Category Archives: Assembling Your Data

Divorce Mediation: Learn from the Boy Scouts

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To increase your odds of getting what you want in mediation, take a tip from the Boys Scouts: Be Prepared. Most of my Brazos County divorces include mediation. When you are prepared, you have a better chance of a successful outcome.

Develop a realistic settlement range. At the low end, know what your worst-case settlement looks like. At the high end, what is your dream settlement? Calculate your break-even point. These steps will prepare you to respond to various proposals that will come from your spouse during the mediation.

Identify what is essential to discuss at mediation. Make a list. Review it with your lawyer a few weeks before the mediation. The issues don’t have to be financial. One of my clients had a strong emotional issue regarding the old videotapes of her daughter’s early childhood. The mediation did not end until she and her husband resolved the issues surrounding those tapes.

Bring your starting offer. If you initiated the divorce, come to mediation with a written offer. Get the settlement discussions started right away. Your starting offer should not be your bottom line settlement scenario. Consult with your lawyer to pull this initial offer from somewhere within your realistic settlement range.

If you are getting a divorce in Brazos County or nearby counties, I can refer you to excellent divorce lawyers and mediators.

The Number: How Much Spousal Support to Seek?

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After a long marriage, women facing divorce struggle with knowing how much spousal support to seek. You can help yourself by understanding your future cash flow situation.

Make a detailed list of the living expenses you will have after your divorce. Identify your expenses. Create a separate list of expenses you wish to cover for your children. Look over your bank statements and credit card statements for the past year. Identify those expenses that will not change after your divorce. Then make a list of spending amounts that will change after your divorce. Will you have a new cell phone contract? How about your vehicle insurance premiums? Are you expecting to have a different home?

Estimate how much of your living expenses can be covered by non-wage income. If you have investments, the income on those may change after you start making investment decisions on your own or are working with an investment advisor. Consider whether you might have Social Security income or pension income. Estimate how much child support you think you will receive.

Will you have income from a job? How much you can earn in a career?  If you already have a career, this step is relatively easy. If you are just now entering or re-entering the workforce, this step is more challenging. Consider seeking advice about your employment possibilities from a career advisor.

To find out how much spousal support you might want to ask for, add your estimated sources of income together and subtract your anticipated expenses. If the result is a negative number, that is your starting number for how much spousal support to seek. Weigh this against the Texas spousal support guidelines and the amount your soon-to-be-ex husband can manage. Work with your divorce attorney to fine-tune your approach.

I can refer you to Brazos County divorce attorneys as well as career advisors and investment advisors.

Collaborative Divorce: Most Common Mistake Men Make

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It’s the “I don’t need to do that” guy thing. If you have been making more money than your wife, you are particularly prone to this mistake.

In collaborative divorces in College Station and Houston, we look at post divorce cash needs to help us see options for splitting investments, property, etc. Wives are fine with listing their expenses. They want to show their husbands that their needs are authentic and accurate. These husbands are glad to see that I am going to show their wives – in black and white – that they can’t keep up the spending level.

You guys don’t feel you need to do a budget. You know how much you make. Your personal spending needs are modest. She’s the one who has been spending all the money. She needs the budgeting, not you.

Bingo. There’s the mistake. You need to let her see your living expenses. They may be modest, but they are not as modest as you think. In my experience, people consistently and reliably underestimate their expenses by at least 50%, many times 100%.

I worked with a couple a few years ago. The husband wanted me to work with his wife on her expenses. He told his attorney we didn’t need to look at his expenses. He said he made enough money that he was going to be just fine. He said he had modest expenses. We got well into the collaborative divorce process when he started to put his own numbers on a spreadsheet. He stayed awake that night thinking that he was offering a settlement he couldn’t afford.

The next morning, I showed him that he wasn’t worried enough. He was underestimating his living expenses. The divorce went on pause while I nailed down his true expenses. He backed off his settlement offer. You can imagine how well that went over with his wife and her attorney.  After all, he had been saying for months that his expenses were modest. His mistake and the aftermath of it slowed down that divorce by about three months.

Guys, you need to show your living expenses early in the collaborative divorce process. You need to show, in black and white, that you are not an endlessly deep pocket. Listing accurate living expense is time consuming and boring. If you don’t want to do it yourself, let your financial neutral do it. Be accurate. Be honest. Don’t guess.

 

4 Tips to Estimate Your Divorce Living Expenses

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These are a few more tips to help you get an accurate budget. I use these with my College Station and Houston clients. The basic steps are in my last blog post.

