MICHELLE SMITH |
He
owes me. I didn’t want this divorce. It was his decision
to leave.” These are the fighting words of a spurned
spouse, and by most people’s definition of what’s
fair, they seem fair enough.
But negotiating a divorce settlement that makes financial
sense isn’t always emotionally gratifying. In fact,
when the only acceptable outcome for one of the parties
and his or her attorney is “gotcha,” get ready
for a protracted and financially draining separation odyssey.
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Consider this situation. A husband and wife, both with MBAs, are
divorcing. She has worked for many years with a small firm making
in the neighborhood of $110,000 annually. She kept her job low-keyed
because she wanted to be around for the couple’s two children.
He, on the other hand, worked day and night, parleying his degree
and knowledge into a senior position at a Fortune 500 company, earning
more than $1 million in some years. But while still married, he
started his own firm and for the last four years he’s experienced
a precipitous drop in income —earning anywhere from $100,000
to $300,000 annually.
Two years ago, he announced that he wanted a divorce. Although
she knew the marriage was barely working, she wanted to give it
more time by going for counseling. When he didn’t agree, she
made it clear that this separation wasn’t going to be easy.
And it hasn’t been. One of the stickiest negotiation problems
is, believe it or not, the MBAs they both have. In New York, and
in a few other states, MBA degrees are considered marital assets,
which can be assigned a financial value. But how do you determine
their value? In this particular case, his Masters in marketing from
Stanford was valued at $1.7 million by the appraiser; hers in finance
at $400,000.
No one denies that she deserves some consideration for putting
the family ahead of a high-powered career. And, if you judge this
strictly in terms of fairness, she’s entitled to the cash
settlement of half the combined value of their MBAs that she and
her attorney are pressing for (which means he would owe her $650,000).
But where’s the money going to come from? The couple no longer
has a substantial net worth. When they first started divorce proceedings
two years ago, they had $1,400,000 in stocks, bonds and other assets,
plus a house worth over a million dollars, which had a mortgage
of $450,000 attached to it. They’ve physically separated,
but she and the children are staying in the house. He’s living
in a $5,000 a month Manhattan rental, and, feeling guilty that he’s
the one who initiated the divorce, has agreed to her request for
$17,000 a month for child support and alimony. The problem is that
he isn’t making enough to cover support and his own living
expenses.
To maintain a lifestyle similar to the one they had before the
separation, both have had to draw down on their joint assets. Not
only that, they’ve each amassed over $75,000 of legal fees
and it’s not over yet. Divorce proceedings are heading for
a court settlement, and the couple’s net worth has shrunk
by 80 percent. From all that I’ve seen when these types of
cases go to court, no one is going to win. The judge’s ruling
could easily reduce support and alimony—at least temporarily
until the husband begins earning more. And the wife may be forced
to sell the house and relocate to less expensive quarters. She might
be awarded the $650,000 from the MBA split, but it would probably
get stretched out over a period of years.
If there’s anything to be learned from this case, it’s
this:
- The amount of money available is the amount of money available.
Adjustments in living arrangements may be needed when a couple
divorces.
- What’s emotionally fair isn’t necessarily financially
sound.
If both the husband and wife in this case had realized from the
start that downplaying their emotions would have helped them salvage
their net worth, how much better off, financially-speaking, they
both would be today. Far better than a “revenge” settlement
that goes for the jugular is one makes financial sense—one
that takes into consideration tax liabilities (or benefits), the
potential appreciation of an asset, the drain of an asset on resources,
and the potential long-term consequences of how assets are divided.
In divorce, fairness counts, but that doesn’t mean it counts
for everything.
Michelle Smith, principal in Smith Financial Strategies Group
of Wachovia Securities, is a certified financial planner (CFP) and
a Certified Divorce Financial Analyst (CDFA). Contact her at michelle.smith@wachoviasec.com
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