a Certified Divorce Financial Analyst in Kingston, Ont., and co-author of Divorce Isn’t Easy, But It Can Be Fair. (CDFAs are planners with additional training in the financial impact of separation and divorce. See “Where to get help,” at the bottom of this page.) “I’ve had clients say things like, ‘I just spent four years fighting with my ex, I have this cheque for $400,000, and I have no idea what that means in terms of my financial future.’”

Surely part of a lawyer’s job entails discussing financial matters surrounding divorce. Apart from custody of children, aren’t money and property the big issues in divorce? “A family lawyer’s job includes giving advice about a number of financial issues, but we are not financial analysts,” says Bruce Clark, who observed many divorce-related financial problems during his 35-year career as a family lawyer in Toronto.

Lawyers may not anticipate the long-term implications of divorce-related financial matters. For example, Hartzman explains it’s possible to have different divisions of assets that all meet the 50/50 requirements of the law but have profoundly different financial consequences for the divorcing partners. Her book includes a case study that presents different ways to legally divide the assets of a middle-class couple. Both are 58 years old, and the largest assets are the house and pensions (his is four times more valuable than hers). In one scenario, the assets are split more or less equally, so the initial net worth of the two partners is about the same. However, her share of the man’s pension is paid out as a lump sum, and the support payments are not structured to reflect the fact his post-retirement income will be higher than hers. As a result, after age 65 the woman’s net worth and monthly cash flow flatline, while the man’s relative financial situation steadily improves. “The person with the pension can end up in a much better financial position than the person with the house, particularly if the pension is indexed to inflation,” says Jim Doyle, a CDFA with Investors Group in Vancouver.

Here’s a different scenario: she keeps the house and gets only a quarter of his pension. To the untrained eye that seems to be simply an alternative way of dividing the pie equally. Yet this arrangement ensures the woman’s net worth stays similar to the man’s for the rest of their lives, without diminishing his financial situation.

Of course, case studies do not translate into rules that ensure ideal financial arrangements for every divorcing couple. That’s why it’s a good idea to consult a financial professional as well as a lawyer if you’re going through divorce or separation.

Don’t assume every asset must be split down the middle. “People often want to split up each individual asset, but not all assets are created equal. It’s usually better to look at assets in terms of how to divide the whole cake,” says Hartzman.

Pinched pensions

Doughty is not the first divorced person to be subject to pension shock. Many people don’t even realize pensions have to be shared after divorce, says Clark. “In my experience, most people consider their pensions to be their personal property, as opposed to an asset that must be shared equally after a divorce. In a longer-term marriage the pension is often the single biggest asset.”

This was the case for Doughty and his ex-wife, who had sold their matrimonial home shortly before separating. By law his ex-wife was entitled to half the teacher’s pension that accumulated during their marriage.

“Pensions are very, very complicated assets,” says Sharon Numerow, a CDFA and divorce mediator with Alberta Divorce Finances in Calgary. “Defined benefit pensions must be independently valued by an actuary, and the rules about paying out a spouse vary from province to province.” For example, in Alberta there are no longer any provincial pension plans that allow monthly payouts to an ex-spouse when the member spouse retires. Therefore, the only option is to give the ex-spouse a designated value that is transferred into a Locked-In Retirement Account or LIRA (called a locked-in RRSP in some provinces). “This almost always has to be done after the separation agreement is signed, and not usually at retirement,” says Numerow.

On the other hand, Ontario recently adjusted its Family Statute Law in the opposite direction. Now a portion of a person’s pension payments can be made directly to an ex-spouse after retirement. Another possibility is for the spouse without the pension to get another asset equal to the value.

Bottom line, don’t underestimate the potential for misunderstanding pension division. It’s important to work with your lawyer to understand the legal issues, then talk to a financial planner who can help you appreciate the short-, medium- and long-term implications of the division of this and your other assets.

Close to home

Another key, says Hartzman, is determining whether it’s viable for one partner to stay in the family home. There are two main questions: Can one partner actually afford to keep the home? And how will keeping the home affect that person’s financial future?

