Meet the Experts
00:00:06
Bob Powell: So welcome to today’s webinar, women, divorce and retirement. So let’s get started. I’d like to welcome our experts, Michelle Petrowski, and Bonnie Sewell. Michelle is a financial planner, wealth manager, divorce and financial strategist, and personal finance coach. And Bonnie is nationally recognized for her expertise in divorce, financial planning, preparing expert testimony for private arbitration and court cases related to divorce.
So here’s our plan for our discussion today. Both Bonnie and Michelle believe that a broken divorce system puts women’s retirement at risk, and today we’ll discuss what’s broken and how to fix it, and what women can do to make sure that their divorce is financially equitable. This session is intended for those about to go through a divorce or in divorce proceedings and future webinars will examine post divorce issues. So Michelle, let’s start with you. I know you wanted to deliver a preamble before we tackle what’s broken.
A Broken System
00:01:01
Michelle Petrowski: Okay, great. Thanks Bob. You know, I’ve thought about this a lot and although we don’t actually physically behead a spouse in divorce, you know, like King Henry the Eighth in England, the experience in the process of divorce can feel like a beheading, just like a death, both emotionally and financially. And there’s so much talk these days about women in retirement crisis.
We talk about the gender wage gap. We talk about the fact that we as women live longer and we need more money in retirement. And we even talk about the fact that we save less generally for many reasons. So for me, I see it as really like the perfect storm around women and retirement. And yet nobody ever talks about divorce. Statistically, you know, we’re told that more than 50% of first marriages end in divorce and those numbers are even higher for second and third marriages.
And there’s also additional data that tells us that 27% of gray divorced women. So it’s women over 50 who are living below the poverty level after divorce, and that’s compared to 11% of men of the same age group. So I just wonder why is nobody talking about divorce? You know, it’s really the silent killer, I believe, of family finances and for female finances.
And so as a woman impacted by divorce and also as a financial planner, I’m really excited to be joined with both my colleagues today, so that we could talk about the impact of divorce on women as well as the impact on our communities, because it’s really bigger than just us a broken system, and just share with you some recommendations that we can implement in the interim until we really have systemic change. So I appreciate you all really joining us today for this conversation.
Bob: Thanks Michelle for that. Bonnie, I’m not sure if you want to add anything to what Michelle just had to say before we dive in?
Bonnie Sewell
Bonnie Sewell: Let’s dive in. I think that divorce is one of those experiences in life that feels like you’re on fire. So I think the best way we can help is to just dive in.
A Lack of Financial Knowledge
00:03:26
Bob: Okay. So we started by saying that the system is broken. And part of the reason that it’s broken is that there’s a lack of training around the folks involved in divorce, whether it’s lawyers or judges or whomever else might be involved. Bonnie, you wanna sort of tee that up for us.
Bonnie: Well, I don’t know how much spare time anyone has these days, but this week we’re actually on break from the Johnny and Amber show, aka “the divorce of the year.” And it’s happening right here in Fairfax, which are the courtrooms we work in here, near DC.
And it’s a great example of why you may not want your day in court and you may wish to conclude things outside a courtroom. So I would encourage everyone to take advantage of YouTube videos that give you a real window into a real trial in Fairfax. One of our biggest court systems, just so you can get an idea of what that looks like. But I would say one of the number one problems we run into and I’ve been doing this for 32 years is women still don’t know their money.
And we find ourselves on the cusp of divorce and now we’ve gotta figure out our money because this is truly the largest financial transaction of your life to this point, even if you’ve been divorced before this divorce includes that divorce plus everything you’ve ever done. So we want to get to the meat of it as fast as possible. So that’s, I think, the number one thing, and of course you should always know your legal rights. So first stop is to an attorney to understand your legal rights and then park that and go right over to your financial pro, who can tell you what your marital state looks like and how to think about dividing that,
Bob: Right. So, one of the problems, you sort of brought this up, is this notion of understanding that your money oftentimes it seems like women have a difficult time uncovering the marital assets and trying to decide what’s theirs and what’s not, or what could be theirs.
Bonnie: Yeah. This is going to be a big part of what you spend your hard-earned money on. You’re gonna spend your family money trying to, in many cases, especially in our high net worth divorce, complex divorces, we’re spending a lot of money, trying to find out what Dick and Jane own, owe, and earn. And every time we have to do that, it’s less money for Dick and Jane to split.
So ideally, I mean, we’ll get to a point in life where blockchain or policy takes over the process. If Dick and Jane own, owe, and earn things, there will be a container that will be known to Dick and Jane of what they own, owe, and earn. Today we don’t have that system. We don’t have a transparent divorce system. So you don’t know how Steve and Tammy got divorced. You just know you’re Dick and Jane and how you are going to get divorced. And while we don’t need to know what Steve and Tammy did, it would be great if we understood the conclusion – where they started and where they ended. So we could study this and learn about why we have such uneven divisions in 2022. When I experienced this as a child in 1966, not much has changed.
Michelle: Yeah. You know, it’s really amazing if we filed for FAFSA guess what? They get our tax return information. And if we apply for a loan, the bank can find out things about us. And it’s, it’s just really, I, I agree with you. It’s kind of ridiculous that at this point, that there isn’t some way, right,as soon as we file for divorce to bring these pieces together so that there is a financial affidavit that we can work from. At least as a starting point that brings some of those key pieces that one spouse might not know. And the other spouse does know as a starting point.
And I don’t know about you Bonnie, but it’s been my experience personally as well as professionally with clients that, you know, financial affidavits are put together. And the belief is that the attorney is going to review this and make sure that everything is there. And, you know, I’ve, it’s been my experience again, personally and professionally, you know, I’m making three years worth of copies of every credit card statement I’ve had, every checking account, every withdrawal for my attorney, and I don’t even get to see my spouse’s paycheck. And how does that happen? You know, like there’s supposed to be rules about disclosure yeah, many times
Bonnie: A great point. And I would just say so, so now we’ve introduced the attorney and us the financial professional. So the things that our audience should understand is, most attorneys, you’ll just be able to check this with questions and ask the attorney directly. What are you trained in first in personal finance? How are you trained? And the answer will almost universally be, Well, I’ve just done a lot of divorce cases. Which is not appropriate training for the job at hand.
