Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Four Essential Steps to Level the Financial Landscape of Divorce Mediation
Published Date : January 4, 2016
Many couples going through divorce are opting to pursue a settlement process through mediation. Mediation can reduce the overall cost and the emotional trauma experienced in a more traditional dissolution process in which spouses are separately represented. While every situation is unique, people generally find the neutral mediator and the structured sessions typical to this approach help parties make smoother progress toward settlement. It is important to remember, however, that in order to achieve the win-win agreement the parties seek, the two of them must be on reasonably equal footing, cognizant of the issues at hand. If there is a lopsided understanding of the family’s finances or the parties’ legal rights, the negotiation may lead to a poor outcome for the less-highly informed spouse. While the mediator plays an important role in helping both parties move towards settlement and informing them both along the way, he or she does not advocate for either spouse and, therefore, is not a substitute for independent counsel.
So, how can a couple choosing mediation assure that the playing field is as level as possible? While the importance of legal representation is well understood, fewer are aware that a financial professional familiar with the process and armed with deep planning strengths can help the less informed spouse understand the current and future financial implications of financial proposals. Following these four steps will help assure an optimal outcome:
- Build your team of advocates – The first step in approaching the divorce process, regardless of the settlement approach, is to find good legal counsel. Take your time and interview reputable family law attorneys in your area whose expertise and communication style aligns with your situation (ex. child custody) and values. Using these same guidelines, you and your spouse will hire and retain a mediator who will coach you through that process. Your own attorney will give you legal advice and support you at critical points in the process ahead. One of these two attorneys may advise you to hire a financial advisor to enhance your team. A financial professional with a strong working knowledge of the marital dissolution process and how it intersects with your money and property will work with you and your legal team to address the significant financial decisions you will face; specifically, the division of complex assets, testing your future cash flows for long term sustainability, and if appropriate, your need for support.
- Determine your goals for mediation – It is always important to identify your priorities as you enter a negotiation. In mediation, if you have a clear focus on your goals, you will have a more efficient and productive experience. Mediation should help you manage the timeline and cost of the divorce. Your long-term goals are your beacon through this sometimes challenging and emotional process. The essential objective is to achieve the greatest degree of long term security possible for yourself and your family in the context of the financial resources available. Subsets of this larger goal are having an ongoing, constructive relationship with your ex-spouse, a mutual focus on successfully raise your children, and for you to feel safe and secure.
- Understand and strengthen your knowledge of the family finances – It is essential in mediation that both parties make reasoned decisions based on a clear understanding of the family’s finances. Since spouses often “divide and conquer” to take care of the family responsibilities during marriage, one spouse often has had less involvement in the family finances and may be less comfortable making significant financial decisions as a result. The process you will go through will help you build a stronger financial knowledge base. With your involvement, your financial professional will compile and analyze information about community assets, a perfect opportunity for you to learn more about your current and future resources. The income and expense declaration, required for dissolutions in California, serves as a foundation to build forward looking budgets and cash management plans. Beyond knowing what assets and liabilities exist at the time of your separation, you will want to understand the risks, liquidity, and tax costs associated with your investments. You and your team will catalog all the income sources, including bonuses, vesting schedules for incentive-based plans, and pending retirement plan corporate contributions, as well. These steps will help you and your team ensure that all the necessary language is in the marital settlement agreement (MSA) and so your team can track all the many moving parts during the ultimate division.
- Weigh your settlement options and gain a sense of security – While the property settlement in community property states, such as California, seems fairly straight forward; the reality is that assets are not always easily split. So when one spouse retains, for example, the family home, he or she effectively trades it for other assets (cash, securities, or other property) to balance the scales to 50/50. When this happens it is important to understand how the trade affects your overall investment risk, future cash flows and tax liabilities. One of your financial professional’s key roles is testing the impact of such choices by running various cash flow analysis projections. Through these analyses, your after-tax income and investment returns are stacked up against your projected spending, adjusted over time for inflation, to test the sustainability of the plan. Returns on investment vehicles are projected based on historical stock and bond market results. Markets can vary greatly year over year and the exercise displays the range of outcomes through strong markets and poor ones. Grasping how various settlement options are likely to play out far into the future informs you and your team as you all work on achieving an optimal outcome. The exercise will also provide a foundation for future planning in your post-divorce life.
As with any major life transition that requires you to make irreversible legal and financial decisions, it is important to enlist a team of professionals to support you through your divorce. Leveling the playing field by boosting your understanding of your legal rights and financial options will allow you to pursue mediation. The dissolution process is not only a major personal transition; it is a significant financial one impacting your family’s financial well-being. Building an able team, identifying your goals for the mediation process, and building your financial sophistication to assure you will make informed decisions as you navigate the process will greatly enhance your chance to achieve an optimal outcome.
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