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186858906How to provide financially for children after divorce has been a much-discussed topic for decades. Courts have traditionally used child support guidelines established by state government to calculate a monthly payment from one parent to the other. The Minnesota guideline child support calculator incorporates a number of variables, including both parents’ incomes, number of children, parenting time percentages, and children’s medical and day care costs, in arriving at a monthly payment amount. While statutory formulas produce a number, they don’t always resolve the issue. Many unanswered questions may remain, such as: “Is summer camp included in my child support payment?” “Do I have to contribute toward dance lessons on top of my child support?” “Our child needs private tutoring … does my ex have to pay half?” “Who pays for hockey equipment and ice time?” Ambiguity often results in conflict. Some couples return to court again and again to try to resolve questions like these. The emotional and financial costs of repeated court appearances add up in a hurry. The Collaborative divorce process takes a different approach toward paying the children’s direct and indirect expenses. Parents compile a list of their kids’ direct expenses (clothing, haircuts, school lunches, daycare, summer camps, extracurricular activities, etc.) and then discuss options for paying these expenses. Some couples decide to fund a joint children’s account to be used solely for enumerated expenses. Others divide the expenses with mom paying some and dad paying some. Others decide to use the guideline calculator, spelling out how any additional expenses will be covered. Indirect expenses (housing and food) are included in each parent’s budget and are usually part of a more general discussion about support. Collaborative support agreements typically include periodic reviews allowing for adjustments as parents’ incomes and the children’s needs change. Plans like these can preemptively avoid repeated unpleasant discussions in the years following divorce. If you are interested in learning more about the Collaborative process, please visit The Collaborative Law Institute of Minnesota’s website.
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98680904Cash flow refers to how your money moves in your household, from the time it is received to when it is spent. When your cash flow is “positive,” it means you have more money coming in than going out; you are spending less than you take in each month. You want positive cash flow in order to pay for expenses and also save and invest money for goals. After a divorce, however, you may find your cash flow is tight or even negative. That is, you are spending your cash almost to zero each month or spending even more than you take into the household. To improve your cash flow, here are several steps to take: 1. List all your sources of income. Your income could include any of the following:
  • Spousal maintenance/alimony
  • Child support
  • Part-time and full-time wages, bonuses and commissions
  • Self-employed income
  • Rental income
  • Royalties
  • Investment income
  • Pensions or draws from retirement accounts
Different sources of income are taxed differently, so you need to know your true after-tax income. Consult a CPA or financial advisor to learn more about this. You’ll also need to know how often you receive each source of income and if it’s fixed/guaranteed (paychecks) or variable (self-employment income). 2. Determine your historical monthly spending. Look back 6-12 months to get an accurate picture of expenses. This could include everything from car or home maintenance to vacations, kids’ sports activities or insurance premiums. Look up spending summaries on your Quicken account or request statements from your bank or credit card companies. Don’t make yourself crazy trying to document every expense to the penny. Just come up with a monthly average per expenditure (e.g. $1,000 on holiday gifts averages out to about $83 a month). Reviewing your spending habits can be a valuable exercise. You’ll likely see areas where you could realistically cut spending in order to improve your cash flow. 3. Decide if positive cash flow requires more income or less spending – or both! There are only two ways to improve cash flow: increase your income or reduce spending. You can increase income by finding a job, increasing the hours you work or finding a different job with a better salary. You could also consider returning to school to train for a better-paying job. Temporary jobs, such as retail during the holiday season, can also provide a cash cushion to meet immediate or pressing needs. If you are already working as much as you can, then look for ways to cut spending. Divide your expenses into fixed expenses (like rent or mortgage), escrow expenses (such as insurance or taxes), and living expenses (groceries, haircuts, school expenses). It is often in the living expenses category that you can find areas to cut — at least short term — in order to create a more workable budget and money habits. Keep going back to this list and making cuts until your budget is less than your income. If you are in the habit of using credit cards as your cash overflow account and aren’t paying off the balance each month, this is another sign that you may not have positive cash flow. Stop using credit for any living expenses and give yourself a cash allowance instead. You will quickly assess needs and wants by looking at the remaining cash in your wallet as the weeks go by. Be gentle with yourself. A new cash flow system takes 30 to 90 days to start showing positive results. Staying in a budget takes practice, but can become fun as you have more money to save for vacation or that retirement dream.
