When a couple files for divorce in Illinois, within two days both parties must submit a sworn “financial affidavit” to the Court. If that same couple moved to Georgia, New Jersey, Connecticut, Florida, New York, Colorado, etc…the State would also require them to file a sworn Financial Affidavit.
This is unfortunately not the case in Michigan, although the state boasts some of the most financially astute divorce attorneys in the country. This outdated policy puts Michigan couples, their attorneys and judges at a distinct disadvantage.
What information is on the Financial Affidavit?
This critical document details the party’s income (including taxes and deductions), a snapshot of current monthly expenses and a list of assets and liabilities. Courts use it to set Temporary Support as well as Child support and Spousal Support.
So, how do Michigan courts determine the proper amount of Child Support without a Financial Affidavit?
Michigan Child Support Guidelines take into consideration the income of the parties, the number of minor children and allowable deductions. The Guidelines don’t take into consideration either party’s household, transportation, personal or medical expenses. They also don’t factor in the minor children’s expenses.
Surely, if a case involves a child with special needs who has been receiving support at a cost to the parents, that should be considered in determining Child Support. Similarly, if the payor-spouse agrees to pay extraordinary housing costs to maintain the children in the family home, that impacts the amount of income left over for Child Support.
Without using a Financial Affidavit, the Court and the attorneys are making decisions in the dark.
The use of financial disclosures would also streamline and simplify the Discovery process for both sides. Armed with a list of assets and liabilities, Discovery can be more focused on the particulars rather than turn into a scavenger hunt of sorts. For example, rather than subpoena employers for retirement account information, attorneys can request Model QDROs and written QDRO plan procedures. Attorneys would also understand early in the case if the other side was making a claim for separate property as that would be disclosed as well.
What can Michigan attorneys do to raise the bar?
Until Michigan follows the example set by the vast majority of other states, Michigan attorneys can modify their practice to incorporate the use of Financial Affidavits. Many attorneys have created their own internal Excel spreadsheets to track client assets, yet this process is tedious and can be difficult to match up against the opposing counsel’s own spreadsheet.
Recently, I started working with Dan Caine, the developer of Family Law Software to incorporate Michigan Child Support Guidelines into this valuable financial tool widely used by attorneys across the country—we want to be part of the solution to raise the bar. Copy the link below into your browser to download a free two-week trial of Family Law Software.
Attorneys (or their clients) can use this simple tool to enter income, expenses and asset/liability information and then generate a Financial Affidavit. It can also be used to run Michigan Child Support Guidelines, opening up the “black box” to reveal the actual calculation for support and print Court forms. Ever want to determine the amount of spousal support needed, cost of spousal support after taxes and the best exemptions for each party? This software can accomplish that as well.
If you have any questions or want to schedule an online demo, contact our office at 248-354-0495.
As I sit in my office looking at a wave of winter storm clouds rolling over Detroit’s skyline, I’m reminded of the wave of stock market induced panic rippling through many of my divorcing clients. Unfortunately, the recent market downturn coincides with the month that has the highest divorce filing rate of the year: January. In fact, as of January 20th, the S&P 500 was down a dramatic 9.03% YTD. Since divorcing clients are often already feeling unnerved about their financial future, the stock market tumble can heighten their discomfort and may cloud their ability to make sound decisions.
Although counterintuitive, the current stock market environment provides divorce advisors an opportunity to raise important financial issues that their clients might not have been willing to discuss during an expanding market.
Be proactive by reaching out to your clients to discuss their concerns and redirect their worry bugs into a positive direction.
Current Cash Flow Concerns?
For those in the process of divorce, their financial future is uncertain. Yet a properly diversified portfolio should take into consideration market fluctuations and have a stable cushion of cash on hand. If the divorce has raised concerns about whether or not there is enough liquidity in the client’s portfolio, this warrants an appointment with a financial planner to discuss a projected budget.
Everyone in the process of divorce should prepare a monthly spending plan or budget. First, it’s important for the client to quantify the cost of maintaining their current lifestyle so they can assess what they can and can’t afford going forward. Further, a detailed budget gives attorneys the information they need to negotiate on behalf of their client. Substantiating the current lifestyle is a critical component of the alimony equation in most states.
