Clean Break

The current system is stuck in big-picture, “let’s just get on with it” thinking. But there are few other times in your life when attention to detail is so crucial as the details can make or break your future.

In his haste to get things done with a court-step deal, my trial lawyer transferred my husband’s shares in our company to me at an adjusted cost base of zero instead of at fair market value. His lack of attention to details cost me hundreds of thousands of dollars.

As someone who lives and breathes in the world of financial management—where every decision, however small it may seem, has profound repercussions—I simply can’t fathom how anyone could suggest that when dividing assets attention to detail and the ruthless pursuit of accuracy aren’t absolutely necessary. Yet every lawyer involved in my divorce counseled me to remain focused on the big picture.

I remember time and time again asking questions like “But what about the tax implications?” “But what about the adjusted cost base?” But, but, but. . . . In retrospect, I should have listened to my gut instincts and demanded detailed answers. Yet as the legal bills mounted and the months turned into years, I became burned out and beat-up by a system that continues to operate with reckless disregard for the details.

Nor is it to say that every single detail matters. “I think it’s outrageous that my ex spent $200 on new running shoes for our son!” is really not important in the big scheme of things, and it’s that type of detail that can bog down the process.

The details that do matter involve where the money is at, the tax implications of every asset, the wording on the transfer of property, the parenting decisions (who will decide what and when), the status of the stock portfolio, and what it would mean to liquidate rather than distribute without liquidation.

These are the very details that often get lost in the correspondence between lawyers, which often amounts to little more than accusations and criticisms without any real purpose except to hurt, grapple for position, and drag things out. If everyone’s energy was spent instead on ensuring that the assets were protected and distributed in a way that maximized each party’s share, then and only then would the system be doing a decent job.

Accuracy with numbers takes a great deal of diligence, but diligence is paramount. In the chaotic setting of most divorces, it’s so easy for crucial facts and figures to get lost in the big picture.

Perhaps there’s a method in the smoke-and-mirrors madness. After all, it’s easier to pull a fast one if the other side doesn’t understand the numbers. (To put a modern twist on a famous one-liner by W.C. Fields, “If you can’t dazzle them with brilliance, baffle them with figures.”)

One approach that works wonderfully starts by first determining the true net worth of the couple—the combined total of their assets and liabilities. While on the surface this seems reasonably intuitive and straightforward, anyone who deals with numbers knows it’s extremely complex. An in-depth look at these issues is beyond the scope of this book; suffice it to say that getting two people to agree on a balance sheet is rarely easy, but once the task is accomplished, the next step is to allocate the assets to each party. Even this task of putting the assets into two columns can be a challenge. The order of these steps—agree first on the size of the pie, and then split the pie into two equal pieces—is absolutely nonnegotiable to ensure a fair outcome for both sides.

We’ve been hearing a lot lately about divorce planning. The term refers to the process of devising a financial plan for your future, one that ensures you’ve thought about the future and considered the impact of your decisions about asset division, spousal support, child support, and so on. All too often people going through divorce get so caught up with their lawyers, affidavits, court appearances, correspondence, and position bargaining that they neglect to consider the financial outcomes of their decisions.

I have worked with many clients who start out seeking a lump-sum settlement, but it’s important to look beyond the lump sum of cash to what that cash will mean to your lifestyle. A financial advisor can produce projections that show you how your capital will translate into income and cash flow when you employ it in any number of ways, including short-term expenditures, investments, retirement savings, educational savings plans, and so on.

Whatever settlement you and your spouse arrive at will have to meet the law in your jurisdiction, but there’s ample latitude to be creative. I’ve seen many creative ways to bring about win-win settlements that give both parties what they need to establish and maintain financial security. One example is a lump-sum payment in lieu of spousal support, or a combination of a lump sum followed by lower spousal support. Another example involves splitting an investment portfolio without liquidating any assets (and perhaps losing the upside in the market as a result). The party who is more market-savvy receives the stocks that require more vigilance, while the lower-risk investments go to the partner with less financial acumen. (Of course, the risk quotient of the portfolio may then need to be adjusted.)

Most people want certainty with divorce settlements. While some uncertainty cannot be avoided, much can be. A carefully considered financial plan gives people peace of mind going forward. As both a certified divorce financial analyst and someone who’s been in traditional divorce’s trenches, I would argue most adamantly that the big-picture approach is a recipe for disaster. Focusing on the minutiae will rarely be as important as when you’re negotiating a divorce settlement.

Taking the time to understand the numbers can be crucial to your future financial security. CDFAs, financial planners, and accountants can be focused and resourceful at a time when resources are precious. The value in using their services is simply inestimable.

In a recent conversation over coffee with a senior lawyer, I asked what kind of financial advice she recommended her clients seek before agreeing to a settlement. Her response was that “we” (by which she meant her and her peers at her firm) “don’t need to send our clients elsewhere for advice. We’ve all got software that performs projections based on different settlement possibilities.”

I was astonished. On top of my MBA in finance and CDFA certification, I have worked and studied in the financial industry for over 15 years, and I still have a lot to learn. Yet in this lawyer’s view, all that expertise is available in a simple software package anyone can use. I haven’t interviewed hundreds of lawyers, but I’ve spoken to enough to gather that many don’t see any need for clients to seek professionally rendered financial projections for proposed settlements.

If there are assets and if you have to use a lawyer, in my view seeking the advice of a financial advisor is a must. To me, it’s akin to leaving your family physician out of the loop because your personal trainer at the gym used Google to diagnose that agonizing lump in your abdomen. No wonder we see so many divorces that leave people feeling hopeless and full of fear!

INTO ACTION

Like most couples entering into a divorce, Adam and Carolyn Cunningham have two key priorities: to preserve the collective sum of their assets as much as possible, and to win for himself or herself the greatest portion of the total asset pie.

Unfortunately, in the traditional system of divorce, these two priorities are mutually exclusive. In the battle to prevail as winner of the greatest share of assets, husband and wife usually watch in dismay as the very assets up for grabs get rapidly devoured by the fees of the lawyers locked in battle.

The Fairway Process offers a new and better way to end your marriage—one that helps preserve the vast majority of your precious matrimonial assets. As you’ll see from our example of Adam and Carolyn, division of assets using The Fairway Process is by no means free of differences of opinion, but the outcome is mutually agreeable and fair.