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98680904Cash flow refers to how your money moves in your household, from the time it is received to when it is spent. When your cash flow is “positive,” it means you have more money coming in than going out; you are spending less than you take in each month. You want positive cash flow in order to pay for expenses and also save and invest money for goals. After a divorce, however, you may find your cash flow is tight or even negative. That is, you are spending your cash almost to zero each month or spending even more than you take into the household. To improve your cash flow, here are several steps to take: 1. List all your sources of income. Your income could include any of the following:
  • Spousal maintenance/alimony
  • Child support
  • Part-time and full-time wages, bonuses and commissions
  • Self-employed income
  • Rental income
  • Royalties
  • Investment income
  • Pensions or draws from retirement accounts
Different sources of income are taxed differently, so you need to know your true after-tax income. Consult a CPA or financial advisor to learn more about this. You’ll also need to know how often you receive each source of income and if it’s fixed/guaranteed (paychecks) or variable (self-employment income). 2. Determine your historical monthly spending. Look back 6-12 months to get an accurate picture of expenses. This could include everything from car or home maintenance to vacations, kids’ sports activities or insurance premiums. Look up spending summaries on your Quicken account or request statements from your bank or credit card companies. Don’t make yourself crazy trying to document every expense to the penny. Just come up with a monthly average per expenditure (e.g. $1,000 on holiday gifts averages out to about $83 a month). Reviewing your spending habits can be a valuable exercise. You’ll likely see areas where you could realistically cut spending in order to improve your cash flow. 3. Decide if positive cash flow requires more income or less spending – or both! There are only two ways to improve cash flow: increase your income or reduce spending. You can increase income by finding a job, increasing the hours you work or finding a different job with a better salary. You could also consider returning to school to train for a better-paying job. Temporary jobs, such as retail during the holiday season, can also provide a cash cushion to meet immediate or pressing needs. If you are already working as much as you can, then look for ways to cut spending. Divide your expenses into fixed expenses (like rent or mortgage), escrow expenses (such as insurance or taxes), and living expenses (groceries, haircuts, school expenses). It is often in the living expenses category that you can find areas to cut — at least short term — in order to create a more workable budget and money habits. Keep going back to this list and making cuts until your budget is less than your income. If you are in the habit of using credit cards as your cash overflow account and aren’t paying off the balance each month, this is another sign that you may not have positive cash flow. Stop using credit for any living expenses and give yourself a cash allowance instead. You will quickly assess needs and wants by looking at the remaining cash in your wallet as the weeks go by. Be gentle with yourself. A new cash flow system takes 30 to 90 days to start showing positive results. Staying in a budget takes practice, but can become fun as you have more money to save for vacation or that retirement dream.
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175383921In my last post “Getting Unmarried: Gray Divorces”  I wrote about the increasing number of divorces for those over the age of fifty. Also of note was how Gray Divorces have many of the same foundational issues as any divorce although there are some distinct differences. Regardless of the issues, a trained financial neutral plays a critical role in the collaborative process. Money matters can be a bed rock of tension in divorce cases.  Financial issues are often cited as a major reason for marriage breakups. A financial neutral assists couples in navigating their finances. They help with the two major financial components in divorce. One is the balance sheet (list of all assets and liabilities), and two the cash flow and support. So what does a financial neutral actually do you ask.  First and foremost a financial neutral is just that – an impartial expert on financial issues. They remain unattached to any particular outcome. A good financial neutral can be worth their weight in gold when it comes to helping couples navigate money issues in divorce. Financial neutrals help a couple gather and identify the financial information needed. I often hear from spouses the detail involved in gathering the financial information is something they have never experienced. The reason for this is all assets and liabilities, each and every one, is separately noted in the final decree so as to leave no doubt who gets what and who is responsible for what. Independent third party written documentation is needed to support each asset and liability. This information gathering is a part of the process that can’t be short circuited. Having said this, when information gathering is completed by a financial neutral it can save spouses a considerable sum. Think about it. You are paying one professional, the financial neutral, to complete this process vs. each spouse providing the same information to each of their attorneys who in a non-collaborative divorce will have to review and assimilate  all the information provided, ask questions of their clients, and then likely have to converse with the other spouse’s attorney. Financial neutrals can assimilate and organize this information in a streamlined manner with the couple’s cooperation. Usually financial neutral hourly rates are less and sometimes significantly less than attorney rates. Once all financial information is collected and organized the financial neutral creates a marital balance sheet listing each and every asset and liability. The marital balance sheet forms the basis for discussion as to how each asset and liability is allocated between spouses. In the collaborative divorce process, couples make their own decisions about asset and liability allocations to each spouse.   