And then building on what Michelle said as well. You’re gonna go a little bit back and forth. If you’re lucky enough to understand your financial life and have access to the documents you need, Michelle mentioned the tax return, there’s a lot more documents, a a very long gory list that we all request. And we’ll get to the affidavit in just a minute.
If you have all that, you are way ahead of the game, you’re going to save a lot more money if you don’t have it. What Michelle’s referring to is now the very expensive discovery process, which is a legal process. We can’t help you with that, but we can take the information you get from that and use it.
And I just wanna clear one other term we’ve used already so that our audience doesn’t get lost in the jargon of our work and that’s affidavit. This is a simple spending plan, and it’s not a plan for what you’re going to spend. It’s a recording by category of what you did spend in your married life, and it defines your need if you’re expecting support or hoping to get support. And it defines your ability to pay if you’re expected to pay support.
Divorce Expertise vs. Financial Divorce Expertise
00:09:13
Bob: So, Bonnie, it seems like there’s a supposition that if you’re going to a divorce attorney, who’s done lots of cases, that they would be well familiar with what needs to happen, the, how assets are uncovered, whether someone has a non-qualified deferred comp or stock options or whatever it might be. But it seems that you seem to suggest that’s not the case. That just because they’ve done a lot of divorces doesn’t mean they will be adept at uncovering marital assets.
Bonnie: Yeah. Our superstar attorneys are superstar legal strategists. They are not financial people. And while they ah, they know enough to make great suggestions, sometimes, if you go from, I’m getting a divorce to, I’m getting a divorce and I have an attorney to, I’m getting a divorce, I have an attorney and I have a mediator to maybe I’m going to court. The only person in that chain that generally is financially trained in personal finance, business sales, all kinds of things that tax law that you have to know is your financial professional.
So if you’re talking about the largest financial transaction of your life and the, this is there’s no do overs without additional litigation. So you wanna get this right. And if you’re, if you’re hoping to get it right, your best chance is to include a competent professional that is trained in these matters.
Bob: Yeah. So obviously if you’re using a divorce attorney, there might be some process to vet that person to maybe at least assure yourself that there’s some working knowledge of the personal finance aspect is, well,
Bonnie: I will say I have never met a family law attorney that didn’t have a working knowledge. It’s, it’s, you just get it from working in the space.
What I would spend some time doing is understanding if everyone can stay in their lane. And if the family law attorney will use the work of the financial professional. I hate to say this, but in 2022, we still have a lot of family law attorneys that reject any outside counsel of any kind. And in my opinion, we see that harming the client all the time. Remember, Michelle and I see them before, during and after, and after if you come to a wealth manager like us, and you’re hoping for services, but you’ve had a terrible divorce there’s nothing we can do for you at that point. Yeah.
Michelle: Yeah. I think it’s important to say, you know, attorneys really we’re hiring them to provide us with information so we can make an informed understanding of our legal rights and obligations and explaining the practical, you know, implications of what’s happening. And it’s been my experience that most attorneys, and a lot of times judges, everything is just 50-50, that makes it easier for them. But they don’t really understand the actual assets and the needs of the client, and the long and the short term impacts of that settlement, that decision to the family, that’s going to go on for years. And I would say that most people, when they go to the attorney and they hear, oh, I’ve done this for 30 years, I’ve done this for 20 years, there’s a misconception on the part of the client that, you know, the attorney is giving them financial advice.
However, you know, in your settlement, it’s gonna clearly say that they didn’t give you financial advice, that they advised you to see a financial professional and, to Bonnie’s point, most attorneys don’t want a financial person involved. And I, I honestly, I find this like a really egregious mistake and it’s something that’s broken in our system, because if we as financial planners were meeting with a client and we were going over scenarios with them and we didn’t address certain assumptions or things that could go right or wrong, you know, we could possibly ha be sanctioned. We could lose our license. There could be FINRA complaints. Yet we have attorneys, you know, really taking on the role of a financial professional when they really have no guarantee, they’re not doing any modeling, most of them anyway, with financial planning software to say, how does this look? What if we go, what if we go B and there’s this whole thought about unauthorized practice of law, right? What about, oh, it’s almost like the unauthorized practice of financial planning that’s going on on the behalf of the judges and the attorneys. And I think to see as clients like, what’s our, you know, what can we then do? Like, like I said, after the fact you can’t go back.
Bonnie: So this is a really good place to pick on us as well. I’ll just, to make sure that the listener knows what kind of professional to look for. Divorce financial advice is not investment advice. Divorce financial advice, in my opinion, ethically, should always be a separate contract from wealth management. You don’t wanna go to a financial professional who is using you as a lure to get your assets. After the fact, if you decide you love the professional, certainly have an interview with them to consider that, after the fact. Divorce financial planning is just that. It is financial planning to get you through the division of assets, income, and debts. That’s it?
Building Your Team
00:14:05
Bob: Michelle, talk a little bit about how you might go about vetting divorce attorneys to determine whether they’re competent enough or willing to work with other team members.
Michelle: You know, I gotta be honest. I think that that’s probably really difficult in general, because there is no standardized process for someone who’s looking for a divorce attorney to say, okay, here’s the checklist, or here’s this standardized way that we evaluate a professional that you could just really go to.
There is the bar association.s So you can go to the bar association website, see if there are complaints. Unfortunately, they are reviewed, it’s a peer review they’re typically investigated. And there’s no real, like, case that gets presented back to the person who made the request for the complaint to say, these are the things we looked at, and this is why we dismissed that. And that happens before it’s actually even a formal complaint. And so you could go there and you should. But there could be lots of complaints that were investigated and disappeared so it’s not really a great place.
I would definitely ask questions, you know, what’s the percentage of your cases that go to, to trial. And if you have somebody that’s really bent that way, maybe that’s not the person for you. Also malpractice insurance, interestingly, is not required in every state. Right? So business insurance, doctors have to have malpractice insurance, but I think, when I was researching it only Oregon is required, at the state level, for every attorney to have that.