#1 If your bank and credit card statements include expenses for people who won’t be in your household next year, such as soon-to-be-ex-spouses, you need to avoid listing those expenses. Either estimate the costs that are only yours or tag the ones you know are not yours and cross them off.

#2 How do you estimate only yours when the costs on the statements are for both of you? Example:  Look at your monthly grocery costs. Think about who eats at home the most. If there are just two of you, allocate more than 50% of the grocery bill to that person. If there are more than two of you, estimate what percentage each person consumes. Subtract out the amount that is for the person who will not be in your future household. Do this for all expenses.

#3 If you think you are going to live in a different place after your divorce, use new information for certain household expenses. Use your current housing expenses as a springboard to your estimated future expenses. Example: Your cable internet bill may not change, but your yard care costs could.

#4 If you know you are going to move but you don’t know where yet, do some research and, aackk!, guess a little.  Find homes or apartments that look like a possible option for you. Ask the landlord for the annual utility costs. Find people who live in similar places and ask them about their annual lawn care costs.

I have created a good spreadsheet for budgeting. If you want a copy, send me an email to stewart@TexasDivorceCPA.com with the words “Budget Spreadsheet” in the subject line. I’ll send you one – free.

Six Tips to Figure Out Your Cash Needs in Divorce

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As a divorce CPA in College Station and Houston, I often help clients estimate their cash flow needs for their new normal life after divorce. When I do this, it is accurate. (But, of course, you would expect that from a CPA!) When they create their own budget, it is often wrong.

Here are some tips to correctly figure out your cash flow needs whether during or after your divorce or even if you are not getting a divorce.

#1 Create a list of 12 months of expenses. You can get the number for monthly expenses by dividing that by 12. Always start with a whole year to capture everything.

#2  Your list needs to include expenses that repeat every month, items that repeat only a few times a year, items that occur only once a year and  items that occur only once every few years.

#3  Get copies an entire year’s worth of all your bank statements and credit cards. Use every item to add up your expenses in various categories.  This is a long and tedious task. But it results in the most accurate information.

#4  If tip #3 made you shout “No Way!” then take the dangerous short cut and use 3 months of statements. But know your risks. You will multiply your monthly expenses by 4 to get a full year. Watch out for those twice a year expenses that fall into those 3 months you chose. Don’t multiply them by 4. I had a client who did that and her budget ended up way, way too high.

#5  If you use less than 12 months of data, comb through your statements and find the expenses that did not fall into those 3 months you chose. Add those missing costs in.

#6  Remember to budget an amount for monthly savings. Stuff breaks, stuff falls apart. You will need that savings to avoid charging car repairs on your credit cards.

I have created a good spreadsheet for this exercise. If you want a copy, send me an email with the words “Budget Spreadsheet” in the subject line. I’ll send you one – free.

The Flip Side of Control

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In collaborative law divorce cases, my role is as a neutral financial advisor. I collect the financial information from both spouses and create a net worth statement (known as an inventory). The process of collecting the documents translates to homework for the clients. When the spouses have unequal financial knowledge, most often it is a situation where one spouse has controlled the money, the investments and the income while the other spouse has little or inaccurate understanding of the family financial situation, the income, the total spending, the investments and the savings level.

Glossary moment:

Monied spouse = the spouse who controls the money, investments, income. He/she has the bank statements, credit card statements, investment statements. He/she established or was given control over the finances early in the marriage for whatever the reasons.

Non-monied spouse = the spouse who has not participated in the family finances. She/he has not seen the statements and has signed but not read the tax return. Typically this spouse has not asked questions.

Note: In any partnership, there is a division of duties. Marriage is a partnership. Early in the marriage, couples divide the duties. I am not judging this arrangement, but I wish more Americans were financially literate.

So long as the monied spouse is doing the right thing, this can work well for a very long time. But, if this couple finds themselves in divorce, it creates some interesting aspects to the divorce process.

In the beginning of the case, when I start to gather financial information, the monied spouse is laden with all the financial homework. During a divorce, everyone is living under stress at home and at work. Piling this homework on top causes more stress and is time consuming for the monied spouse. One such spouse called this homework phase his “other job”.

The longer it takes the monied spouse to gather all the required documents, the longer the divorce will drag on. When this spouse is particularly eager to get to the end of the marriage, the irony is that his/her own inaction can be the cause of the delay.

This is the flip side of having control of the family finances.