Couples must ultimately reach agreements on the balance sheet. The financial neutral along with each spouse’s attorney helps facilitate these discussions. The alternative in more traditional litigated divorce cases is someone else, a judge, makes decisions for the couple since they are not able to agree on their own. Financial neutrals help spouse’s asses their ability to meet their reasonable living expenses (cash flow). This part of the process includes analyzing income sources and estimating future living expenses. Generally spouses are asked to complete some sort of budget template. In my experience both as a financial neutral and a financial planner, I find most people do not care for the term budget. I do a fair amount of public speaking and when I ask people what they think of when they hear the word budget it usually has a negative impression like restrictive or confining. I have attempted to remove the word budget from my vocabulary as a result and replaced it with cash flow or spending guide.  Budgets tend to be backward looking while the words cash flow and spending guide are future oriented. Assessing income and expenses (cash flow) provides each spouse with a realistic look at their financial security moving forward. Financial security is the number one goal I hear that each spouse wants to achieve. No one has ever told me they want financial insecurity. A realistic look at cash flow for each spouse is critical to providing the financial security they seek. Here is a phrase I have used when having cash flow discussions. If your outgo is greater than your income, then your upkeep may be your downfall. Think about that for a moment. Better yet remember it, as it will serve you well no matter your financial stage in life. Yes the balance sheet with its listing of all assets and liabilities and the cash flow and support pieces form the two financial pillars of every divorce. Sometimes the financial issues can become very emotionally charged. A well-trained experienced collaborative financial professional along with the help of other collaborative team members can help keep spouses on track. I encourage couples to the extent possible to look at these decisions as business decisions. It’s easier said than done but in the end it usually is a business decision. I am a firm believer that each spouse and their family are far more important than any numbers on a balance sheet or cash flow report. In my book and in my work people always come first before numbers. There are other important financial issues a financial neutral can assist with. Watch for part II of “Getting Unmarried: Money and Divorce.” There I will talk about marital and non-marital property, analyzing tax implications of various scenarios for child support and/or spousal maintenance; analyzing property and business interests, debt pay off scenarios, and comparing pros and cons of using one asset over another. Is a collaborative divorce process right for you? If you or someone you know may be looking for a divorce alternative without court click on this link to learn more:  www.collaborativelaw.org
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112295220This article sprouted from a series of brainstorming meetings that I recently had with fellow Collaborative Attorney Bruce Peck. We decided to meet for coffee from time to time to discuss and share ideas for writing about any alternative topic that may come to mind that would be different from the usual topic of divorce. One reason people seek a divorce (in Minnesota, what we call Dissolution of Marriage) is because they start to think that they cannot trust their spouse financially. So they feel that unless they divorce their spouse, they will face a mountain of debt because of the careless way their spouse handles money. If you are feeling that way, you may be experiencing something like the following circumstances.  Do you view your spouse as untrustworthy with money? Is your spouse spending too much money?  Does your spouse gamble too much? Do you worry that your spouse will take on significant debt without your knowledge or consent? Does your spouse make terrible financial decisions? These financial concerns often lead to divorce because one spouse feels that the financial issues in their marriage are out of control and they cannot go on that way and have no other choice. One spouse feels that they can’t take on the financial risks involved in staying married and that divorce is the only option to save themselves from financial ruin. In these circumstances, divorce is not the only potential option you should consider. One alternative to divorce is a “legal separation”. In Minnesota, a legal separation may be granted by a court when the court determines that “one or both parties need a legal separation.” Arguably, avoiding financial ruin is a good reason to need a legal separation. This is because a “legal separation is a court determination of the rights and responsibilities of a husband and wife arising out of the marital relationship.” Further, a “decree of legal separation does not terminate the marital status of the parties.” In other words, a legal separation