So you might wanna ask your attorney, do you have malpractice insurance? And honestly, if they got ruffled, I would be a little concerned about that. Like, why wouldn’t they want it, or why would they be turned off by my question? I would also ask how often do they work with a financial professional or a CDFA in that process? Do they value it and, and or why or why not? So those are just some of my thoughts. Yeah. Bonnie, what do you say?
Bonnie: I, I, I agree with all of that. And I would say, honestly, ask your financial professional. We are in the trenches every day with great attorneys. We have vetted them through daily work. And I would, I would use us as a great place to get three names, cuz you don’t wanna, you know, we go to the ball games together, use my friend, Nancy. You want someone that we’ve vetted and can speak to how they’ve handled cases.?
Michelle: Mm. I like that. Yeah. And you know what too? I mean, I hate to say this, but almost like Facebook groups too, right? If you’re asking in a local group, you might get a more honest answer versus if you just look at a, a Yelp review, but you have to really realize too, somebody’s experience might not be your experience.
So you wanna, you know, get a little more information other than don’t just go to them. Like what happened? What, you know, how does, why does it occur for you that way? But talking with others, financial professionals, of course, but also maybe other people in those venues too, to just get some feedback like, oh, is there something here? And you know, what I, I thought about the other day was the Better Business Bureau, like why not look up your attorney there because the Better Business Bureau actually investigates cases and tries to look for resolution. So just like any other service business,
Bonnie: You know, this reminds me of a classic trap that we see all the time. Client A goes and gets an attorney, appropriate step because you need to know your legal rights, and they get spun into the process of the legal process and a year or two or three later, they go, you know, I think I need a financial professional. It dawns, I’m not kidding it, dawns on them. And, and, and now they’re broke or exhausted. Both things will make the outcome that could have been mostly out of reach. Yeah.
When You’re Not a Member of “The Club”
00:17:44
Bob: Yeah. When we were talking about doing this webinar, we, we talked about this notion of maybe divorce attorneys being very clubby and that perhaps, being, not necessarily advocating for their client, but just trying to get cases moved through to conclusion. Any thoughts about that is that will, that’s an approach.
Bonnie: Well, I can tell you that here in, in the Fairfax area, I pinged my attorneys and asked for their opinion about the trial. They all know the attorneys in the trial. They go to ball games, they hang out, this is their office.
That’s not unnatural. It’s not terrible. It is what it is. I hang out with financial professionals and insurance people and people in my industry. They do, too.
When you think you’re getting your day in court, you are getting a judge and two attorneys who know each other, that’s their other office. And that doesn’t mean that you cannot get a fair outcome. It means that you’ve gotta overcome the club nature where you are a guest and you’re case 4562, and case 4563 is outside waiting to come in when you are done. So you just need to be realistic about our system and try to get your arms around it before you make financial commitments to parts of the system that may not serve you well.
Michelle: Yeah, I think, too, that’s where a lot of people want their day in court and they think that there’s this system out there that’s gonna really do the right thing and listen and that’s not really the case, you know?
So you need to, like Bonnie said, you wanna start out earlier with that financial person and really start working the pieces that are important because the judge, unfortunately, I think that there’s a lack of training around domestic violence, around high conflict couples, and definitely finances with the judges and the attorneys.
And here in Arizona, I don’t really know about anywhere else, they rotate through different courts. So they might be in criminal court and then tax court. And now they’re in family law and you get somebody new or maybe they’ve just been around a while. They’re getting their feet wet. And maybe now they’re learning more, but guess what? They get moved to another court. So you don’t really have a subject matter expert and they’re not, you know, there there’s different levels of education I think where we could, you know, there could be some improvement around there. So you’re not gonna be like my day in court, the judge is there for me and it’s gonna be so fair. No, you need to be more realistic about the process and how it works.
Take Control of the Divorce Process – Understand Your Needs and Values
00:20:13
Bob: Right. So I guess, you know, if you’re in court, you’re you have your attorney, spouse has their attorney and you’re dealing with the judge who either doesn’t have adequate financial knowledge or has a caseload that is such that they’re just trying to move cases through, you know, family court. Any thoughts about how you can protect yourself against that kind of outcome.
Bonnie: Yes. Settle outside. The other person that you have in those cases inside the court is witnesses, expert witnesses. And when I’m an expert witness, I’m paid for my time there, but I’m hired to come in and testify to a particular thing. So this can be another use of your resources. Expert witnesses are not inexpensive. That’s nothing anyone makes a career out of, generally speaking. Some people do. There actually is a whole network of people who only do that kind of work, but that’s not too typical in the cases that we see.
But I think the best way to preserve your resources is to know as much about your finances before you start to negotiate. We do have an on-demand webinar about this, that we are happy to send to any listener, but what we’re talking about is a ping pong game.
So just think about this for a minute. Dick and Jane are getting divorced. They have to divide their assets, income and debt. Jane doesn’t really understand what all of that is or means, or she certainly doesn’t understand what she needs to in order to say, I need these things, this is what I want. And as Michelle alluded to earlier, you may be in a state where it’s generally gonna be 50-50, if we have to go a legal route. But private negotiation allows you a lot of leeway. Now, there is no world where people are typically getting 60-40, 70-30. That is not typical. At least from the data we have in our industry. Remember none of this is actually studied because none of it is put into a national database.
However, the way that you save on all of this and keep more of your money is to simply negotiate for it. So the toughest negotiation you will have is spousal support, cuz no one likes paying it. A lot of people don’t even like receiving it, but they must in order to pay their bills.
When we divide the assets, these are the assets that have been collected for the future life you expect to have without work, without income. If we start to use them now, and this is still found in many states and cases, you know, Jane, you just take your money, tyu’ve got $2 million. What’s the problem? That’s a lot of money.
I’m not gonna argue that’s not a lot of money, but we have to know Jane’s expenses in the marriage. We have to know how old Jane is. We have to know if Jane has healthcare needs or healthcare. There’s just so much here. And if Jane can go armed into the ping pong game, which I’d be happy to explain in more details as we sort of work through the process, but if Jane shows up to that game prepared and I don’t mean game derisively, this is one way you should think about it, then she’s going to have the best chance at an outcome that gives her the assets she needs for her future life, and income she may need now to get to that future life.