The stock market decline is the perfect excuse to remind your client to get to work on that detailed budget.
Ready to Veer off the Course?
Although none of us can accurately predict where we are in the market cycle, it’s never a good idea to “sell low.” Certainly, the stock market may fall even more in the coming months, but that shouldn’t change a long-term investment strategy.
It is worth asking those in the process of divorce if they’ve assessed their current long-term investment strategy to see if it will be appropriate after the divorce is over. Now is a great time for them to meet with their financial planner (or find a new one) to start thinking about their post-divorce game plan. Since an investment strategy is based on current cash flow needs, risk tolerance level, portfolio size, anticipated retirement income and personal tax situation, it stands to reason that a divorce mandates an updated financial plan. It’s never too early in the divorce process to recommend that your client seek financial planning advice.
Tax Implications of Selling Stock during a Divorce: Tip for Attorneys
Sometimes, regardless of a pending divorce, it does make financial sense to sell an asset at a loss, particularly if clients perceive that the value of that asset will continue to decline for the medium- or long-term. The good news is that capital losses are used to offset the taxes owed on capital gains and can be carried forward from one year to the next. The value of the capital loss (the potential tax savings in the future for one party) can be substantial and therefore needs to be considered within the context of the divorce settlement.
The financial aspects of divorce can be complicated. A jittery stock market can exacerbate these issues. A skilled financial advisor working hand-in-hand with a divorce attorney can help clients remain calm through these uncertain times.
Significant changes in Social Security claiming strategies were abruptly enacted by the 2015 Bipartisan Budget Act signed by President Obama on November 2, 2015. The changes close what is referred to as “unintended loopholes” that were employed by savvy retirees and their spouses/ex-spouses to maximize their total payout from Social Security?
Much of the information that has been published in journals, magazines and blogs is confusing to the consumer. How can you pare down what divorcing clients need to know and what they can ignore as “white noise”?
WHAT LOOPHOLES CLOSED?
1. File and Suspend
Under the old provisions, a retiree could file for Social Security benefits at Full Retirement Age and then immediately suspend their benefits. Why would anyone play this cat and mouse game with Social Security? This was a clever strategy that allowed a spouse or ex-spouse to begin receiving spousal benefits on the retiree’s earnings record (generally 50% of the retiree’s benefit) while the spouse or ex could delay receipt of their own benefit, thus allowing for an 8% increase in the starting dollar amount per year of their benefit (up to age 70).
Up until April 30th of this year, this strategy will work. For those who suspend their benefit after April 30, 2016, this strategy will be unavailable. If benefits are suspended after April 30, 2016 for the retiree, they will also be suspended for anyone receiving benefits on that person’s earnings record.
The take-away? If this could benefit your client, they need to implement within the first four months of the year!
2. Restricted Application Phaseout: For those born on or after January 2, 1954 (age 62 and younger):
In the past, a spouse or ex-spouse could receive their spousal benefits (generally 50% of the retiree’s benefit) on a retiree’s earnings history and then switch to his/her own higher benefit amount up to age 70. For those who are younger than 62 or turned 62 on January 2 of this year, that option is no longer available. If you start claiming a spousal benefit, you can’t switch to your own higher benefit at a later date.
However, if you were born before January 2, 1954, you can still take advantage of this clever strategy. Even more important, whenever you were born, as long as you delay receipt of your own benefit, it will increase by 8% per year from age 66 to 70.
WHAT IS STILL THE BEST CLAIMING STRATEGY?
As indicated above, the most valuable claiming strategy for Social Security has not been repealed: delay, delay, delay! Every year that a Social Security recipient delays receipt of benefits between Full Retirement Age (66 for most retirees) and age 70, they will receive an 8% increase on the starting dollar amount of their lifetime payments. As it’s extremely difficult to replicate a guaranteed 8% rate of return on any investment, this strategy is still the most important and the most under-used. Furthermore, any client who considers taking reduced Social Security benefits starting at age 62 up to full retirement age needs to offset the permanent reduction in their benefit against their current cash flow needs.
