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11 Costly Financial Mistakes in Divorce Settlements

Divorce is expensive even without mistakes. Read on to learn of the top eleven most common financial mistakes made in divorce.     

1. Mis-Specifying Marital vs. Separate Assets

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.

2. Dividing Each Asset 50/50

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.

3. Not Considering an Alimony Buyout

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.

4. Errors in Valuing Executive Compensation

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?

5. Not Considering the Possibility of Hidden Assets

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.

6. Not Looking at Creative Settlement Options to Meet Each Spouse’s Unique Needs

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.

7. Mistakes in Retirement/Pension Valuation and Division Orders

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.

8. Failing to Consider Tax Consequences

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.

9. Allowing One Spouse to Keep the House When it’s Not Financially Feasible or Beneficial

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.

10. Not Properly Accounting for a Closely Held Business

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.

11. Not Accurately Budgeting for Your Post-Divorce Life

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.

Take Control of Your Future

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.

Schedule Your Complimentary Divorce Strategy Session Today!

3 Key Things to Look for in a Divorce Mediator in Pennsylvania

Getting a divorce is certainly not the best of times and should be a last resort to solving marital conflict. Sometimes, despite our best efforts, things just don’t work and it’s important to accept that and move forward. If you find yourself searching for a “divorce mediator near me,” then you’re in luck. Using mediation can eliminate a lot of the stress, strife, and expense from the divorce process and help both parties get a satisfying outcome.  

As divorce mediators in PA, we know how to bring clarity and calm to these situations. However, when you’re seeking out a divorce mediator in Pennsylvania, there are going to be a few things to look for in a qualified professional: 
 

    1. Expertise. Before you secure divorce mediation in PA, ensure that the person you hire has the right qualifications required to be your mediator. She should be skilled in all areas of divorce–legal, financial, and emotional and be able to expertly guide you and your spouse to a solution that you’ll feel good about now and for years to come. A CDFA-Mediator may be your best choice.

        

    2. Experience. A highly-experienced professional can make all the difference. Any divorce mediator in PA you seek out should have a good number of years working with divorcing couples. When you talk to a potential mediator, ask her about her success rate and what’s made her effective.

        

    3. Demeanor. Divorce is an emotional roller-coaster and “divorce brain” can make it hard to make good decisions. You should look for a divorce mediator in PA who has the training and personal style that is helpful when working with a couple where one or both of the spouses is experiencing confusion, shock, anger, resentment, sadness, and more.  

      If you’re looking for a divorce mediator in Pennsylvania, then you should call our
      PA Office for TruNorth Divorce Solutions or Schedule a Free Strategy Session to get help you determine if mediation is right for your divoce and gain tips on how to approach mediation successfully. 

TruNorth Divorce provides expert divorce mediation and guidance to individuals and couples considering divorce. Their mediators are not only experienced mediators who are highly knowledgeable about divorce law and procedure, they are also trained as divorce coaches and are Certified Divorce Financial Analyst CDFA® professionals who specialize in divorce financial issues. This powerful combination allows them to address each of the dimensions of divorce–legal, financial, and emotional–leading their clients to a better and brighter future that has taken all their needs into account.

 

 

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484.321.6990

hello@trunorthdivorce.com

Getting a Divorce in Pennsylvania During COVID-19

2020 was a rough year for most of us and for many people in committed partnerships and marriages, a serious make it or break it year. People who live together are spending more time together than ever before and to complicate things, collective anxiety is at an all-time high.

If your marriage is on the rocks and you are seriously considering divorce, you’re probably wondering how to go about separating and moving forward in the midst of the new social distancing normal. TruNorth Divorce is here to offer some guidance around a few questions you may be asking yourself because of the unique considerations divorce in Pennsylvania during Covid-19 has created.

Should I divorce during a pandemic?

No one should stay in a marriage that they are unhappy in. If you’ve decided that things between you and your spouse are irreconcilable and you’re emotionally ready to begin the separation process, don’t let the pandemic stop you from pursuing a happier life.

Are my local courts operating at normal capacity?

Local courts can process your divorce if you have a signed settlement agreement. For contested matters that aren’t resolved outside of court, many local courts are attempting to keep up with phone and video conferences but, currently, in-person conferences, hearings, and trials are backlogged for six months or more. This has made divorce processes like mediation and represented negotiation all the more attractive.

If you’re looking for the silver lining, the good news is that widespread use of video conferencing is improving the court process by cutting down on wasted time getting to and from the courthouse. Video conferencing has improved mediations, too. Not only has Zoom made them more convenient, but remote mediation also has the added benefits of allowing couples to work with the best mediator for them even if not geographically local and to meet with their mediator while the couple is in separate locations.