“Most people I’ve worked with live in houses that require two incomes, so after divorce one person would be trying to maintain the home on half as much income, and often it just isn’t affordable,” Hartzman says. “Can you imagine how hard it is to tell someone already going through the emotional turmoil of divorce that they can’t afford to stay in the family home they and their children are so attached to?”

Sandra Baron, an Ottawa mother of two, did manage to stay in the matrimonial home after her divorce. A financial planner helped her figure out how to pull this off. “My first lawyer really didn’t seem to understand my financial situation,” Baron explains. “I went to see a financial planner and asked if I could afford to buy out the matrimonial home from my husband. He helped me work it out.”

Baron and her spouse had always lived within their means. They had no debt other than a mortgage with much lower principal than they qualified for. That, combined with support payments and Baron’s earning potential (she had been an at-home parent most of her marriage but began doing contract work after the divorce), meant she was able to keep the family home.

The financial planner also gave Baron some tax-saving advice on how to invest some money she had brought into the marriage. Since she had that money before the marriage and kept it in a separate account, it was not an asset that had to be shared equally. However, had she used that money to help pay down the mortgage, it would have become part of the value of the matrimonial home and therefore a joint asset.

This is also the case if one spouse receives an inheritance or gift during the marriage. In most provinces, as long as the money is kept in a separate account it does not have to be divided equally after a divorce. But if it is used to purchase a joint asset, such as a house, it becomes the property of both spouses. (In some jurisdictions growth in the value of the inheritance or gift may count as an asset to be shared.)

Perhaps the biggest factor in Baron’s situation was that she and her husband actually saved money for their separation. “It was almost five years from the time we realized the marriage was likely not able to be repaired that we saved for the eventual separation. Unless the relationship was harmful, I felt it was in the best interest of everyone—particularly the children, who are all that really mattered in the end—to plan and wait so things would be better for them financially.”

It’s a safe bet the path Baron and her ex-husband took is not typical of divorcing couples. Obviously they got along well, even after deciding to separate; they had no debts other than the mortgage and were both well acquainted with their family financial situation. The opposite is much more likely, says Numerow. “It’s common for one partner to know very little about the family finances, and they often don’t know the extent of their debts.”

Lady in red

When Anna Masters, of Taber, Alta., separated from her husband she moved in with her sister and started a new job at a bank. She also applied for a new credit card through that bank, so the person doing the credit check was one of her colleagues. When the Equifax credit report came through, the coworker quietly asked Masters to step into her office. “You are behind in all your bills and credit cards. Most of them are in collections,” the embarrassed colleague said.

“I was horrified,” says Masters. “Even the cell phone bills weren’t paid. I didn’t even know my ex had his own cell phone.”

That’s not the worst of it. Masters’ ex-husband had a line of credit she didn’t know about it, which listed her as a co-signer. Masters says he must have forged her signature on the application.

It’s not hard to find similar tales of woe. Alan Leclair of Winnipeg tried to remortgage his house not long before he and his wife split up. “When the credit check came in the banker said to me, ‘You’ve got debts you didn’t tell me about. You’d better go home and talk to your wife about it,’” says Leclair. These debts were considerable—between $30,000 and $40,000 in unpaid credit card balances. Fortunately, Leclair’s ex-wife eventually agreed to take responsibility for them.

Masters was less fortunate. She got stuck with a big chunk of debt—loans and credit cards her husband was supposed to pay off, but didn’t—as well as the line of credit he’d fraudulently put her name on. “I could only get part-time work at the bank, but I worked every other junk job I could find. It took me three years, but I paid off my share, and in a way I’m glad I went through the experience. I’m in control of my finances now,” Masters says.

The one smart thing Masters feels she did in the lead-up to her separation was to start setting aside money (“Omigod money,” she called it) so she’d have something to fall back on in an emergency. “Even before I realized the full extent of the financial mess we were in, I knew my ex was spending irresponsibly, so I started squirreling money away.” That money—about $3,500, which she kept in a sock hidden under a pile of towels in the linen closet—ended up being used to cover her living expenses during a spell of unemployment after moving to a new town after she was separated.