is everything a divorce is, without calling it a divorce and without actually divorcing the couple. People who have a legal separation in Minnesota are actually still married to each other. So, if you want to stay married, but determine all the rights and responsibilities of you and your spouse in a court order, just like in a divorce but without divorcing, then you might be interested in a legal separation instead of a divorce. In my experience, legal separations in Minnesota are quite rare. Usually, if a couple wants to separate their financial lives by determining their rights and responsibilities, they also want to be free to marry someone else if they decide to do that in the future. That rules out legal separation because if you are still married, you can’t get married to someone else. Even if a spouse has no intention of ever marrying again, they typically do not want to be married to their current spouse. With a legal separation, a person is still married and so they cannot marry someone else. I suspect that the only reason that there is such a thing as legal separation in Minnesota is that there have historically been people whose religious beliefs prevented them from even considering divorce. While many people still have an aversion to divorcing, I haven’t run across many people recently who still hold divorce as completely inconsistent with their religious views. The only two reasons that I can think of to get a legal separation are 1) you want to get a divorce, but your religious beliefs don’t allow you to divorce, or 2) you want to stay married as long as you can separate your financed from your spouse so that financial issues don’t come in between you and your spouse. There are some possible negative consequences and limitations of a legal separation. One is that your health insurance eligibility may be affected. Another may be the issue of how your change in marital status may affect your taxes. Another is that any joint accounts you have with your spouse are likely still at risk. There are additional issues to consider related to bankruptcy and debt collection. This is not meant to be an exhaustive treatment of all the positive and negative aspects of legal separation, but this gives you a sense for the potential issues to consider in making your decision. In order to choose legal separation over divorce, you should consult with a bankruptcy attorney, a family law attorney and a tax accountant and think through your options thoroughly before making a decision. The Collaborative process is ideal for helping couples talk through and make these decisions with the help of legal (and other professional) advice readily available to both spouses. An alternative to legal separation, without going through with a divorce, is to complete a postnuptial agreement.  This is like a prenuptial agreement (which is commonly referred to as a “prenup”), but a postnuptial agreement is signed after the couple is married (rather than before marriage). It is an agreement about the financial rights and responsibilities of the couple if they ever separate. This is a whole separate topic and is too large for this article. I’ll write more on the topic of postnuptial agreements in another blog post soon!
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During and after a divorce, tax matters take on new importance since your financial circumstances have probably changed, as has your filing status. If you were in charge of tax returns during your marriage — and especially if you were not — keep these tips in mind to support the best possible outcome when filing your annual returns. Some legal fees are deductible. While most court costs and legal fees for obtaining a divorce are not deductible, some are, including:
  • Fees paid for tax advice related to a divorce
  • Fees paid to determine or collect spousal maintenance
  • Fees paid to determine estate tax consequences of a property settlement
  • Fees paid to professionals if the services were completed to verify the accurate amount of tax or to assist in obtaining spousal maintenance (appraiser, actuary, etc.)
These deductible costs are usually claimed as a miscellaneous itemized deduction on Schedule A of your income tax forms, but are subject to the 2 percent of adjusted gross income floor.  Talk to your tax advisor to see if you qualify. You may be held liable for past unfiled joint tax returns or audited returns. Even if you were not involved in the preparation of your taxes during your marriage, you may still be held liable for unfiled returns or inaccurate returns. You can request copies of past federal and Minnesota state tax returns from your tax advisor or from the IRS and Minnesota Department of Revenue (Federal Form 4506-T and Minnesota Form M100). Plan ahead for filing of future tax returns. Your marital status on December 31 of a calendar year determines your filing status for that year. If you were married most of the year, but your divorce is finalized on December 31, you cannot file as married joint, but would instead file as either head of household or single. If you are in the process of getting divorced, consider working with your spouse, your attorney and a tax professional to determine which filing status would best suit your financial situation. Also, keep in mind during the divorce process that it helps to spell out the following in the divorce decree:
  • Who will itemize mortgage interest, real estate tax, charitable contributions and other itemized deductions?
  • Who will claim any dependent children’s exemption and tax credit?
  • Who will take any long-term capital loss carryover?
  • Who will claim any quarterly estimated tax payments made during the year?
  • Who will report investment income from joint accounts?