Will I have an issue finding a mediator or lawyer?

Most mediators and lawyers are still working remotely through the pandemic. Choosing council to represent you or a mediator to help facilitate the divorce process will be much like it was pre-pandemic. The only caveat is that most—if not all—of your meetings will be held remotely.

How will the pandemic influence the emotional aspect of divorce?

The act of divorce is often an extremely emotional experience for both parties involved and is purported to be one of the biggest stressors an individual can experience in their life. Slap that on top of pandemic anxiety and forced isolation, and you’ve got the proper fixings for an emotional meltdown. The pandemic has made divorce harder on children, too, with challenges to readily spending time with both parents and not being able to easily connect with their friends.

Remember that you aren’t alone in this. Enlist professional and personal support, even if it’s not physically present. One great source of support is Vesta Divorce, which provides diverse education and connection to networks of vetted divorce experts across the country to address a variety of legal, emotional, and financial needs.

Divorce is never easy, but getting a divorce in Pennsylvania during COVID is possible with the right support. 

 

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484.321.6990

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How is Alimony in Pennsylvania Determined?

Alimony in Pennsylvania is but one financial aspect of divorce. There are many which you should have a qualified divorce financial professional review

Alimony is a generic term that actually refers to three types of support payments. They are made by the higher earning spouse to the lesser earning spouse:

  • Spousal Support – Awarded to the lesser earning spouse. This is pre-divorce and before either party files a divorce complaint. Can be awarded even if the parties are living in the same house so long as they are separated, i.e., living separate and apart.
  • Alimony Pendente Lite – Support after the divorce complaint is filed and before the divorce is final.
  • Alimony – Payments made once the divorce is finalized for a set period of time per the divorce settlement.

Spousal support and alimony pendente lite are calculated in the same way. Alimony in Pennsylvania is determined by a number of factors but it is often calculated with the same formula.

Basic Calculations

No Minor Children: Spousal support and alimony pendente lite is calculated before child support. It is based on net income. If there are no children, the amount is the difference between 33% of the obligor’s (higher earning spouse’s) and 40% of the obligee’s (lower earning spouse’s) net income. For example,

Obligor’s Monthly Net Income is $15,000; 33% is $5,000

Obligee’s Monthly Net Income is $10,000; 40% is $4,000

Difference = $1000 = Monthly Support

With Minor Children: The same basic formula but the percentages are changed to 25% and 30%, respectively. To illustrate,

Obligor’s Monthly Net Income is $15,000; 25% is $3,750

Obligee’s Monthly Net Income is $10,000; 30% is $3,000

Difference = $750 = Monthly Support

Additionally, there will be a separate amount calculated for child support that will be added to the monthly alimony.

Post-Divorce Alimony Considerations

Many courts use the formulas above. These amount may be modified based on a number of factors, the most important of which are:

  • Difference between spouses’ earnings
  • Ages and health of the parties
  • Sources of income
  • Expectancies, e.g., inheritances
  • Financial needs of the parties
  • Marital misconduct (rarely considered)

Duration of Post-Divorce Alimony

How long alimony will be paid is a discretionary decision that is based on the factors above. The rule of thumb, though, is 1 year for every 3 years of marriage. So, if a couple has been married for 20 years, the lesser earning spouse would expect to receive alimony for 6 – 7 years. If, however, if the lesser earning spouse is near retirement at the end of that period, the court may extend until he or she is able to collect Social Security and/or access retirement funds.

Alimony Buyouts

The vast majority of men and women view alimony with disdain. Who wants to have to write a check to their ex-spouse month after month? Likewise, does anyone like waiting for and worrying about the monthly check they’re expecting from their ex? What happens if the payor dies, loses their job, or becomes disabled? Is he or she going to be obsessing about whether their ex is cohabitating with a new partner? One alternative is to add an offset to the distribution of the assets equal to the present value of the expected alimony payments. So long as there are sufficient assets to cover the amount, this is a win-win for both parties and eliminates the ongoing angst of monthly payments.

Read more on divorce financial considerations here. Alimony in Pennsylvania It can be a messy affair and a CDFA, like those at TruNorth Divorce Solutions, can help you sort out the details.

 

 

 

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How is Child Support in Pennsylvania Determined?

Child support in Pennsylvania (and 36 other states) is centered on the Income Shares Model, which is based on the concept that children should receive the same proportion of parental income that they would have received if the parents lived together. That amount is found to be related to the level of household income and the number of children for food, housing, transportation, clothing, $250 in annual  medical expenses for each child, and miscellaneous items that are needed and provided for by their parents. This amount is expressed by the child support guidelines.

