SEVEN THINGS TO DO BEFORE YOU DIVORCE
Get Our FREE eBook!

In our previous article, “How Executive Compensation Impacts Divorce,” we presented the types of executive compensation that should be considered for purposes of marital property division, as well as future income that should be included for support calculations. This article will examine the basics of dividing executive compensation. We begin by identifying several key aspects of executive compensation in divorce.
In most cases involving divorce, we must first determine to what extent the compensation is marital and subject to division. In all cases, if the compensation was awarded and vested during the marriage, they are 100% marital. If awarded but not vested, we must first determine the extent the award is based on past service vs. future performance. To the degree based on future performance, that portion would be considered separate property. To the extent that there are no plan-specific rules regarding the division of benefits, coverture fractions are used to determine the percent marital.
Coverture fractions based on past performance are based on the Hug formula. The numerator (marital service credit) represents the total number of years or months during which the retirement benefits were earned or accrued while the spouses were married. This includes the period from the date of marriage to the date of separation or divorce filing, whichever is applicable. The denominator (total service credit) represents the total number of years or months that the spouse worked or accumulated service credit that counts towards the retirement benefit. Up to the present date or retirement date. Calculate the marital coverture fraction by dividing the numerator (years of marital service credit) by the denominator (total years of service credit).
Coverture fractions based on future performance are based on the Nelson formula. The numerator (period of marital service) represents the period during which the spouse earned or accrued retirement benefits while the marriage was intact. This typically starts from the date of marriage to the date of separation or divorce filing, depending on state laws. The denominator (total period of service) represents the total period during which the spouse worked or accumulated service credit that counts towards the retirement benefit up to the present date or anticipated retirement date. Calculate the marital coverture fraction by dividing the numerator (period of marital service) by the denominator (total period of service).
Most executive compensation cannot transfer directly to the non-employee spouse. Even if it can be, it may not be advantageous to transfer it at the time of vesting or payment. In these cases, we need to be able to provide a value for the portion earned during the marriage so that the employee-spouse can keep the compensation while the non-employee spouse receives other assets to compensate. Valuation, however, is not always a straightforward exercise.
When transferring to a non-employee spouse, we need to adjust for the taxes paid at the time of vesting or exercise. Depending on the plan, the recipient’s marginal tax rate applies to some transfers when exercised. Only the employee spouse can exercise others, using the employee spouse’s marginal tax rate at vesting or exercise.
Attorneys may subpoena the employee spouse’s company or the employee spouse can provide documents that are necessary to determine if the executive compensation is based on past or future performance, granting conditions and vesting schedules. Request the following documents:
In our next article, we will look at some of the nuances of handling executive compensation across the more common types of executive compensation.
When you consider divorce, one of the biggest realities for those in the divorce process is the financial settlement and financial analysis post-divorce. Get the assistance of Berni Stevens, a Mediator and Certified Divorce Financial Analyst® (CDFA®.)
Berni provides step-by-step guidance on matters related to divorce. With a wide range of experience and expertise related to divorce issues. Berni will simplify the process and provide much-needed clarity in areas such as long-term tax consequences, asset, and debt analysis, dividing pension plans, continued health care coverage, stock option elections, protecting support with life insurance, and much more.
You can read more divorce related articles, news and resources here. Don’t forget to follow along on social media for helpful divorce tips and resources!
Did you know that there are basically three kinds of divorce mediators? There are lawyer mediators, therapist mediators, and financial mediators.
Most people new to divorce think first of lawyer mediators. Lawyers are experts at navigating divorce through the courts: filing petitions, presenting at hearings, filing motions, and arguing cases before hearing officers and judges. If you’re meditating your divorce, though, there isn’t much that a lawyer can bring to the table other than knowledge of the filing procedure and state guidelines and these are readily available to all. Lawyers aren’t allowed to provide the couple with legal advice, either. Regardless of your choice in mediators, it’s a good idea to hire an attorney as a consultant to get legal advice and review your settlement agreement before signing.