Michelle: Absolutely. I think one of the important things too, in that process is for clients to understand their values, too. Like what’s really important to you. And because, like Bonnie’s talking about, negotiating, the most important person in that negotiation is your spouse, you know, and you need to know that and you wanna understand your own values and there’s a phrase “priorities versus, you know, positions” when we’re mediating. And a lot of times clients get caught up in a position. And many times when you’re working with an attorney that can be almost like exploited and that they’re just kind of like bent on this one particular outcome and it’s very emotional and this can keep it going on and on and you’re not really making any headway. So whomever you’re working with, whether it’s a mediator, an attorney, to have someone to help you understand what are your values and what’s actually that priority for you.
So I’m gonna just give a quick example. Let’s say you’re the mom. And I’m saying that because a lot of times I see it with the women. You wanna stay in the marital home because you want your children to have stability. So now you’re bent on a position that “I have to have the house.”
It might not actually be in your financial wellbeing, like longer term, to keep the house. So, but more important here is the value that I want my children to feel safe. I want them to feel secure. And so I’m making the connection that I think that just keeping the house is gonna create that. And it might not, because perhaps they’re going to be cash poor in a few years and then moving two or three years later might be more detrimental.
So understanding the big, bigger picture financially, and then understanding my values, I have more to offer and negotiate with my spouse. Maybe it is downsizing and just having a house closer by, you know, so that we get to stay in the school district. So we wanna know that, what are our values, so when we’re in that process, we’re not just getting stuck on that emotional position.
Making an Offer
00:25:17
Bonnie: And one more thing I’d say about the actual process that’s critical to understanding, cuz the money goes really fast once you start this process – no one really appreciates that till it starts slipping away. We want to get to the offer/exchange part of this process. Until we get there, we’re just writing checks. Once we get there one of your responsibilities is to either put a written offer through your attorney or yourself, your kitchen table, your attorney, mediator, court, however it works for you, put an offer, a written offer on the table or agree to evaluate one from your spouse.
There is no universe where somebody puts an offer forward and you just tell them no and you don’t do anything else, now I’m forced to negotiate against myself. So here’s the gain: Somebody puts an offer on the table. The other somebody must respond. You don’t have to agree. You need to say what you agree with, if anything, and what your terms are. This starts the negotiation process. Until you get here, you are just spending money and this is a missed point over and over again. And you certainly don’t wanna start negotiating without full information.
So you have control here as the client, you can control the train. You can say, I will not negotiate until everything is transparently available to me for assets, income and debt in the marital estate. And then you can deliver, you know, stay true to that. And then once you have that information, you can instruct your attorney to put a written offer together and or to tell your spouse, you will review one with a and then counter because until that part of the process starts, you are just spending time and money.
Finding the (Hidden) Assets & Valuing a Business
00:27:04
Bob: So not to have someone spend even more money, Bonnie, but in terms of trying to uncover assets, that may be hidden, any thoughts about hiring a forensic accountant, for instance, as part of this process where someone might be a highly compensated employee with deferred comp and stock options and other comp or maybe, you know?
Bonnie: Yeah. Great question. So the rabbit hole of they’re hiding money and it’s offshore and all that, so it, there may well be hidden money, but if we have some of the basic documents like tax returns and certain kinds of statements, there’s very little room to go off the grid, doesn’t mean it can’t happen, one of the easiest ways we keep money from a spouse is to ATM at a grocery store, I bought a hundred dollars worth of groceries and I kept a hundred dollars in cash, and you think I bought $200 of groceries.
So there is some of that in every marriage that I see. But we’re, if you’re really talking about substantial amounts of money, material amounts, we can do that by a percentage in the estate that you expect to be missing.
There are forensics, so you’re gonna ask your financial professional and your attorney for their recommendations. In the attorney world, that’s gonna be someone they’ve worked with in the past that they believe does a good job. Then you’re gonna come back to someone like me and say, have you seen the work? Cuz here’s what we see. Sometimes big bills, few results, no reports. Very, very irritating. We would never get away with that in our world.
So just a forewarning, if you, and we do see fraud. So fraud and abuse cases, sometimes the best place for them is court, let’s get there and start the machine because you have, you are married to a bad actor. If you have significant fraud, it could be tax fraud, it could be account fraud, it could be, there’s lots of kinds. If you have that in your case, there is no mediating this one. We have a bad actor and you’re gonna spend more money, hoping the person will change, that didn’t change during your marriage. So we want to skip that part, and if there isn’t, so it’s pretty easy upfront to tell if we have a potential fraud case or not, not that we never miss one, but most of the time it’s fairly straightforward whether it’s a question or it’s not, and if it’s not, let’s put that to rest and get to the rest of it.
Michelle: Yeah. I think to your question, Bob, is it sometimes a good idea? Yes. I don’t think you always need to jump to that immediately. There are lots of things that your financial professional can locate and say, Hey, oh, I saw this, you know, I looked at, you know the person’s W-2 and then I looked at their last statement from their employer and guess what? I saw there’s deferred comp on there, but it wasn’t over here. Let’s look into that, you know, or, you know, there are various things that we can look at.
So I wouldn’t run immediately and say, we need that. I think though, if you have, I see a lot of times, if folks have a business, there seems to be some reluctance in valuing the business. And I think in many cases that’s a mistake. And so you need to really think that one through and say, if I’m gonna spend X, but this business could really be this big, you know, let’s think bigger picture.
But not assume either. I mean, I remember years ago meeting an attorney at a, at a BNI event, I think it was, and he asked me if I do business valuations as a CDFA. I said, oh, absolutely not. That’s not what I do. That’s a whole different thing. And he shared a story about a client that he had, who’s CDFA was doing a business valuation for her. Yeah. And it only came up to like a couple of hundred thousand dollars, but as time went on, the woman decided, you know what, maybe I should get an attorney who insisted she get the business valuation done. The husband was a partner in a law firm. Well, this turned out to be millions of dollars, not hundreds of thousands. So you have to like, take a step back and say, is this realistic? You know, or if it’s just your husband, he’s the plumber and works by himself, I don’t know. I don’t know. Maybe if you need a business valuation or not, but you know, don’t be jumping also into these professionals all the time either and get hooked into that cycle as well.