 If this is not clearly spelled out in your divorce decree, consult with your tax professional or attorney for guidance. Review your tax situation to determine withholding, estimated tax payments, cost basis of assets and taxable retirement benefit distributions. Your W-4 withholding may need adjustment after your divorce to ensure that enough tax is deducted from your wages — or less tax, depending on your situation. You should also determine if you need to make additional estimated quarterly tax payments to cover spousal maintenance or personal investment income (which does not have taxes withheld like wages). You’ll need to know the cost basis of your personal investments, real estate and any life insurance with a cash value. If you sell these assets in the future, the cost basis will determine if you have taxable income from the sale. Finally, if you take a distribution from a retirement account during the divorce process, you may have to pay taxes on that income. Plan ahead for your taxes during the divorce process and prior to filing that first post-divorce return. You’ll reduce the time, cost and potential frustration of this necessary part of your new life.
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I just finished watching the documentary, Divorce Corp, and I have to admit that I have mixed feelings. On the one hand, as someone who has devoted his career to helping people understand that divorce should not occur in court, or even in the shadow of the courthouse, this movie may be a powerful tool in raising awareness of this very serious issue. On the other hand, as someone who feels dedicated to the truth and who feels a deep commitment to helping people fully understand their options in a fair and honorable manner, I bristled at some of the sensationalism and the broad generalizations made from some extreme examples. To the extent that the movie attempts to show that the problem with our family law system is that it is inundated with corrupt judges, greedy lawyers and dishonest custody evaluators, I need to state very clearly that I do not believe that to be true. Having worked in the family law system in Minnesota for more than 30 years, including two decades in court, I have found that the majority of judges, divorce lawyers and custody evaluators are honest people who care about children. Indeed, one of the reasons I strongly believe that the adversarial system does not work in resolving family issues, is that operating in the shadow of an adversarial system often damages families even when you have good people involved. There is much need for reform of our system and there is a strong need to raise awareness about the alternatives to court.  I had hoped that the movie would help people understand the existing alternatives to court rather than focusing almost exclusively on proposing legislative changes. To the credit of the movie makers, they did feature excellent commentary from two very credible peacemakers that I have come to know quite well. Woody Mosten and David Hoffman, two law professors who are worldwide leaders in mediation and Collaborative Practice, gave the movie producers valuable insights on how we can help families find a better way. While very few of those insights made it into the movie, the producers did release a trailer that discussed the benefits of mediation and Collaborative Practice as alternatives to court. An article by David Hoffman also does a good job summarizing many of the shortcomings of the film. As for the rest of the movie, I am recommending that people see the movie and draw their own conclusions. Even if you disagree with some of the exaggerations and proposed solutions, as I clearly did, it will at least get us all thinking and talking about this important issue. If you happen to be someone who is facing divorce, you should not emerge from this moving believing you will have found any answers or even a real grip on the truth of our family law system. Rather, my hope is that the movie will cause you to respect the important question about how to proceed with divorce so that you will seek out reliable information about all of your options. To learn more about Collaborative Law and other options that I believe are not clearly understood, go to www.collaborativelaw.org and www.divorcechoice.com.
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Child concernedWhile divorce is often expensive, when you look back on your divorce many years from now, the financial cost is not likely to be your most significant concern. If things do not go well during your divorce it is more likely that your real regrets will have more to do with the “real cost” of divorce; the impact on your children and on your emotional state. Can this “real cost” of divorce be reduced? Yes, but it takes hard work. The cost of your marriage. Of course, the first thing to think about is whether the divorce is necessary. If you are considering starting a divorce that you think can be avoided, make sure you explore all of your options before you give up on something you have worked to build. I am not talking about continuing to be unhappy in your marriage. I am only urging you to think about whether finding a way to become happy within the marriage may be a possibility and to consider whether the idea of happiness outside the marriage could be a mirage. If you have determined that the marriage cannot be saved (and I realize this may not be within your control), your next focus needs to be on how to avoid the real “cost” or damage that divorce can create. The cost of conflict to your family. Almost all divorce cases settle before going to trial. However, many people experience conflict during the settlement that can cause long term damage to their co-parenting relationship or their ability to move forward with their lives. So how do you achieve a settlement without high conflict and still protect yourself in the divorce process? Good settlements require a high degree of commitment. If you, and the professionals you hire, are truly committed to reaching a settlement that works for you and your children, you can achieve an outcome that reduces conflict and protects your other important interests. While your commitment will make the most difference, you also want an attorney that is committed to getting a good settlement as well. Almost all attorneys today will say they want to help you achieve an acceptable settlement. However, the difference between wanting a good settlement and committing to settlement is night a day. If getting the best settlement, and avoiding the real “cost” of divorce is important to you, you should consider hiring an attorney that is fully committed to settlement. Collaborative attorneys are attorneys who commit, in writing, to achieve a settlement that is acceptable to you. At the beginning of their case, both Collaborative attorneys sign a written document stating, in essence, that if they cannot get an acceptable settlement, they will be fired. The commitment to settlement causes everyone to use methods that are more effective; including full transparency, negotiation based on big picture goals, working with other professionals for more efficiency and reducing the posturing and arguing. To learn more about the Collaborative Process, and to find attorneys who are experienced in this area, go to www.collaborativelaw.org or www.divorcechoice.com.