What is STILL the best TIP for DIVORCED CLIENTS?
Don’t remarry before turning 60 (or 50 if you’re disabled). Ex-spouses are entitled to full Social Security survivor benefits on their ex’s earnings record–as long as they were married for 10 consecutive years and they don’t remarry before age 60! If they get remarried at age 60 and 1 day, they can still collect full survivor benefits for life.
Keeping in mind that Survivor Benefits can be as high as 100% of the full amount the retiree was entitled to, this is the one tip that divorcees can’t afford to overlook.
Recently, I had an opportunity to review the services of a competitor in the QDRO drafting market. I won’t mention the name, but if you look for, “QDRO drafting services” on the internet, I assure you “Company X” pops up towards the top for all search engines.
I am a firm believer in competition. Competition strengthens the market for any product and pushes each supplier to provide the best service and product for the client. I also have a lot of professional respect for some of our local competitors who provide high quality service at reasonable prices.
For all the reasons above, I was absolutely floored by the product that Company X provides for a hefty payment of $350 per QDRO.
What’s wrong with using Company X?
1. Company X requires the client to do the legwork on retirement plan research!
While this might sound like a simple task to the uninitiated, it’s not. In fact, the most complicated part of our job as QDRO drafters is obtaining accurate information on all the plans being divided. We’ve amassed a wealth of plan information in our databases gleaned over 15 years of working with individual companies and plan administrators and our staff is highly trained in quickly locating any missing pieces. At least 50% of the cases we draft come to our office with plan information missing.
Why does it matter if the plan name, plan administrator and mailing address are wrong? Errors mean more delays and costs for the client. In our experience, incorrect information often leads to immediate rejection by the plan administrator. In turn, parties need to redo the Orders and resubmit to attorneys and the Court.
Even worse, many times clients inadvertently fill out our intake forms incorrectly. They’re not sure which plans are being divided. Without a person reviewing their file and interpreting the Judgment language, most of our clients wouldn’t get the money they’re entitled to receive. Although Company X asks for the Judgment of Divorce, in the case we entered, they didn’t let us know that we completed the form for the wrong account. They simply told us they couldn’t confirm the account name.
2. State laws vary widely on specific QDRO regulations for pension division.
Company X states that it does try to cross-check any issues with your state. On our sample case, there was a glaring error that conflicted with state laws in Michigan. Company X told us it couldn’t confirm any laws that conflicted in our state. The negative outcome for a client? More delays, more court costs and perhaps more litigation without an expert on hand to testify as to why the submitted QDRO does comply with state law.
3. Company X requires the client to interpret the terms of their Judgment.
There are subtle nuances in the language used to divide pensions and 401ks that can have a tremendously large monetary impact on both parties. As we always tell our clients, QDROs are not neutral; they always benefit one party at the expense of the other. A QDRO can be approved by the Plan Administrator and still be in conflict with the terms of a Judgment of Divorce.
4. Company X doesn’t read the Judgment language and prepare a QDRO; they expect the client to interpret the language and complete their forms with the particulars.
What if the client makes a mistake in interpretation? If they’re lucky and they still have an attorney, hopefully the attorney will catch it. If not, it could cost them thousands of dollars down the line in lost income and net worth in retirement.
The upshot: For an additional $100-$150, most reputable QDRO preparers will do all the legwork, applying their years of knowledge in language interpretation and state law specifics to your QDRO. Not only is the extra fee worth the value, it also could save clients additional losses in unnecessary attorney fees to untangle a mess and untold losses in future income and net worth when the plans distribute the money.
In my humble opinion, Company X’s product isn’t worth a fraction of its fee and could end up hurting clients more than helping them.
Divorce attorneys are generally extremely experienced with divorce cases. Their confidence in their skills and knowledge base is understandably high. Their clients, however are a different story. For most individuals going through divorce, this is their first time experiencing this trauma. For them, everything is new, unfamiliar territory.