Leclair did something similar. “I had a friend who was going through a divorce and I asked him for advice. He said, ‘Put a few bucks away.’ So I did.” He hid cash in his house and even left about $500 at a friend’s house. “When the separation happened I was in scramble mode, dealing with all kinds of things. It was comforting to at least know that money was there,” he says.

Clark, the family lawyer, explains any money you stash prior to separation “will still be subject to division, but you will have the use of it while property issues are being sorted out. There is nothing illegal about this as long as you declare the amounts you have put aside.”

Other eye-openers

It’s hardly surprising that people have trouble working through issues like asset division and debt. But the path to divorce is laden with other potential financial mistakes.

One is trying to settle too fast. “People want it settled tomorrow,” says Jim Doyle, the financial planner. “Emotions often determine the choices rather than making the numbers make sense. I say to people, ‘Let’s slow down and do the math.’” He says it’s common for partners to make hasty, ill-advised decisions about asset splitting just to avoid conflict. “Sometimes in relationships where there is an imbalance of power, one person might simply capitulate, resulting in a financial decision that may have negative consequences down the road.”

Don’t ignore the tax implications. “One of the biggest items that is often overlooked in separation and divorce agreements is tax deductions, such as child-care expenses, and credits that may apply to separated and divorced parents,” says Numerow. For example, a divorced parent can claim one child as a dependent, but both parents cannot claim the same child.

Another dangerous road is trading property for time with children. “Big mistake—just don’t do it,” says Numerow. In addition, remember that spousal or child support and asset division are, for the most part, completely separate issues.

Finally, if you’re a common-law spouse, don’t assume the process is the same as it is for married couples. Generally, legal requirements regarding spousal and child support are the same, provided a couple has been living common-law for at least two years (three in some provinces). However, the division of assets is not automatic, as it is in a marriage, which comes as a surprise to many people, Numerow says. “Go to a lawyer and find out what you do and don’t have to share. Laws concerning common-law separations vary by province.”

One message Clark, Numerow and Hartzman all want to get across is this: both partners should always be aware of the family’s financial situation. If one partner is more hands-on with the money, the other at least needs to understand the big picture. “I’ve met a lot of spouses who weren’t involved in the finances and they’re ashamed,” says Numerow. “I tell them, ‘Don’t beat yourself up over it. Now is the time to begin your learning.’ However, if both partners were on top of the family finances it would make divorce a lot easier.”—written by John Hoffman

Where to get help

Certified Divorce Financial Analysts usually charge between $175 and $250 per hour. “If people do their homework and bring in all the relevant financial information, we can usually get a fairly good handle on the situation in two hours,” says CDFA and author Debbie Hartzman. “For an individual, it usually takes no more than three hours overall. With couples it usually takes three sessions of an hour or an hour-and-a-half each.” She notes that a better understanding of your financial situation can save your lawyer’s time, which is much more expensive.

To find a CDFA, do a web search for your town and CDFA, or visit the website of the Institute for Divorce Financial Analysts (www.institutedfa.com) and search by city, town or area code.

Source: MoneySense.ca – by  

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DLC on how to manage mortgages during divorce proceedings

Traversing the thorny issue of mortgages amidst divorce proceedings can prove to be problematic, and a Red Deer-based agent recently offered insights on how to handle the situation.

In a contribution for The Red Deer Express, Dominion Lending Centres – Regional Mortgage Group broker Jean-Guy Turcotte noted that it is possible to purchase a matrimonial home for up to 95 per cent of its value, should one desire to do so.

“[It] feels more like a refinance, but technically one spouse is buying out the other,” Turcotte explained. “The funds can be used to pay off the amount owing to your spouse and debts listed in the separation agreement – keep in mind not all lenders allow payouts and rules are changing on us all the time, so time can be of the essence.”