Bonnie: That is a great point, Michelle. And especially with the demographics of business owners that we have retiring and selling businesses. So this is a big part of cases today. So that’s a great point. And another place I’d point to is real estate. Rental real estate, investment real estate. So one of the things you wanna be really careful about, if you’re agreeing to take that in trade, is you’re agreeing to take the asset, is you wanna make sure your tax records are correct, complete and current, let’s say you decide not to take it. You’re gonna trade it away for something else in your marital estate. You’re giving up rental income, make sure that’s taken care of somewhere else. So all of these assets have features to them. And real estate often has debt attached to it when it’s investment real estate, that’s for leverage and for write offs. So you just want to make sure all the moving parts have been considered financially with tax impact for you.
What About the House?
00:32:06
Bob: Yeah, very important. So, so Bonnie, Michelle mentioned the marital home a second ago. Any thoughts about the pros and cons of, of keeping it versus not keeping it?
Bonnie: Yeah. Try to have an open mind here. So I realize if you’ve got kids, say in a special needs program in a particular school district, this may not be an option for you. But if you don’t have a specific need that cannot be accommodated any other way, keep an open mind. My, I hate to inject my own personal stuff, cuz it doesn’t apply to anybody else except me, but I’ll just do this so I don’t have to give a client story that a client might recognize.
When I was getting divorced myself, I had been used to several homes. I was privileged enough to have a few homes to, to my name, but I gave them up to rent because I was moving to a new city to buy a business. And my point here is, the first thing I did after my divorce, and I know better, was to put money down on another home because I couldn’t… I grew up broke and I couldn’t imagine not owning real estate after accumulating it during my life. And then I had to yank that back, little expensive, and then I had to go rent this place and I rented for 15 months and I really, it gave me the mental bandwidth to consider what I wanted to do.
One of the primary mistakes that Michelle’s alluding to is that when we do a transaction in real estate, we want you to stay there somewhere between six and 10 years to get back the transaction costs you just paid to get into that investment. And of course we have a very elevated real estate market today, so you’re overpaying in addition to those transaction costs. So that’s my thinking about real estate. Keep an open mind.
Finding a Financially Equitable Solution
00:33:46
Bob: You know, as you’re talking, I’m thinking of all the potential spinning plates that folks will have to deal with. So there might be a marital home, there might be a business, there might be a 401(k) or IRAs and you’ve gotta start worrying about maybe QDROs and all that sort of stuff. And in terms of trying to come up with an equitable financial, financially equitable solution, any thoughts about how you sort of look at all these different assets and come to some place that makes sense for you?
Bonnie: Experience, education, and ethics is our friend along with software.
Michelle: Yes, exactly.
Bonnie: We have great tools today that we can put in the most complex assets and work through what makes sense. And then of course, Dick and Jane, what we can do is once we’ve got all the input, we call it a base case, here’s where you’re starting, here’s what the marital share is data separation, we’re gonna move you to, you know, what the future could look like. So we can move Dick and Jane’s assets and income and debts around endlessly once we have the base case in there. So it’s a beautiful thing.
Michelle: Right. Absolutely. And you know, the software takes the taxes into consideration and that’s really a big area, you know, that just, just taking a net worth and going 50, 50, 50, you know, there’s no tax conversation in there. And so the software really is very incredible.
Bob: Is there a standard software that everyone’s using?
Bonnie: So we’re being recorded and I don’t want them to take away my subscription, but we need better software. We have outstanding tax software, outstanding financial planning software, we need much better divorce planning software.
But I just wanted to spend a minute on elegant divisions. So if I have 10 retirement accounts and I’m trading them between parties and their IRAs, annuities that are retirement based, and 401(k)s, I can make an elegant division. I don’t have to go 50-50 on everything cuz those dollars share some similarities and some distribution disparities. So I wanna make sure that I’m doing an elegant division for the parties so that when they receive these assets, they perform in the way that they, I’m not talking about the investments inside, talking about the tax characteristics and moving the dollars over.
And one last point on pensions, Bob, you mentioned a QDRO – qualified domestic relations order. We don’t write those. But when they’re written, they need to be correct because that’s what splits a pension. And we, in general, do not trade pensions, period. In terms of trade them away is what I need to say. So we often trade them, we don’t trade them away. Especially, I live near DC, we have federal pensions. Those will be the last ones paid before we shut the lights out. And we don’t trade those away if you have them. And if you’re entitled to a marital share of one of those, I would suggest that you get your marital share of those, cuz those are gonna be paid and that’s money you don’t have to save and money that’s not exposed to markets.
Solutions: Spousal Maintenance & Child Support
00:36:53
Bob: Yeah. So we’ve covered a lot of the problems. I wanted to save some time for solutions and then get to questions. Bonnie, we’ll get to your policy changes in a second but I think Michelle, you had a solution regarding spousal maintenance and child support being paid directly to the less moneyed spouse. Talk about that.
Michelle: Oh yes. I was suggesting that the spousal maintenance really be paid to the less moneyed spouse directly. When you do that, you can create a history of that income and it can actually be used if you’re looking to refinance the house or maybe buy another home. But if it’s paid directly, let’s say one spouse is paying the mortgage on behalf of the other person, they don’t really have that benefit. And if you do do that, you really need the spousal maintenance paid for a minimum of three years, and it’s three years from the date that the divorce ends. And I shouldn’t even say that. It’s three years, really, from when you’re gonna apply for the loan. So let’s say your divorce ends now, but you’re not applying for the loan for four years, but you, so you really need that special maintenance now to go for four years. So you don’t get cut off too soon.
Bob: Bonnie, any thoughts on that?
Bonnie: Well not that specifically, cuz I like those suggestions and I think they work really well. I would say, as one solution, let’s start back at the beginning. Do we have to do this? There is a statistic out there that says a lot of people who divorce are regretting that you’re changing out humans. Everybody’s got dirty socks and you wanna make sure that you are really wanting to leave this marriage. But before you do, assuming that the answer is yes, this marriage is done, now we have a responsibility to ourselves to move forward financially, as securely as we can.
