Pitfall 2: Ignoring the Tax Implications & Pitfall 3: Not Gaining a Full Financial Picture
For many couples, there is an imbalance of financial power and knowledge. Many of my clients go into a panic mode when we first begin discussing assets, as they grasp how much knowledge they are missing in terms of what the assets are, where they are held, etc. Sometimes, the other spouse has always controlled all the finances—paying bills, tracking bank account information, doing all of the financial planning. In other cases, for example, if the spouse owns a business or works on a cash basis, there is room for doubt as to the numbers.
In litigation, much money will be spent on attorneys sending interrogatories back and forth and issuing subpoenas to attempt to get all of the information. The spouse who had less knowledge of the money will emerge from the divorce still not really understanding the finances or what the numbers were, as these are usually negotiated by the attorneys behind closed doors. In particularly difficult cases, each side may spend money on hiring financial experts trying to look for more information (which does not always exist) and arguing over values of various assets. In very few cases of litigation do both parties to the divorce have a plan (with specific numbers and budgets) of what their finances will look like day to day.
Collaborative Divorce Agreement
The Collaborative Divorce Process addresses these issues in two ways. First, the costs for interrogatories and subpoenas are avoided because of the stipulations in the Collaborative Participation Agreement. The Agreement signed by both parties has them agree to voluntarily provide all of the information, having the other spouse do the same. This is bolstered by the stipulation that the professionals should withdraw from the case if they feel this is not being done. It would be very difficult for someone to work with their attorney and work toward a settlement beneficial to them while hiding assets. This is a nice “check” in the structure of Collaborative Divorce Process, ensuring that all information must be disclosed.
The second piece unique to CDP is the role of the financial neutral. Rather than each side having to hire independent experts to argue over values, assets, and budgets, the financial neutral helps both parties understand all the current numbers, understand the full financial implications of all possible scenarios being discussed for division of assets in the settlement, and most importantly, to build budgets and have a strong understanding of the new financial future each party will face (and the parties will face as co-parents) post-divorce. Because this professional works for both parties, rather than just one or the other, the incentive to skew numbers to look a certain way is avoided. The financial neutral works to educate both parties on the existing assets, as well as future budgets and, along with the other professionals on the Collaborative Team, helps the parties in reaching a united vision of what the numbers mean and how to best proceed in a way benefiting the entire family, rather than just one party or the other.
Check out Part I on avoiding trial here and be sure to tune in for Part IV coming soon!