To qualify for the Spousal Buyout Program offered by banks, lenders, and mortgage insurers, the party who wants to purchase the matrimonial home should first complete a Legal Separation Agreement, “with the bare minimum that a lawyer provides each party with their own Independent Legal Advice (ILA).”

“[Both lawyers] do need to sign off to ensure that your rights are protected and to determine what liabilities are remaining from each other, if any (i.e., child support, alimony, etc.),” Turcotte said. “Ensure you talk about all the debts you jointly have so they can be separated appropriately and can be managed inside the separation agreement.”

An appraisal of the property’s value will also have to be conducted, as “[there] can be large value differences between what you think it’s worth and what it’s really worth.”

Creating a purchase agreement should follow, which can be done quite readily with the help of lawyers. Tapping the assistance of a mortgage professional to help with the other qualifying criteria would also benefit both parties as the process would be expedited.

Source: CANADIAN REAL ESTATE WEALTH – by Ephraim Vecina22 Feb 2017

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‘No safety net’: How a divorce rips a tornado through your finances, and what to do about it

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Divorce sucks.

Whatever else you may think of divorce, or marriage for that matter, we can all agree on that.

In fact, I looked up the word “trauma” in the Oxford American’s Writer’s Thesaurus while writing this article. To my delight: “Trauma, noun, 1. The trauma of divorce.” There you go. Divorce is known as so universally crappy that it’s used as the example for a word whose synonyms include “torture” and “war-weariness.”

Reaching beyond the obvious emotional implications though, a major consequence of divorce is the absolute tornado it rips through your finances.

Few couples realize that no matter how conscious the uncoupling, no matter how determined they are to dissolve their marriage congenially, their finances are likely to be, if not decimated, then at minimum thrown into disarray.

“I really don’t know if there’s a watershed mark when people look at this thing and say ‘I have no money left’,” says Donald Baker, a family law specialist at the Toronto firm Baker and Baker.

“During the divorce what happens normally is that they don’t even think of the financial ramifications because, you have to remember when they go through this process, it’s an incredibly emotional process. Even a so-called simple divorce … they aren’t really thinking that clear.”

That is, until they are confronted with the raw numbers.

To determine asset split and spousal support, Canadians must fill out a financial statement, which is a document of about 15 pages detailing income, expenses and assets.

“This is sort of the first point in the process for people who are saying, ‘I didn’t realize it costs me this much to live,’ and it usually comes as a bit of a shock for most people,” Baker says.

Greg, who asked not to use his real name, is 48, works in sales and had two sons with his wife of 15 years. They divorced last January in what he describes as “amicable” circumstances.

“Almost no one talks about how you’re going to manage your finances when you’re separated before you actually go out and educate yourself at that time,” he says.  “And you’re dealing with a short window of time to bring yourself up to speed…. You’re not an expert and you’re learning things that surprise you.”

The biggest surprises for Greg were not the obvious hefty expenditures, like child and spousal support, but the smaller legal and administrative costs. For example, both Greg and his ex-wife had to take on critical illness insurance.

“There’s no fall back. Even in a situation where two people are married and one is stay-at-home, that situation can be changed and that other person can go back to work,” he says. “I don’t have that option (now).”

They also spent thousands on legal fees.

The cost of an uncontested divorce ranges from $1,000 to $3,500, according to 2015 Canadian Lawyer’s legal fees survey, but you also have to consider the cost of things like making a new will (another $430 to $750).

“I was still surprised, despite how amicable (we were) … how expensive the legal system was to navigate through,” Greg says. “And we did as much as possible ourselves in terms of the paperwork.”

Baker says that the court’s main fiscal aim is to ensure both parties “leave the marriage as equal partners.”

That means all property is generally split 50/50 and the spouse with the higher income pays the spouse with the lower income an equalization amount so that one party doesn’t experience a huge drop in his or her standard of living. (Any assets, besides the marital home, that you can prove you brought into the marriage you usually get to keep.)