So if you have not announced that you’re leaving yet and you have the luxury of time to collect your documents and your knowledge about your finances, I would certainly take the time to do that. You know, when you’re, there’s workshops all over the country for this purpose. Go as many times as you need to, to acquaint yourself with our process because once you’re in it, the toll booth has started.
So I would say, you know, one of the best solutions is for everyone to understand their money as well as they can and put, make this your new part-time job if you find yourself facing divorce and you don’t know your money yet. It’s not beyond your comprehension. We use a lot of jargon and the industry is specifically designed to keep you a little bit confused. You don’t have to remain confused. You, this is all accessible to you with a, and if you need professional help to educate yourself, take advantage of it or local groups or whatever, because that’s your best arsenal in negotiation.
Solutions: Dividing the Retirement Assets
00:39:36
Michelle: Yeah. I agree. I think just to kind of circle back to the QDRO that we were talking about a few minutes ago too. You would need a QDRO if you had a 401(k). So it’s really for any employee retirement assets covered by ERISA. So if you had a 401(k), you would, you would also need the qualified domestic retirement order. But if you have an IRA you don’t, so you don’t wanna get confused.
Bonnie also shared, you know, your attorney is not really going to prepare that. That’s gonna be by another attorney typically that specializes or somebody who specializes in QDRO preparation. So just keep in mind, there’s gonna be an expense for that, to prepare it. Many times there’s an expense nowadays to execute it with the other spouse’s employer.
So you wanna address those in your document. How are we going to pick the QDRO professional? Who’s it going to be? How are we gonna split the cost? How are we going to split the execution cost? And you really want your settlement to be specific, you know, how is it being divided? Is it a percentage? Is it a dollar amount? Percentage is always better. You want the valuation date. You want actual account numbers or last, like at least like the last four digits, the custodians where these are held, the employer’s names. Many times folks think they’re gonna get those retirement assets, but because their settlement wasn’t written properly, the QDRO professional now after the fact, the attorney, the judge has signed this and you can’t actually get the QDRO written and now you can’t get those assets that you need.
So ideally you wanna make sure the details are in the settlement and that QDRO is actually prepared before it’s sent to the judge for signature. And then it’s sent to the TPA at the spouse’s employer to make sure that it meets their requirements and it actually can be executed. Then lastly, when you get it after you’re divorced, make sure you execute it immediately. You don’t want somebody dissipating those assets and then when you go to get it five years, 10 years later, they’re not there anymore. You really have nowhere, you can’t turn that bus around at that point.
Bonnie: So the point I wanted to make was, a percentage is often best in a rising market, but Michelle and I, in any given case, might tell you to take dollars. In a falling market, dollars can be more valuable. So that’s one thing.
And then I wanted to alert everyone listening to a little thing about 401(k)s that attorneys, I never see them mention it and I don’t understand why. But maybe they don’t know how to do it so you can help them understand this position.
When you’re, cash is king or queen when we’re divorcing, there’s very little of it, but a 401(k) can provide cash. So the way that that happens is if Dick has the 401(k) and Jane needs cash, she can take part of Dick’s 401(k) in a division and she can take cash out when she moves that money over incident to the divorce. Not six months, two years later, incident to the divorce. When she does that, she’s an alternate payee of the plan. She must include that cash in her taxable income in the year she receives it, but she avoids the penalty and she, and, and so it’s a way to get cash. You cannot do that with an IRA, but you can do it with a 401(k). So in we, and we don’t want you doing that, cuz that’s supposed to be for your future life. But there are cases where a woman, in particular, must have cash. And if that’s true, that’s an option.
Michelle: Yeah. So just make sure, right, that you don’t move that money over to the IRA and then think you’re taking it out incident to the divorce. And I believe it’s 72t(c) or something, is like the election that you could speak to the administrator about it. So it’s coded properly when you receive that.
Bonnie: Yeah, it has to be done correctly.
00:43:17
Bob: So, Bonnie, earlier you mentioned one way to avoid the problems of dealing with judges who may not be well-versed in divorced law that settle outside the court. We haven’t touched on collaborative divorce or the use of mediators. Any thoughts about that?
Bonnie: Well, I can say this because I can’t get tomatoes thrown at me, but I, I, I don’t do collaborative. There are some outstanding collaborative practices. I don’t, I’m not attached to those, so I don’t have those in my arsenal. What collaborative, when it works, works well. What I have too often is a straw man. Collaborative, if I participate in collaborative with Dick and Jane, I cannot manage their assets afterwards. And so as a professional, that’s not a great business model for me. I’m gonna get a little paid work. I’m gonna get to know them intimately and I gotta walk away and put them with the rest of the world that I don’t think does as good a job. But worse than that, if Dick and Jane don’t come to an agreement, Dick and Jane get to start over, not the collaborative attorney. So in my world, I appreciate litigated, litigating attorneys who use strategy to keep my clients out of the courtroom and win fair settlements.
Bob: And the same, mediation, you’d feel the same way about that too?
Bonnie: Mediation is a very good tool, if you have two good actors. If you have a bad actor or you are a bad actor, you’re going to spend money that you can’t get back using mediation, which is the wrong tool, but we don’t have transparent people who are negotiating.
Bob: Yeah.
Michelle: Yeah. So, and I think sometimes that is used for that reason exactly. People don’t want transparency. And that’s not a good thing if that’s the motivating factor for mediation.
Solutions: Policy Change
00:44:57
Bob: So I’m gonna get to the questions in, in three minutes, but Bonnie, I, I wanted to have you address some of the policy changes that you think are needed in order to fix the broken system.
Bonnie: Yes. Mrs. Gates, Mrs. Bezos, if you’re the, the former, if you’re listening, this is where I think policy changes need to be made. We need to make it possible for both parties who are divorcing, regardless if they’re male-male, female-female, or male-female, we need to make it possible for them to understand what they own, owe, and earn inside the context of the marital dates, number one.
