EP 193: Understanding Divorce Settlement Negotiation Tradeoffs

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When negotiating a divorce settlement, you need to understand what trade-offs you’re making, and make sure that you’re keeping the big picture in mind. When it comes to your assets, and the debts that you have in your financial life and your marriage, they are what they are. When you’re thinking about your divorce settlement and your future, your goal, really, is to figure out what the best combination of assets is for you, so that you can move on with your life in the best way possible.

You need to be realistic and reasonable, and make sure you’re negotiating for things that make sense for you. One of the biggest areas I see people having trouble is not being accepting of what the status quo, what today, what their actual financial picture is, and not confronting head-on what you actually have. I understand everyone wishes they had more money, more cash, less debt, higher income, or whatever it is. What I see, oftentimes, in the divorce process, when working with you, is that you might feel, or at least pretend to negotiate as if you have a higher income than you have, or as if you have more money than you actually have. I’ll say this on calls all the time, it’s okay to advocate for yourself and ask for a little bit more to that you get … you have wiggle room. But at the same time, you need to be realistic about your financial picture is and what your future looks like, and be real about how that’s going to work for you in the future.

One of the first steps when it comes to negotiating and thinking about your divorce settlement, and preparing and structuring things the way that you want to do, whether you’re working with a lawyer, you’re doing it yourself, going through the litigation process, doing collaborative divorce, or whatever, is you really need to understand what you have and what you’re splitting with your soon to be ex-spouse. Not only do you need to know what exists, be it a house, a mortgage, rental property, investment accounts, cars, a business, all of the basic stuff that we talk about a lot on the show, but you need to understand the value of those things with clear numbers and specific. It’s not enough just to say, “I have a house, and I think it’s worth $400,000.” That’s not right. You need to do your homework and figure out either with a real estate agent, or an appraisal, or whatever the case may be, whether it’s $400,000 or whether it’s 375 because of something, or maybe it’s 437,000 that you could sell it for. You need to understand the value of that. You need to understand, if you have a rental property, if you have a business, what is that worth? Because knowing that value could serve as a big impact on your divorce process.

When I comes to knowing the worth of things, you need to know what that means in total. One of the questions I’ll ask you is, I’ll say, “Hey, let’s break down the major assets. Let’s figure out what you have. We’ll subtract out any debts.” But what is your total marital pot worth? Is it $325,000? Is it 3.2 million dollars? Or more than that? Or somewhere in-between? Or somewhere less? Whatever the number is, you need to clearly understand and keep in mind the total value of all of your assets as you’re thinking about your divorce settlement.

And then, from there, you also need to understand and have a clear sense of what support obligations you’ll either be paying or receiving. This is an important point and is relevant to the total calculation of stuff that you’re splitting up, and you need to understand that number. I’m going make you some simple numbers just for the sake of discussion on these two point; the total value of your assets, and then also the support discussion, to illustrate an example for you.
Let’s say the total value of all of your assets is $200,000. That means any houses, bank accounts, retirement accounts, everything totals up to $200,000 between you and your soon to be ex-spouse. Now, let’s say, on top of that, you’re expecting to receive some sort of financial support obligations. For the sake of discussion, I’m going to assume that you’re going to receive $5,000 a month for five years, which means $12,000 a year, times five years, is $60,000 in support. Now, if you think about that, that actually adds to the total amount of money that you are splitting up, because not only are you splitting up $60,000, but on top of that … I’m sorry, not only are you splitting your $200,000 in marital assets, but there’s also an additional $60,000 on top of that that you need to keep in mind.

Now, why is that such a big deal? Well, that’s a big deal because when it comes to negotiating a divorce settlement and thinking about your options, is that you need to understand that regardless of what you do, there’s always benefits and disadvantages and potentially trade-offs that may work better for you, that you haven’t considered or are still thinking about.

Let’s take this example: Let’s just say, since you’re going to be getting $60,000 in support over five years, on top of your share of the marital assets, what would I be thinking if I am doing a coaching session with you, or if we’re working more in-depth together? One of the first things I would think, and just on my mental checklist, is all right, you’re going to be getting … Let’s just say you’re the person receiving support. You’re going to be getting about $100,000 in assets that you’re splitting, because you have a $200,000 pot, so you’re going to split that in half, roughly. It varies, but let’s just say for simplicity sake, you’re going to be getting about 100,000, plus you’re going to be getting about $60,000 in spousal support over five years. In total, you’re going to be getting $160,000 from the marital pot.