But no matter how careful a couple is, there are almost always expenses that don’t make it into the calculations.

For example, Greg was required to split his pension plan with his ex-wife. Although he found the concept of the division fair, what really irritated him was that the pension plan administrators charged $800 just to find out the present value of the fund — a fee he was responsible for paying in full, since it was his asset, even though both parties would benefit.

He also got his taxes reassessed this year because he and his wife agreed to split the Child Tax Benefit, which seemed fair to them since they share custody. But the CRA told him the party receiving any kind of support is the one that can claim the entire tax credit.

“I still don’t understand why the system is set that way. It’s hard to comprehend where the equality is,” he says. “As far as I know we’re trying to set up each household with roughly equal income, so we naturally assumed that (credit) would be split as well.”

Ultimately, whichever way you split it, running two households is simply more expensive.

“It’s like single people,” Baker says. “You have two separate lives financially. Instead of paying one rent or one mortgage payment you have two of them. Those are after-tax dollars, so that’s pretty painful financially.”

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Greg dealt with this by going through his budget line-by-line. Luckily, he was fiscally aware enough to know what he was spending and managed to trim his expenses by about $300 a month.

“The biggest thing I recommend everyone to do is go through your expenses twice,” he says. “Once to eliminate what you don’t need and, for the things you want, ask how you can get that stuff as low as possible.”

Even if you can cut back a bit, having higher overall expenditures means that saving for retirement often gets put on the back burner after a divorce.

Greg and his ex-wife used to put money in their RRSPs, but there’s simply not enough cash to go around right now.

“I’m not making progress on building security for myself and a buffer,” Greg says. “It’s a very thin line for me and I would be in a situation, if I were to lose my job, I would almost inevitably have to put up the house for sale immediately.”

Despite their experience on either side of the issue, neither Greg nor Baker can see any real way to prepare yourself for a divorce.

I don’t have a safety net and neither does she

Baker does suggest that people draw up a Marriage Agreement, sometimes called a pre-nuptial agreement, before they wed: Taking inventory of any assets you have before exchanging vows makes it easier to deduct them from your calculations upon dissolution.

Greg suggests taking a more practical and serious view of marriage and divorce.

“I believe in love and romance and marriage and all that stuff,” he says. “The only thing I’ve changed slightly is that I believe both parties should receive independent legal advice before they get married. That does need to be considered because you are essentially asked to sign a financial document without representation. It’s a legal document.”

It’s true that part of the reason divorce catches us so off-guard is because it’s a reminder of what we’re dissolving: not just an affair of the heart, but a covenant between two parties who once agreed to combine and share assets within a conjugal relationship.

“This is really permanent,” Greg says. “I don’t have a safety net and neither does she.”

How to make the financial side of divorce less horrible

1. Sign a Marriage Agreement

Commonly called a prenup, creating a Marriage Agreement before your wedding will allow you to tabulate your assets before marriage. If you ever divorce, says Baker, you’ll be able to prove that you did indeed have savings of $30,000, for example, before entering the marriage, which will then likely be entirely yours to keep.

2. Consider going through a mediator

If your divorce is amicable, you may be able to save money by going through a mediator instead of hiring two lawyers. Greg says he wishes he and his wife went to a mediator first “given we were so close,” and because they were so “surprised at how quickly the (lawyer) fees added up.”

3. Recognize divorce law is not what you see on TV

Canada has totally different divorce laws than the U.S., and trying to get tips from your favourite lawyer show won’t help you at all. For example, behaviour has zero effect on how much money you’ll walk away with. The division of assets is a purely mathematical calculation.

4. Know your expenses

Ultimately, the divorce process is likely to catch you off-guard and throw you into the ocean where you’ll be gasping for air. The only real way you can prepare for your post-divorce financial situation is to know what you’re spending now. By tracking your expenses, you can figure out where you can cut back once you’re on a single income and you’ll feel much more confident taking a firm grasp on your expenditures.

 

Source: Financial Post – Danielle Kubes, | February 19, 2016

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