Spendthrift Spouses

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I was recently quoted in an article on moneycentral at msn.com. Liz Weston wrote a great article about spendthrift spouses. You can read it at http://tiny.cc/6bzw4

Financial issues is one of the top two reasons couples divorce. (The other is lack of communication.) Differences in spending habits is one of the most common types of incompatible financial attitudes. And money is very difficult for many couples to talk about. So there is the double whammy of financial issues and lack of communication.

I have seen a lot of marriages tipped to divorce because of money and debt. Those couples who have chosen to divorce in the traditional litigated pattern have fared the worst. The costs of those divorces were substantially greater than the collaborative divorces of similar circumstances.

When it comes to divorcing a spendthrift spouse, the best divorce method is the collaborative law process. In this process, as the financial professional, I am usually asked to educate the spendthrift spouse about cash flow and budgeting. The couple gives me their bank statements and credit card statements for a period of time no less than three months. I pull together an accurate, detailed picture of their expenses. They are always surprised. Everyone thinks they spend less than they actually do. The spendthrift spouse and I work together to create a cash flow plan that works in their unique living situation. The spouse chooses where to cut back on spending. This is the crucial buy-in that assures the new budget commitment. It also reduces the chances that this spouse will boomerang back to the other spouse in future years to ask for more money.

Budgeting is one of the foundations of financial literacy. The AICPA (American Institute of Certified Public Accountants) and the TSCPA (Texas Society of CPAs) have been providing educational tools on financial literacy for years. You can read more about these at http://tiny.cc/sk2zz

Equity in the House

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The equity in your house is the value minus the debt. If you have had the house appraised, that is the value. The debt is the outstanding balance on your mortgage(s).

In a divorce, the amount to be divided is the equity amount. However, the equity amount does not take into consideration the selling costs or the fix-up costs. So, when you are trying to calculate how much money you can have after the house is sold, you need to take the value and subtract from that the debt, the fix-up costs and the selling costs.

If you call your mortgage lender to ask about the outstanding balance on the debt, you can get two numbers. One is the principal amount outstanding and the other is the payoff amount. The former includes any interest due. If you are current on your payments, just use the principal amount. It is simpler. Keep in mind that every day the payoff amount will change due to the interest on the loan. And every time you make a loan payment, both the principal outstanding and the payoff amounts will change.

Check for liens on the property. You can have tax liens or mechanic’s liens on your property without your knowledge. To find out about liens, you can hire a title company to do a search or you can go to your county records office where your deed is recorded.

Tax Effecting Inventory Items

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Tax effecting inventory items means to put them on the inventory at their after-tax values. Some people want to do this. But it is a bit tricky and never, in my opinion, is it accurate.

Example: The balance in a bank account is not subject to income tax upon withdrawal. But the contents of a traditional IRA or 401(k) account will be subject to income tax upon withdrawal. In this example, to tax effect the retirement account is to attempt to compare apples to apples.

However, the tricky part comes in with the calculation of the future taxes on the retirement account.

Shall we assume the retirement account is drained and taxed at the time of divorce? I think not, since that is usually unlikely. Shall we assume the retirement account is drained and taxed when one spouse retires? Which spouse? And when will that be…. for certain? At what tax rate shall we tax the retirement account withdrawals? What will the tax rates be at that point in the future? What deductions and credits will be used by the spouse (which spouse?) at that future point?

If we are all in an agreeable mood, we could agree on some assumptions. But those assumptions could be wildly inaccurate when the future arrives.

House Selling Costs on the Inventory

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When creating an inventory or net worth statement for a divorce, some couples prefer to factor in selling costs for the house. Selling costs are deducted from the estimated value of the house. Usually, the person who wants to deduct selling costs is the person who is intending to keep the house. The reduction in house value from the deduction of selling costs means that person has less on his/her column, leaving room for more assets or money to be placed in their column.

The discussion over whether selling costs should be deducted can be a lively one. Couples talk about the likelihood of actually selling the house soon. After all, where do you draw the line on timing? If he/she intends to sell the house within 6 months, then they get to deduct the selling costs now? What if he/she has a change of heart and decides not to sell the house after all? What if he/she plans to sell the house in 4 years after Johnny has gone off to college?

Then there is the discussion of how much are selling costs? Are they only the real estate agent’s commission? Are they all the costs to sell (whatever those are in your geographical area). Do they include fixing up the house, such as repairs and painting? Then there is the differing opinion about whether painting the living room will produce a higher selling price anyway.

I don’t have an answer here. Just issues to consider. Every couple deals with this in their own unique manner.