Recently, I met with a client “Lisa” who is in turmoil over her divorce case. She’s facing significant financial hurdles and decisions and is unsure about how effective her attorney’s representation is.
I find that Lisa’s story is not unique. I hear from many people who feel out of sync with their attorneys. For the most part, everybody would be happier with with better avenues of communication during this process.
Here are some things to keep in mind as you work with your divorcing client:
1. Does your client feel that you are attentive to his or her case?
It is totally reasonable to let some time elapse after receiving phone calls or inquiries from your clients. In fact, it is unreasonable for them to expect instantaneous responses to all their inquiries. However, if three or four business days pass without any response and this occurs repeatedly, this becomes a major sticking point and ratchets up your clients’ anxiety.
2. Help your client determine what requires immediate attention and what does not.
Your client might be inclined to call after every encounter with their spouse, especially if there is a great deal of anger or bitterness. An interaction with you where you help them decide what events require you to be notified and what is immaterial helps clients figure out what is significant versus what is just annoying and hurtful and will cost them un-necessary legal fees for your time.
3. How does your staff treat your clients?
It’s unfortunate when a client calls the attorney’s office in tears and the attorney’s assistant responds in a curt, uncompassionate manner. For some clients, this interaction indicates that their attorney lacks compassion. Train all staff members who deal with clients how you expect them to handle phone calls, emails and in-person interactions, maybe conducting some staff training involving role playing that helps your staff become more sensitive and learn to inculcate feelings of trust in clients.
4. Discuss the pros and cons of important decisions with your clients and be partners in making decisions.
Don’t just tell your client that it’s perfectly fine for the business accountant to perform a valuation on the spouse’s business without discussing the potential drawbacks of this arrangement. Don’t order your client to accept the settlement the other side is offering without discussing the pros and cons of continuing with litigation. It facilitates communication if you spend time with your client about all the benefits and costs of each decision. In other words, they want to be “bothered” with the details; after all, they have to live with the consequences.
Clients want to feel that they have made the correct decision in selecting their divorce attorney. They are seeking a person with knowledge and leadership, but this process works best when the client and attorney act as partners, both in search of the best outcome. Honest, timely and sensitive communication on the part of attorneys goes a long way towards making the process smoother for both parties, which should lead to a more favorable result.
Elder Divorce and the Pending Pension Precipice
Following a late night deal back in December 2014, Congress passed provisions for the Multi-Employer Pension Reform Act of 2014, which were subsequently signed into effect by President Obama.
Although it has the potential to wreak devastating financial consequences on millions, many retirees and their ex-spouses are just beginning to realize they’re standing at the edge of a steep precipice.
Taking a step back, let’s review some pension basics.
Pension plans set aside money today to pay future retirees a guaranteed stream of monthly income that cannot be outlived. Employers set up qualified pensions that are governed by rules Congress enacted in 1974 to protect retirees. Employers must pay insurance premiums to the Pension Benefit Guarantee Corporation (PBGC), which in turn, insures pension benefits if a plan becomes insolvent.
A multi-employer plan is created by multiple employers in conjunction with a union. For example, electrical employees, sheet metal workers and food service industry employees are covered by multi-employer pension plan benefits.
How does this new law affect retirees and their ex-spouses?
Let’s take the case of “Jon” and “Jan”, who divorced in 2013 after 30 years of marriage. Jon, a retiree, received a letter from his plan trustee five months ago stating this his pension, accrued after 30 years as a truck driver was slated for a 50% cut.
At the time of their divorce, the most important thing to Jon was keeping his pension. After all, he was quite certain this was an income stream he could count on for the rest of his life. He was older than Jan who was still working and felt he needed the full income to maintain his lifestyle. His lawyer finally convinced Jan to take an extra $250,000 in brokerage assets if she would walk away from her share of Jon’s pension. In exchange, Jon would also agree to waive any claim he had to receive alimony from Jan.
Fast forward to 2015 and Jon is kicking himself for giving up $250,000 and closing the door to alimony. Now that his pension might be cut, he’s going to have to return to work or simply manage on less.
