Divorce is costly, both emotionally and financially. Dividing joint obligations and marital assets, calculating child support, maintenance payments when warranted, his-and-her matching attorney fees… If you are anticipating an empty pocketbook after the divorce is finalized, take heart! A financially savvy mediator may be tremendously helpful in providing sound guidance through an otherwise confusing process. Mediating divorce agreements generally costs $1,000 - $2,000 per couple, as opposed to each spouse litigating their issues through hired attorneys. Each attorney's initial retainer can be $5,000 - $10,000 with replenishments as needed.
Mediation is a creative process that, when successful, culminates in workable agreements for a particular family’s situation. Most people enjoy a greater degree of control over their private family matters, as opposed to accepting what the letter of the law may dictate via a court order if the couple cannot agree.
The mediation process may assist couples in identifying individual financial priorities:
- Real estate (primary residence, second homes, and rental investments)
- Retirement funds
- Stock options
- Cars and recreational vehicles
- Collections, antiques, artwork, etc.
- Family-owned business assets, debts, and ongoing profits
One spouse may value real estate ownership while the other spouse places greater significance on retirement funds. Judy Larkins is a financially savvy mediator who has assisted hundreds of couples over the last 10 years by dividing assets after an in-depth negotiation addressing all financial factors. The process can be more involved than it appears on its face. One common mistake is overlooking the tax ramifications in dividing assets by making dollar-for-dollar offsets rather than addressing the pre-tax versus non-taxable assets (retirement funds are usually pre-tax; equity from a primary residence are tax exempt up to $250,000 / $500,000 for certain joint returns) . For example, paying a marital settlement from a 401k withdrawal could cost a 10% penalty, tax on the withdrawal and put the taxpayer in a higher taxable bracket for all income in the year that the withdrawal is made. It may be more beneficial to use a Qualified Domestic Relations Order, or QDRO, where the assets are transferred “in kind” – from a pre-tax retirement account into the spouse’s own pre-tax retirement account.
Another decision-making challenge may be the family home in a housing market that favors buyers rather than sellers. The marital home is typicone of the largest investments a couple makes during a marriage. Evaluating whether to keep the house until the market rebounds is an important consideration. If it makes sense to keep the home, a financially savvy divorce mediator will assist the couple in negotiating written agreements that address many factors, including:
- Who will live in the home (a renter or one of the spouses)
- Who gets the mortgage interest tax deduction
- When a spouse has the right to demand the house be refinanced or placed on the market for sale
- Who will pay for the repairs along the way
- How the equity will be divided when the house is eventually sold or refinanced
- Other necessary agreements.
When interviewing a mediator to assist in your divorce or post-divorce issues, ask questions to determine whether the mediator has expertise in the areas that are important to you. An incomplete or bad agreement can be costly. Like all professions, there is a wide variance of financial and business experience that each mediator offers.
This article was originally published 6/22/10 on the blog How Financially Savvy Are You? and revised for this publication.