First things first: when helping a divorcing client through the division of assets and the calculation of spousal support, there is one thing an advisor must never, ever do: tell the client what he or she thinks the client is entitled to.
“I don’t tell anyone what the right solution is,” says Jackie Ramler, a certified financial planner who specializes in divorce with Divorce Choices Inc. in Barrie, Ont.
Erika Penner seconds that motion. “I am never going to tell the client what he or she can have legally,” maintains the Richmond, B.C.-based financial divorce specialist. “My role is to look at the different options and project their future impact so the client has a better idea of their implications.”
Indeed, your role as the advisor — after helping the client gather all pertinent information (including property, business and pension valuations) required for the full financial disclosure — is largely one of education and advocacy.
“It’s really a matter of making sure the client comprehends the choices he or she is making,” says Penner. “I also help them understand why it’s important to fight for their fair share.”
> Splitting The Assets. The specifics of asset division — formally referred to as the “equalization payment” — are determined at the provincial level but tend to favour a 50/50 split. In Ontario, for example, the equalization payment is based on the value of the matrimonial home plus increases to each spouse’s net worth (taking into consideration investments and pensions, among other assets) during the course of the marriage, and minus any liabilities.
“For example, if one spouse has a total worth of $50,000 and the other spouse has $100,000,” Ramler says, “the spouse with $100,000 would have to pay the other person $25,000 as an equalization payment.”
This payment may take the form of cash or other assets, such as the matrimonial home or RRSPs. “There are different ways to negotiate that settlement,” says Ramler. “In the case of mediation or the collaborative practice, both parties have a say in that.”
Ramler works only within mediation and collaboration and is often present during client negotiations as a “completely neutral sounding board.”
In litigious cases, the judge determines the amount and method of payment, based on input from each spouse’s lawyer. “The judge’s decision is very much based on precedents,” says Penner. “But the lawyer for each party will present a case that he or she considers to be best for the client.”
An individual who is unable to make the full equalization payment in cash or assets may have to fork over a portion of his or her pension to the ex-spouse.
“A common solution is to transfer partial ownership of the pension to the spouse, who can then move it to a locked-in retirement account,” says Ramler, who notes that you can only tap into a portion of those funds annually, usually after the age of 55. “The challenge there is that if people don’t understand how that type of account works, they think they can cash it out right away.”
No matter how the divorce is settled, a common trend prevails. “The husband doesn’t want to give up the pension and the wife doesn’t want to lose the house,” says Penner. “But he needs to understand that the pension is a joint asset, and she needs to understand that she can’t eat the house — she needs to have some income, too.”
At first blush, the value of the pension and the house may seem interchangeable, and a straight swap may look like a simple solution. “But that’s what got me into this field,” Ramler says. “I saw so many non-working spouses taking the house for the sake of the children, without knowing whether they could afford it.”
You can help your divorcing client see the ramifications of various trade-offs before any decisions are made. John Booth, a certified financial divorce analyst and a senior financial advisor with Assante Capital Management Inc. in Burlington, Ont., uses software from the Mississippi-based Institute for Certified Financial Divorce Analysts to trade one asset with another easily and illustrate income or costs associated with each asset.
These “what ifs” often serve as a wake-up call for those clients who don’t want to touch their ex’s pension or who are hell-bent on keeping the house. “A spouse might say, ‘Just give me the house and the child support — all I want is to make sure that my kids are taken care of’,” says Booth. “Sometimes, it takes getting the pension valuated in order for a client to see that there’s something there and that the client can’t survive without the equalization from it.”
@page_break@Running the numbers may also show that the spouse can’t afford to maintain the family home. “I plant that seed in our initial meetings,” says Ramler, who notes that until the spousal support amount is determined, clients really don’t know what their future income will be. “At that point, we can sit down and make a budget and do projections on how different settlement options will affect their net worth in the future.”
> Determining Spousal Support. Unlike child support — which, in most cases, is determined by a relatively set formula — there are no such set regulations for spousal support. Instead, advi-sors may use the Spousal Support Advisory Guidelines set forth by the Department of Justice to calculate various support scenarios. Ramler, for instance, uses DivorceMate software from Toronto-based DivorceMate Software Inc. to determine three estimates: high, mid-range and low. “That way,” she explains, “the client has room for negotiation.”
In litigious cases, Penner helps clients assess the support amount put on the table. “My role,” she says, “is to look at those options and project their future impact.”
Beyond the numbers, negotiating an equalization payment and spousal support amount is an emotionally charged process. It can also be a lengthy one, depending on the valuations required.
“Most people just want to get it over with. They don’t realize that, first off, even having a pension evaluated can take six to eight weeks,” says Ramler. “As well, no matter how fast they want to race through it, a lot of emotional stuff tends to arise that slows things down.”
She notes that it’s best for collaborative negotiations to pause until both parties are on an equal emotional footing. “A lot of people sign off on things without really understanding the consequences,” she says. “It’s our job to help protect clients from themselves.”
A spouse who doesn’t want to rock the boat may sign off on a settlement that is less than what that spouse is entitled to. Or guilty parties — in the case of infidelity — may be more generous than necessary. But you can’t stop clients from making potentially damaging decisions, says Penner: “If they want to leave something on the table, that’s fine — as long as they’re aware they’ve left it on the table.” IE
COMING IN THE DECEMBER ISSUE:
THE ADVISOR’S ROLE VS
THE LAWYER’S ROLE
Make sure clients understand choices they’re making
Often the husband wants to keep the pension, while the wife wants the house — but you can’t eat the house
- By: Maureen Halushak
- October 28, 2008 October 28, 2008
- 10:54