The second policy change, I think, is essential is every person who records a divorce should be required, not the people who are going through the divorce, the professionals in the system, should be required to enter the results from the base case, where we started to where we finished, per Dick, per Jane into a national database blindly so that we can study this and understand, so all of us can understand why Jane, when she’s 73 will become broke and we’ll all pay Jane’s bills when Dick and Jane had enough for both Dick and Jane to live. There’s my soap box.
Michelle: I love that. That’s awesome.
Bob: I think we’re a long way from that becoming reality.
Bonnie: I do too, unfortunately, ‘cause we have the tools today. This is doable. This is not rocket science. It’s doable.
Q&A
00:46:20
Bob: All right. So let’s go to our reader, our viewer questions. If you have a question you can use the chat box with the Q and A button. At the top of the list is, what happens when the spouse, usually a man, has assets internationally? How are you getting the information that you need around international assets?
Bonnie: We’re using the tools that are available at the international level that look like ours. So real estate records, tax records. It is more difficult. It absolutely is more difficult. We have to overcome a lot of things. We have to overcome currency differences. We have to overcome local customs and we have to overcome a spouse who may have some influence locally. There’s a lot to overcome when that’s true. So if that’s true in your situation, do your best to get as much information as you can before someone who is being paid to get that information starts their work.
Michelle: Yeah, I guess exactly. Before the other person knows.
Bob: All right. We’ve got a question about prenuptials and whether they’re worth it.
Bonnie: Oh, are they worth it? If I could, if I could have every young person marrying create a prenup, go through the exercise just for grins, if nothing else. If your marriage cannot handle a financial discussion transparently, you’re gonna have a different kind of marriage than perhaps you thought you would have. Most of our work is with people who thought it would go forever and it’s not going to. The prenup does not define how you divorce. It informs how you might divide in the future. There’s a lot, there it’s a whole separate thing. And if we ever had that conversation, we should probably have attorneys speaking to the law of prenups, but did you know, you could also do postnups? So if you don’t wanna get divorced, there’s a way to stay together and divide things financially inside the marriage.
Michelle: I think both options are a great one. At the very least, like you said, uncover those things in the relationship that could show up later on just to be red flags.
Bob: Yeah. So one of the questions it’s, it’s not quite clear, but it it’s asking for you to address what’s described as maybe a lopsided prenuptial?
Bonnie: Oh. So sometimes prenups are signed without the other party understanding the terms and it’s on the eve of the marriage. There’s remedies for that. When it could also be the case, so here’s a thought – you can make them expire. So sometimes prenups are genuinely written with I just gotta make sure I know you, maybe your mask stays up for six months, maybe it stays up for four years. But when I actually know who you are in our marriage, we start to live together, we can have this thing expire in 10 years because now even if it, even if we divorced, you have earned what, what was true for the prenup. There’s a lot of options there only limited by your creativity and the law.
Bob: I think we answered this one, but I’ll ask it just to make sure. Should QDROs be done before the divorce is final?
Michelle: I would agree with that. Yeah. Cause that’s the only way you’ll know whether it’s actually acceptable to your spouse’s employer and therefore executable after the fact.
Bonnie: This is a little bit of a babysitting job cuz some attorneys will delay, so oh yeah. You may have to babysit it.
Bob: Talk about RMDs during a divorce a process as part of obtaining cash.
Bonnie: RMDs are income, so I’m not sure I understand the question.
Michelle: Yeah, I would agree.
Bob: Yeah. I’m not sure either. I guess maybe
Bonnie: They could restate it. What is their, what is their,
Bob: Yeah, I’m guessing that if one spouse has an IRA from which RMDs are being withdrawn, right, how do you divvy up that income, perhaps?
Bonnie: Oh, okay. A little bit more than we can go into in this general webinar, but that is a question we can answer. It’s gonna be part of the division and it’s two things. You’ve got the remaining asset from which the income is being paid and you’ve got the income being paid. So there’s, there’s a little bit more to it than we can go through here.
Bob: Right. You know, Bonnie, just a quick question. You’ve mentioned on a couple occasions looking at things from an after-tax perspective. Does that entail also bringing a CPA into this process in addition to a financial expert?
Bonnie: It certainly can. Yeah. I mean, it certainly can. The first time we might see the CPA is getting the tax returns so we can understand them. The second thing we, the second place we might see the CPA is if we have business or real estate tax issues. Capital gains and losses are pretty straightforward, any CDFA worth their salt could deal with those. But we might wanna trade individual holdings, preserving the capital gains and losses as we move them across. There’s a lot of different ways to do it. But after-tax impact, if Dick and Jane are splitting something that has after-tax impact, Jane might be surprised when, what the dollar she thought she was getting is 70 cents.
Bob: Yeah. So it would be important then to talk in after-tax terms for the, for much of the assets and income that you’re discussing.
Bonnie: Correct. Yeah.
Michelle: Yeah. And there are, there are adjustments that you can make to the value to, you know, tax affect it. So you’re trading apples and apples.
Bob: Should IRS transcripts be used instead of copies?
Bonnie: They’re hard to read, but if that’s all you’ve got, then yes. But if you paid anyone to prepare your return, they owe you a copy if you signed it.
Michelle: Yeah. But if you can’t get them any other way, go the transcript way. Don’t just wait for your spouse to send them to you. I order them.
Bob: Can you discuss the pros and cons of selling the marital home before the divorce is final versus after?
Bonnie: After-tax impact. If selling the home later produces a tax result because you’re selling it as a single person, if that’s true, depending on how it’s modeled, how, what, how it actually happens. But the other thing too, I would say is that you’ve decided you don’t wanna stay together, and now you’ve attached yourself with a major asset to go into the future. So I understand there’s reasons to do it, but if you’re going to take that asset into the future together, there’s a lot to consider. So you’re gonna be writing a lot more legal language around any exit. I die. I’m disabled. I have a new friend who doesn’t like me having a house with you. All of our plans have changed, so we don’t need the house anymore. I mean, there’s just, we see it all the time. It can be accommodated. So the advantage, to answer the question is, I don’t know, it depends on your situation.
Bob: But talk maybe to, or Michelle, about the specifics of dividing the marital house in terms of adjusting cost basis and and then, perhaps, the impact when you go to sell the house, given that you’re selling it as a single versus a joint.