Second, therapist mediators are specially trained in various mental health areas and are useful as divorce mediators when there are special circumstances, e.g., complex custody issues or personality disorders. They do not possess financial expertise, nor can they help with legal documents or divorce processing. On the other hand, you may want to utilize a divorce coach to help you stay on track throughout the divorce process and be more effective in your negotiations.
Financial mediators, specifically Certified Divorce Financial Analysts® or CDFA-mediators, bring divorce financial expertise to the table, helping couples determine an optimal divorce settlement. They can provide the couple with financial advice that neither lawyers nor therapists are equipped to do. Working with a financial mediator facilitates:
So be aware that there is more than one type of mediator option and that your first leaning may not be the best choice for your situation. Book a complimentary, private consultation to learn more.
Divorce is expensive even without mistakes and getting comprehensive guidance on divorce financial planning is critical. Read on to learn of the top eleven most common financial mistakes made in divorce.
What’s considered marital property and subject to division? Most will say that any comingling of assets (e.g., depositing the funds in a joint account or using marital funds to pay the mortgage) constitutes an asset as marital. And in some states and counties, even if a portion of an asset that was separate on the date of marriage will, over the years, transition to marital. This can impact considerations of real estate, retirement, inheritances, and more.
Too often, lawyers, hearing officers, and judges take the easy way out by forcing division of each asset equally. Why? It’s easy and not easily challenged. This approach, though, fails to consider the needs and wants of each spouse, as well as the tax consequences of and administrative effort in dividing each asset.
No one likes alimony. Payors hate writing the check and the recipient hates depending on it. Plus, if the payor dies or is disabled, the payments stop (an example of why insurance is important post-divorce). Instead, if there are sufficient assets to cover it, calculate the present value of the stream of anticipated payments at an appropriate discount rate and build it into the division of assets.
If there’s one financial topic that befuddles many, it’s how to treat deferred compensation, including stock options, both qualified and not qualified, as well as restricted stock and restricted stock units. Are they marital or separate? Are they based on past or future performance? Can they be transferred to a spouse/former spouse? What is the correct valuation method: intrinsic value, Black-Scholes, or the binomial method? How are taxes accounted for?
Given the opportunity and motive, many a spouse will start stashing away funds in anticipation of a divorce, whether for financial security, sense of ownership, or vindication. Tax returns, W-2’s, credit card statements, and bank account statements are all sources to identify diverted funds. Even when not suspected by a client spouse, a quick review of these documents may reveal otherwise unidentified assets.
What if a spouse wants to keep the house for and can’t get approval for a mortgage buyout? It’s easy to just say “sell” and move on, but there are ways to facilitate the desire of a spouse who wants to remain in the home for a period without undue legal or financial burden to the co-owner spouse. As another example, maybe retirement funds are of utmost concern and alimony/cash flow not so much? A skilled divorce financial expert will come up with alternative settlement options to address the unique needs of each spouse.
Retirement plans, and especially pensions, are widely misunderstood in divorce. The one who’s name is on the retirement plan thinks they are the rightful owners. Some incorrectly think the “current value” on a pension statement is the value of the pension. Pensions of all kinds, and especially military and federal pensions, require an expert for valuation and drafting of appropriate orders for submission to the custodian.
All assets are not alike when it comes to splitting them in divorce. $250,000 in a 401k is not the same as $250,000 of equity in a house. The former is taxed at an ordinary income tax rate upon withdrawal while the latter may be largely excluded from any taxation and otherwise taxed at the capital gains rate.
The marital home is an asset laden with emotion and sentimentality. It’s common to want to keep the house for emotional stability without consideration of the impact on future financial health. Houses don’t necessarily appreciate significantly over time, maintenance expenses are often overlooked or discounted, and a house is not a liquid asset. An objective evaluation is critical before deciding to keep or sell the marital home.
If a spouse owns a business, is it a source of income, an asset to be valued and divided, or both? If a source of income, do we just look at the tax returns for the business? If to be valued, do you pay a business valuation expert thousands of dollars to get an accurate figure? Get the advice of a divorce financial expert is necessary if one of the spouses owns a business.
Do you have a good hold on where your money goes? Have you really assessed how much you will need post-divorce? Your choice in divorce settlement options needs to be balanced between short-term cash flow needs and long-term net worth.