Well, when I think about that, I say, “Okay, well, what … Do you want all of that now? Would you like to take all of that upfront, or do you not mind getting support over the five years?” One thing I might say, particularly if you don’t want to be reliant upon your example-spouse, or if you need cash upfront to get yourself back on your feet, I might say, “Hey, you know, the $100,000 is pretty easy to split because it’s mostly coming from a retirement account or something. That extra 60, well, what if we made it $50,000 instead of 60, because you’re going to it all upfront, and we just took out extra, and maybe your spouse keeps the house and just cashes out some of equity to pay you off.” That’s an option that I just kind of made up off the top of my head.

But the point is, sometimes you need to think about, well, you know what, it’s actually a better scenario if I get more money upfront and take that money now, rather than delay the divorce process some. Excuse me, not delay the divorce process, but take that money over time. And your spouse actually might give you less money for that effect, but it could be worth it to you. You’re no longer waiting on those monthly payments to clear every month. Who knows what happens. And on top of that, maybe you get some spending money upfront, because you moved to a new place, or moved to a new town, or are in school for a little while, and that additional support upfront could be very useful to you.

Also, the converse is true in terms of thinking of your trade-offs. Let’s stick to this example. For some of you, if you know you’ve never really created and stuck to a budget before, and you think you’re going to blow through all of that money upfront, maybe it’s wiser for you to take those payments monthly, that $1,000 a month each month for the next five years, because it will help you plan and budget better. Someone like me, I know myself well enough, oftentimes that would be a much better deal for me personally, because of the way that I think about money and spending, and cashflow, etc. Sometimes, it’s more valuable to kind of have that stable payment coming, rather than if you’re one who is potentially tempted by having a lot of money sitting around in a bank account. Then it’s better off if you take those payments over time, and it might be worth it for you.

Now, conversely, if you’re on the other side of things, and you’re the spouse making these payments, it can be very important and very well worth considering, do you really want to write a check every month for the next however many months you’re going to be paying support? Or maybe you can buy out all of that support upfront, or a large chunk of that support upfront from your previous savings, be it retirement or from cashing out of a house, or otherwise, because that will give you the advantage of, maybe, having more flexibility later.

I’ll give you an example. I have a friend of mine here in Texas who basically said, “Hey”, to their spouse, “I’m going to give you 80% of the assets that we have, in exchange I’m not going to pay you any ongoing support.” But this person, in particular, is an entrepreneur, and he knew he could made the money back, and so he did. He say, “Hey, you know what? It’s worth it for me just to pay all my support obligations. Now, you’ll be comfortable and you won’t have any issues, and I’m not going to be writing that check every month. And then, I’ll just have to find a way to re-earn and rebuild myself financially in that case.”

If you’re the one paying, it can also be a win for you to think about some of these trade-offs, because you can actually clean up your financial picture a lot by not having this ongoing monthly bill, or reducing that monthly support payment substantially over time, just by understanding some of your trade-offs. You have options and leeway in terms of thinking about, well, maybe a lump sum is better for all parties involved. Or maybe it’s not. Or maybe a partial lump sum is better, where we front-load support a little bit; get more of it upfront and less later. Maybe there are other considerations where we structure a deal so that everyone ultimately is better off. You could have higher monthly payments for the first two years, and then a slightly lower the next two years, or something like that, so that everyone ends up in a better position possible.

When you’re thinking about your finances, and your picture, and your divorce, and your settlement, I want you to look with a little bit more creativity, in terms of solutions. Understand, all right, well, here are all these numbers on a sheet of paper that you have. There’re going to be assets and debts and everything else. What’s the best way that we can come to an agreement using these assets? And what are some ways that I might not have thought about before, in terms of getting a benefit from these assets and things that we need to do? Something for you to think about.
And regardless of where you are in your divorce settlement process, if you haven’t started, or you’re in the middle of the process, what I want you to do is a little bit of homework. You have a picture in mind in terms of who’s going to get what, and how those things are going to be split. Well, what I want you to do is come up with some alternate scenarios where, financially, everyone ends up just about the same, but you’re getting a different set of assets and debts, and splitting it a different way. Come up with one or two or three more scenarios, or I can help you come up with those scenarios, as well, but different ways to think about your picture. Some of the best settlements that I’ve had the pleasure of working with, are literally that exercise, where you think you got to do things one way, but let’s say, “Hey, let’s split things a totally different way, and let’s just see how that looks, and see if everyone is agreeable for it.” There might be something to it that would satisfy everyone involved.

Just by, at least, doing the exercise, whether or not you ultimately stick to the path that you’re on, or consider some other ones, you can often come up with some really useful solutions that you may not know existed. But, that’s the nature of the divorce process. It’s a complicated process. There’s a lot of different moving parts, and sometimes you just need to use those moving parts and the complexity to your advantage to come up with something that’s more creative than maybe you considered before, and actually it might be something that works better for everyone involved.

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