Michelle: Well, there’s actually some cases where you can write your agreement in such a way that you still can get the joint tax exemption a couple of years later. So, you know, there are different maneuvers that you can make about that. But if you are the single person you would wanna know ahead of time, like Bonnie pointed out, am I gonna lose part of that exemption and now I’m really gonna get a lot less than I thought I did. And that apple, I you know, I exchanged for an orange. It actually was an apple and orange, it wasn’t an apple for an apple. So the software that we use, many times can help us model those things out and help people see that ahead of time.
I think one of the things that comes up too, when we’re talking about property ahead of time, couples might have a primary home and then they have a secondary home as a vacation home or something. And one person might say, well, I’ll just take that vacation home. And the other person goes, okay, I’ll keep this one. And, you know, there are rules around how quickly you sell that house. You might not be able to take the full $250,000 capital gain exemption cuz you haven’t lived there long enough. So you wanna kind of factor all that in, talk to your professional about that. You might also take a home that had depreciation and that has to be recaptured at the sale, which means you’re gonna make less money. So again, you wanna kind of figure that out ahead of time. Am I getting less in this sale than I thought I was gonna get? And then that way you can make that as part of your negotiations and have an offset somewhere else.
Bob: It seems like one has to have a good understanding of the time value of money as you’re going through this process. Is that fair to say?
Bonnie: That’s fair to say. We are, you know, we, through Jan through December of last year, we were all living in Lala land with valuations. How lucky for us? Now we’re not. So you know, it’s not an excuse to settle prematurely, however, you might wanna be cognizant of the fact that, you know, values are decreasing and that may be with us for a while. So that would argue for potentially exchanging dollars or potentially exchanging positions if you believe the positions are simply down for a period of time. That’s you know. But if you have a house, it seems like this would be a great time to sell it. Although you must have shelter, so you have to consider if you’re just trading a high dollar for a high dollar. It’s tricky. Yeah.
Final Points
00:55:23
Bob: So we have about two, three minutes left. We can go over the top of the hour if we need to, but we covered a lot of ground, anything we missed or anything that just bears reemphasizing before we wrap up?
Bonnie: I guess, I guess the main thing I’d say is read, read, read. Try to stay off social media reading, that’s not the reading I’m talking about. Your local library has books that cover divorce really well. Try to make sure you’re getting current information, so attend free workshops in your area, ask us for our on-demand webinar, which is free to anybody. It is copyrighted, but otherwise, the point is to get yourself as knowledgeable as possible. As much of the personal earthquake as this is, you will get through it. And when you get through it, you’ll have the full responsibility for creating a life you love. And it’s gonna be fabulous. It has the potential to be fabulous. If you’re in the wrong place today, getting to the right place is a good place to go.
Michelle: Yeah, absolutely. I think, too, another place to look would be in your individual state’s rules around divorce. Get familiar with those. And are you in a community property versus an equitable distribution state? There are some nuances there.
And I don’t know, I know Arizona and it seems to be a trend, what most of the professionals I’m talking to is like we’re moving towards this assumption that we’re starting from 50-50 custody, which then impacts child support. I, I mean, I have to be honest, this is one of the places I see there needs to be some systemic change. You know, if we have a family and we have one spouse that never took an active part in their child’s life, in child rearing, how could we assume that day one after the divorce, all of a sudden they’re going to be made to make all these modifications and accommodate that child. And most times it doesn’t happen. You start from 50-50, it impacts the amount of child support that the non-moneyed spouse gets, and now that non-moneyed spouse, many times is babysitting or has that child 90% of the time, the other spouse does not.
So I really think, you know, we have to kind of, like, re-look at that as a systemic change and say, well, maybe we start from what the family actually looked at. And then if things change over the next year, then let that other parent file for a petition in modification, not the opposite, you know. For 15 years, this person wasn’t part of these children’s lives, and now we’re gonna start from 50-50. And that disadvantages most of the time, the woman, because many times she is the caregiver.
I also think like no-fault divorce wasn’t necessarily the big win that women, in general, we thought it was, you know. There was an economic benefit that was given to the non-moneyed spouse’s contribution to a marriage, like a business contract. And we really lost, I think the spirit of that, and that really helps impact also the division and the impact of female finances later on after divorce.
Bonnie: Bob, one quick note statistically, that we know to be true. A lot of, there’s a lot of association with boomer women having raised children, stayed out of the workforce, that creates gray divorce and, and a very big problem for late in life. However, we know statistically, millennial women, the biggest generation of all, are making the same choices. So if millennial women are listening to this, or if, you know, a millennial woman who is making that choice, perfectly valid choice to make, make sure she investigates the financial injury by staying outta the workforce and protects herself in her good current marriage for the future. So it’s just not boomer women.
Bob: So I mentioned that this will be the first of many webinars we do on the topic. We, there are so many topics that we didn’t broach today. Things like insurance or, or employee benefits for instance, and so many more. So I think there’s a lot – debt, credit, and bankruptcy. There’s just so many things. And I think we’ll get, we’ll come back and revisit some of the topics that we didn’t cover as it pertains to being in a divorce.
And then I also want to, in future webinars, talk about the sort of the post-divorce issues that women in particular need to think about. Whether it’s saving for their own retirement or whether there’s divorce, spousal Social Security benefits, et cetera, et cetera. So we’ll broach those topics in future webinars.
We’re at the top of the hour and, and what I, and for those that are still on the, on the live webinar we’ll post the on-demand video as soon as possible. And then if we didn’t get to your question today, we’ll post a link where you can send us a question and then we’ll ask Bonnie and Michelle to weigh in, if they don’t mind, to answer some of these questions that are coming in, as people watch the webinar. And and and, and in the meanwhile, Bonnie, Michelle, I can’t thank you enough for sharing your knowledge and wisdom with our, with our viewers. It’s so greatly appreciated, you getting us from street level to curbside to, maybe, planner’s doorstep.
Bonnie: My pleasure.
Michelle: Yes. Thanks, Bob.
Bonnie: Thank you.
Bob: And thank you all for watching.