The Multi-Employer Pension Reform Act gives employers a way to get out of making good on their promise of payment to existing retirees. In fact, Central State’s Pension Fund, which covers retired truck drivers across many industries, has already initiated the process to cut pension payments for nearly 300,000 existing retirees.
Retirees and their ex-spouses won’t have any recourse to appeal the cuts and as a result may have to live with irrevocable divorce settlements that no longer work, but can’t be changed.
What can you do?
The non-partisan Pension Rights Center in Washington, D.C. provides updated information and insight into what Americans can do to fight this slippery slope legislation. For more info, visit http://www.pensionrights.org.
Peggy has a heart condition and has been covered by her soon-to-be ex-spouse Dan’s military health insurance plan. Peggy was told her coverage would continue as long as she remitted her health insurance premium payments on time. After her divorce was finalized, Peggy was given the unpleasant news that regardless of what her Judgment of Divorce stated, she was never eligible to receive continued health insurance coverage through Dan due to a timing loophole of which her attorney and financial advisor were unaware. This second blog raises some particularly surprising health insurance continuation tips that all divorce advisors should become familiar with to help their clients avoid any interruption in coverage.
Tip: Continuing health insurance is tied to the division of pension benefits for ex-spouses of federal government employees.
This is surprising but true. Federal employees (i.e. Postal workers, Agency employees, etc…) and their spouses are covered under Federal Employees’ Health Benefits (FEHB). When federal employees divorce, their former spouse may be entitled to coverage under what’s called “Spouse Equity Continuation of Coverage” or under Temporary Continuation of Coverage (TCC).
The Federal government loves their acronyms!
“Spouse Equity” coverage is available to the ex-spouse only if he or she is also awarded a portion of the employee’s pension or pension survivor. In other words, if the parties agreed that the ex-spouse would walk away from his/her share of future pension benefits, they are also closing the door to continued health insurance.
What does health insurance coverage have to do with pension benefits? We’re not exactly sure, but again, it only matters that we know the rule, not that we can justify it.
Another way to become ineligible for Spouse Equity health insurance coverage is for the former spouse to get remarried before age 55.
Are there any other options for a former spouse? Yes, for some who can’t receive Spouse Equity coverage, as long as they apply within 60 days of the Judgment of Divorce, they can qualify for TCC benefits. The downside? The ex-spouse can only retain this coverage for 36 months and the cost is 102% of the Single Premium cost for an employee.
Tip: Health insurance continuation coverage for ex-spouses of the military is tied to length of marriage.
In order for a military ex-spouse to be entitled to continued health care coverage, they are subject to what is known as the 20/20/20 Rule. Simply put, if a spouse is married to a military member for 20 years and the member has put in 20 years of service AND they overlap each other, the former spouse is entitled to continued health insurance coverage for the rest of their life. Not only does it last throughout the ex-spouse’s lifetime, but it is free as well.
This makes timing as it relates to military divorce critical. In the opening example above, Peggy and Dan were married for 19 years. It certainly would have been well worth Peggy’s while to remain married to Dan an additional year in order to receive lifetime free health insurance coverage.
The bottom line in both these instances? If you’re an advisor who isn’t familiar with the peculiarities of federal and military employee divorce, call in an expert who is.
“I’m not preparing the Court Order so I don’t need to be an expert on my client’s military pension.” –Anonymous Attorney
Around our office, this statement is enough to make our stomachs drop to the ground. While it would be unreasonable for clients to depend on their family law attorney or financial advisor to have detailed expertise in the complex issue of military pension benefits, their advisor should have a basic understanding of the types of questions that need to be asked to protect their share of the benefits. One misstep is all it takes to turn this into a potential liability.
My partner (and husband) Dave Roessler and I recently had the opportunity to speak at the Association of Divorce Financial Professional’s (ADFP) annual conference in New York on this very topic. My next several blogs will highlight the important takeaways for those that weren’t able to attend or have requested a refresher.