Work with a qualified divorce financial professional, i.e., a Certified Divorce Financial Analyst® (CDFA®) to help you avoid costly mistakes in divorce. You only get one chance to get it right.
When you consider divorce, or if you know someone who is contemplating divorce, one of the biggest realities for those in the divorce process is the financial settlement and financial analysis post-divorce. Get the assistance of Berni Stevens, a Mediator and Certified Divorce Financial Analyst® (CDFA®.)
Berni provides step-by-step guidance on matters related to divorce. With a wide range of experience and expertise related to divorce issues, Berni will simplify the process and provide much-needed clarity in areas such as long-term tax consequences, asset, and debt analysis, dividing pension plans, continued health care coverage, stock option elections, protecting support with life insurance, and much more.
In a recent post, I addressed the notion of “winning” at divorce. There are many lawyers who claim they can do just that, and they will be happy to take your hard-earned money while they fight your war for you. The reality is, in the vast majority of cases, you’ll wind up no better off than if you’d negotiated to begin with, and all the while you’re funding your lawyer’s kids’ college education instead of your own.
Winning might instead be viewed as getting through this divorce transition with integrity, keeping more of your own money, and maintaining your and your children’s emotional health throughout. Ideally, you’ll do this without ever stepping foot into a courthouse or even speaking to an attorney.
So, how do you get better outcomes, at a lower cost and without judges, courts, or even lawyers? If you have minor children and marital assets, don’t attempt a do-it-yourself divorce unless you want to risk costly mistakes that cannot later be reversed. If you want an easy, affordable, and legal solution, seek a qualified divorce mediator.
You will want to find a mediator who has the knowledge, skills, and experience to guide you and your spouse to a financially optimized settlement agreement and, if applicable, with a parenting plan that preserves the integrity of your family. A mediator with the divorce financial expertise of a Certified Divorce Financial Analyst (CDFA®) is ideal.
How, though, to address the legal piece of your divorce? You will find that legal agreements and divorce papers are straightforward in a mediated case. These can be easily facilitated by your mediator so that you never even have to work directly with an attorney to process your divorce. (It’s never a bad idea, though, to have an attorney review your agreements before they are finalized, and this can be done at a minimal cost.)
Rationally approaching your divorce, along with a dose of grace, can result in a lower-cost and faster process while addressing your financial needs and preserving your family’s emotional well-being. Now, wouldn’t you agree this would be a “win” at divorce?
Are you contemplating divorce or in the early stages of divorce and determined to get or keep as much as you can, leaving your spouse with as little as possible? If so, you’ll easily find a divorce attorney who will fight your war with you for years. And you’ll only end up where you would have if you’d negotiated to begin with. And guess what—you’ve funded your lawyer’s kids’ college accounts rather than your own. Is this a “win” at divorce?
Perhaps you should instead consider getting through this overwhelmingly difficult transition with dignity while keeping a lot more of your own money and maintaining your and your children’s emotional health throughout. In most instances, you can do that without ever stepping foot into a courthouse or even speaking to an attorney.
The fact is that ninety percent of divorces don’t belong in the court system. When you involve the court, you give up total control around life-altering decisions regarding your assets, your income, and the custody of your children. Whether within or outside of court, if you involve an attorney for both you and your spouse—the traditional model—it will result in legal expenses that you can’t possibly fathom when you’re 1) just getting started and 2) convinced the “system” will see your side of what’s just. Attorney-driven divorce processes will not provide you with practical guidance and needed emotional support nor correctly value all your assets and considers both the short and long-term impact on each spouse’s financial health.
I set out years ago to find a better way to divorce, creating and refining a process to deliver just that. At TruNorth Divorce, we provide a legally-sound, one-stop solution for divorcing couples who want a financially optimized settlement that helps both spouses achieve their long-term goals. When children are involved, we also provide effective and durable parenting plans. Yes, there is indeed a better way that will be less expensive, faster, less stressful, minimize the negative impact on your children, and launch you towards a new and promising future.
Want to know more? Read How to Win in Divorce.