These guidelines may be adjusted by the court based on additional information regarding special needs and obligations, e.g., private schooling or extraordinary medical expenses. The current schedule for monthly child support up to $30,000 combined monthly net income can be found here.

If monthly combined net income is above $30,000 the amount may be increased based on how much it costs to maintain whatever lifestyle the child has become accustomed to without burdening the custodial parent. Generally, when combined monthly parental income exceeds $30,000 (after deductions), the court orders parents to pay the highest basic support obligation for their number of children, plus a percentage of the amount over $30,000.

  • One child: $2,839 plus 8.6 percent of the combined monthly parental income over $30,000
  • Two children: $3,902 plus 11.8 percent
  • Three children: $4,365 plus 12.9 percent
  • Four children: $4,824 plus 14.6 percent
  • Five children: $5,306 plus 16.1 percent
  • Six children: $5,768 plus 17.5 percent

Parents’ Individual Payments. Child support in Pennsylvania is paid to the custodial parent. If shared custody, support is paid by the parent with the higher net income. When the parents share custody such that the support-paying parent has more than 30% of overnights with the children, a reduction is made accordingly.

Earning capacity may be considered if higher than actual income. Each parent’s contribution takes into account a “self-support reserve” that represents the poverty level of one person as well as an assumption that the children will spend up to 30% of their time with the support-paying (aka “obligor”) parent.

Net Income. Net income is based on a six month average of a party’s income and includes income from any source, including employee wages, businesses owned, pensions and other retirement, estates and trust, social security, tax refunds, awards and verdicts, and alimony that is intended to finance the support-receiving parent (aka “obligee”). Gross income is reduced by mandatory payments, e.g., taxes, FICA, and union dues but not discretionary deductions, e.g., retirement contributions. It may be further lessened by alimony paid to a former spouse or child support for other children of the obligor parent.

Basic Child Support Calculation

The basic child support calculation is determined by

  1. The child support guidelines that take into account the parents’ combined net income and the number of children (see the PA Child Support Guidelines)
  2. The parents’ respective percentages of net income
  3. Adjustments for shared custody
  4. Additional expenses, e.g., child care, health insurance, medical over $250 per child
  5. Other adjustments, e.g., alimony, other children, extraordinary medical expenses, a new spouse’s income. A basic calculator can be found here.

Example Calculations

Example 1: Basic Calculation. Consider the hypothetical case of Keith and Audrey. Keith is the primary physical custodian of their child and has a monthly income of $2,500 after deductions. Audrey has a monthly income of $3,500 after deductions.

Keith and Audrey add their monthly net incomes together to get $6,000.

Keith divides his monthly earnings of $2,500 by $6,000 to get 0.4167, meaning he earns 41.67 percent of the combined income. Audrey divides her earnings of $3,500 by $6,000 to get 0.5833, or 58.33 percent.

Keith divides his monthly earnings of $2,500 by $6,000 to get 0.4167, meaning he earns 41.67 percent of the combined income. Audrey divides her earnings of $3,500 by $6,000 to get 0.5833, or 58.33 percent.

Audrey, the parent with partial physical custody, multiplies $1,761 by 0.5833 to find she must pay Keith $1,027 a month.

Example 2: Shared Custody. Audrey spends three days a week with the kids (40 percent of parenting time), so she qualifies for a 10 percent reduction. She takes her portion of the combined monthly income, 58.33 percent (from Step 3) and decreases it by 10 percent to get 48.33 percent. She multiplies the new percentage by the combined basic support obligation from Step 4 to get her reduced amount: $851 (.4833 X $1,761).

Example 3: Low Income. Consider Paul, who has a monthly net income of $1,150 and must pay support for two children. The support schedule shows the obligation based on his income and number of children is $154 due to his low income status.

The other parent has a monthly net income of $1,000, making their combined monthly parental income $2,150. According to the chart, their combined obligation is $735. With 53.49 percent of the income (see Step 2 for calculation instruction), Paul’s individual obligation would be $393.15, per the guideline formula.

Paul will pay $154 per month in support, the lesser of the two results.

Example 4: High Income. Fern and Roger have two children and a combined monthly income of $35,000. They find the highest support obligation on the schedule for their number of children is $3,902.

Next, they multiply $5,000, the amount over $30,000, by 11.8 to get $59,000, then divide by 100 to determine they must add $590 to the amount from the schedule.

They add $590 to $3,902 to determine their adjusted combined support obligation is $4,492.

To calculate the amount he must pay as the partial parent, Roger multiplies $4,492 by his percentage of the monthly income, which is 52 percent (see Step 3). Roger owes Fern $2,336 monthly (4,492 X 0.52) before deviations for shared custody and other expenses.

Read more on divorce financial considerations here.

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