Tip #1: Remarriage Rules before age 55:
Sue and Sam, both age 53 are divorcing after 20 years of marriage. Sue is in the Air Force Reserves. Sam has plans to marry his girlfriend right after the divorce is final. Luckily, his astute attorney warns him that remarriage before age 55 would eliminate survivor benefit coverage for him on Sue’s pension plan. This old-fashioned federal regulation, quite different than the rules for those who have a private sector pension, is strictly enforced by the DFAS although remarriage for Sam after age 55 would not impair his ability to collect survivor benefits.
Keeping in mind that a survivor benefit is the amount paid to a beneficiary after the death of the plan participant (Sue, in this case), Sam feels he’s better off waiting to age 55. After all, his share of Sue’s pension is quite large and she is in poor health—he feels certain he will outlive her. He would have been quite unhappy had his attorney not informed him of this remarriage pitfall.
Tip #2: 10/10 Rule:
In order for a military pension to be divisible, the parties must have been married for 10 years that overlap 10 years of military service (either active, reserve or a combination). In fact, DFAS will reject any order that attempts to divide the pension if the 10/10 rule is violated.
What does that mean for clients? If one party has a military pension that isn’t divisible under DFAS rules, it still is a marital asset. The best option would be to retain an expert to value the pension and provide an offset within the marital estate. Unfortunately, we often run across settlement agreements that attempt to divide the military pension, even though the parties were married for less than 10 years.
As the two warnings above indicate, military pensions are subject to unique restrictions when it comes to division after a divorce. My next blog will cover two additional pitfalls that are almost too strange to contemplate. Stay tuned.
Not every client needs financial planning advice during their divorce and certainly, not every client feels they can afford it. We’re often asked if there are any tried and true red flags that should alert an attorney that divorce financial advisors should be consulted.
Read on to discover the top 3 signs some outside help is needed.
1. Your client is afraid to sign the settlement agreement.
You’ve assured your client Doug that he can afford to pay the agreed upon spousal and child support. His income is high–you believe it’s a good settlement for him. However, he’s worried he won’t be able to afford his own expenses if he agrees to the settlement. The solution? You send Doug to a financial expert who runs projections that give him a concrete number for his after-tax, post child and spousal support net income. Now, Doug can make decisions from a position of knowledge, not guess-work.
2. Your client is willing to give up everything for the “_______.” Fill in the blank with anything that fits; it could be the marital home, his or her pension, a share of a family business, etc…
Consider this all too familiar scenario:
Mary and Joe were married for 13 years with three children under the age of 10. Mary was a full time mom while Joe was earning a hefty salary. Mary is emotionally attached to the house and was willing to walk away from all the retirement and cash assets to keep it. Mary’s attorney is concerned and set her to a divorce financial advisor. Together, they prepared a reasonable monthly post-divorce budget and looked at several different cash flow and net worth projections. Mary was sad to discover that if she kept the house and did not return to work, she would run out of money in 3 years. She was sad, but empowered to make decisions from a position of knowledge.
3. One or both parties have pension plans and retirement accounts that will need to be divided equitably.
No two corporations have identical retirement benefits for their employees. Furthermore, even in the most amicable of cases, employees often don’t understand all the quirks of their particular pension and/or retirement savings plan. As a firm that prepares close to 1,000 orders that divide retirement benefits pursuant to divorce, we have in-depth knowledge of what makes Acme Widgets’ 401k different from Beta Widgets’ 401k as well as the federal requirements and restrictions related to post-divorce division. Since no two plans are alike and no two divorce cases have the same circumstances, an expert should be called in on every case unless the attorney has intimate knowledge of the plans being divided.
This leads to the obvious concern: can my client afford to get financial advice? Often, the client that needs advice the most is the one who feels they can’t afford it. Don’t assume that a divorce financial advisor won’t take a case on a limited basis. It always pays to inquire if they may be willing to offer clients an hour or two of consultation time.
Divorce can be complex even under the best of circumstances. The financial aspects of divorce not only have the potential to be complex, they may also be emotionally-laden. Helping your clients find the path to financial stability may require the expert advice of a financial advisor.