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The Future is BrightPart 6: Selecting the right team for your family may be essential to the success of your Collaborative Divorce. Collaborative Divorce is often a team process, in which you work with mental health professionals and financial neutrals, as well as with attorneys, to help you achieve the best outcome for your family. One of the keys to your success is selecting a team that can best meet the unique needs of your family. Some divorcing couples and professionals prefer the standardized process in which the full team is assembled at the beginning of the case. In Minnesota, a full team generally consists of two attorneys, (one for each party); a child specialist (if there are minor children); a financial neutral and a divorce coach. The advantage of assembling a full team (often described as the “Cadillac” of the Collaborative Divorce Process) at the very beginning is that you know that you have all of the necessary professionals on board, so that all of your family needs can be immediately addressed. While you may be concerned about keeping your professional costs down, the full team process, if used efficiently, will not necessarily be more expensive. Working with the right professionals at the right time may actually reduce the conflict and, therefore, your overall costs. Perhaps more importantly, even if it does cost you a little more, getting a better outcome for your family may have incalculable benefits and may save you financial and emotional costs down the road. Other families and professionals prefer what I will call the “customized team” model. In this model you and your spouse work together to decide exactly which team members you need to help address the unique needs of your family. This option allows you to put your dollars where they are most needed.  For example, if you believe that you and your spouse need the most help in creating a parenting plan, you may wish to spend more of your money working with a child specialist. Similarly, if your difficulties lie primarily with finances or communication, you may wish to spend more time with a financial neutral or a divorce coach. To learn more about the role of each professional and to get assistance in selecting the right team of professionals for your family, go to www.collaborativelaw.org or www.ousky.com .
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The Future is BrightPart 5:  Working with a team of professionals in Collaborative Divorce creates better outcomes. A Collaborative Divorce is one in which the husband and the wife each retain a lawyer for settlement purposes only. In addition, in a Collaborative Divorce, the other professionals on the team, must commit to work or settlement purposes as well. Divorce marks the end of a martial relationship and the beginning of a new life. While divorce is a legal proceeding, future success for your family may have more to do with parenting, financial planning and communication than with legal issues. While lawyers can be helpful on these additional  issues, your family can generally get better assistance, at a lower cost, by turning to professionals with more skills in these other areas. If your primary concern is how to co-parent your children in divorce, you are far more likely to gain valuable insights on how to do this by having your family work with a child specialist with the education and training in child development rather than law. If you are concerned about how to meet your expenses in both households, you are likely to get more initial benefit from working with a financial professional than with an attorney.  Similarly, if your primary concern relates to difficulties in communicating with your spouse, you may want to work with a divorce coach who has the skills and training to help you focus on these important areas. The Collaborative Divorce process is often a team process in which you work with a team of professionals rather than just with attorneys. You may initially be apprehensive about working with a team of professionals believing that it will increase your cost. However, if you plan your process carefully, working with other professionals can reduce your cost and help you create a better outcome. Generally, the work done by the financial professionals and the mental health professionals replaces much of the work done by the attorneys, allowing you to get more skilled help, generally, at a lower hourly rate. One of the keys to success in working with a team is to make sure that you get the level of professional help that best meets the needs of your unique family. Options in working with your Collaborative Divorce Team will be discussed in an upcoming blog. However, if you want information on this now, go to www.collaborativelaw.org and www.ousky.com. You can read the final part of this series, here.