Case Studies

Level of Conflict

Sheila was very upset but willing to compromise; Joe wanted out of marriage, very controlling, wanted to keep more than his fair share and wanted to live in the house until settlement reached. Joe not confident in Sheila’s ability to pay mortgage. Sheila not confident in Joe's willingness to pay monthly support. 

What Sheila Wanted

Buy house from Joe, substantial child support to allow her to pay the new mortgage, Joe to pay for kid’s hobbies currently at $2,000 per month (horses, motorcycles, etc.) Both kids to live with Sheila with an 80/20 split in timeshare with a strict predefined schedule. Health insurance coverage for her pre-existing condition.

What Joe Wanted

Sell his share of home equity to Sheila; keep 100% rental property and all investments. He wanted to apply old appraisal of home and use current real estate listings for rental property appraisal to his advantage. Kids to live with Sheila in a 50/50 timeshare with a flexible schedule. Time with dad would be made up after school, on weekends and during summers.

Problems with Their Wish Lists

• House – If refinanced Sheila could not qualify for increased mortgage payment. The buyout would be funded with nondeductible child support. Joe would have a high tax bill. Sheila would pay no tax due to the high mortgage payment and child support is not taxable. This was also risky as Joe is in the construction industry. If his business fails or declines then the house would be lost.
• Child Support – Government calculated child support is based on timeshare.  A custodial parent may insist on more timeshare in order to increase their child support income. Government child support tables are not based on needs of the children and can result in unreasonable payments causing hardship to the noncustodial parent.  Child support is nondeductible for tax purposes. A payer of child support incurs an extra 30% - 50% in taxes for every dollar they pay in child support leaving less money for the children.

The Mediated Solution

• House – Joe and Sheila retain ownership of home as joint tenants and do not refinance, removing the risk of foreclosure.  Sheila lives in the house until the children are 18 and pays no rent.  In return Joe does not pay nondeductible child support.
• Child Support – Joe employs Sheila to work in his business part-time. This provides the needed extra income since no child support is paid. Sheila uses her car and cell phone in the business, therefore the business pays ½ of these expenses. These are all tax deductible.
• Health Insurance – Sheila is covered through the business health plan.
• Child Custody/Parenting Plan – 50/50 flexible plan   
• Tax Savings - $34,200 in taxes on nondeductible child support
• Future Relationship – The family relationship is healthy.  The financial risk has been removed by the experts and the parties now have the ability to communicate without conflict. 

How the Experts Helped

• Divorce Counselor – Set ground rules of behavior for the divorce process, helped each party determine what they really wanted, helped design a binding parenting plan and created a foundation for the parents to cooperate in the future.
• Financial Planner – Prepared a budget for both households for current living expenses and post-divorce living expenses.    Created an investment plan including college tuition and a retirement plan for both parties. 
• Certified Public Accountant – Consulted with the Financial Planner, the Divorce Counselor and the clients to develop strategic plans to reduce the tax burden, the risk and the conflict regarding the finances. Calculated the tax consequences and cash flow of the different property settlement options and child support options.  Found a creative way for the Sheila to keep health insurance even though she had a serious pre-existing condition.
• Mediator – After consulting with the Divorce Counselor, the Financial Planner and the Certified Public Accountant the Mediator presented all options to the clients and mediated a mutually beneficial binding Marital Settlement Agreement.

Costs Avoided
and Actual Cost

Limited Contested divorce with children

1-2 years

$19,500 - $65,000

DKYM2 Actual Cost of Divorce

60 days

$7,000

Level of Conflict

Marv wanted revenge – not willing to compromise – doesn’t want divorce; Diane wanted out of marriage.

What She Wanted

Beach front home – she would mortgage it for $1.5 million to buy Marv’s share. One-half of the value of the business.  Valued by a professional at a cost of $10,000.  A forensic accountant to determine if there was fraud by Marv at a cost of $5,000.  Marv to pay both fees.  One-half of the investments. Alimony for life. $1 million Life Insurance Policy to cover alimony in case of Marv’s death.

What He Wanted

Beach front home sold and proceeds split 50/50.  The best investments in their portfolio. 100% business as he claimed it had no value.  No alimony payments.

Problems with Their Wish Lists

• House - If house sold there would be huge capital gains tax to pay of $720,000.  If house was mortgaged all of Marv’s alimony payments would go to pay the mortgage. If Marv’s business failed or declined then the house would be lost.  In this scenario Marv is funding his own buy out and Diane would not have enough income to sustain her current lifestyle.
• Business – The valuation would cost an estimated $15,000 for a simple business with only two employees.
• Investments – Not fairly divided according to their liquidity, real market value, growth potential and tax consequences if sold.
• Alimony – This agreement would have resulted in an adversarial relationship affecting all members of their extended family including the grandchildren.
• Life Insurance – Very expensive due to the age of Marv.

The Mediated Solution

• House - Diane received 100% of the house. Marv to live in the house rent free for 10 years. ( Note - Diane remarried quickly, so Marv had the house to himself.)
• Business - Marv received 100% of the business. The business was valued by a business broker at a cost of $1,000 as the business was not complicated.
• Investments - Marv received the majority of the investments to balance Diane’s gain in receiving 100% of the house.
• Alimony - Diane received alimony for two years or until she remarried.  This off-set her receiving 100% of the house.
• Life Insurance – Not needed.
• Tax Savings - $720,000 in capital gains tax by not selling the home
• Future Relationship – Both happy to move on with their lives. Marv to allow family gatherings at house with Diane, grown children and grandchildren.
  
  Their neighbor paid $700,000 for a similar type of divorce.

How the Experts Helped

• Divorce Counselor – Set ground rules of behavior for the divorce process, helped each party determine what they really wanted and then coached them to a successful and healthy post-divorce relationship for the sake of the extended family.
• Financial Planner – Prepared a budget for both households for current living expenses and post-divorce living expenses.  Determined the real market value of the investments including their liquidity, growth potential and tax consequences if sold. Prepared an investment and retirement plan for both parties.
• Certified Public Accountant – Calculated the tax consequences and the cash flow of different property settlement options.  Determined that the original wish list of the clients would result in financial disaster for both with high tax payments, high mortgage payments and too much risk. While working with the Financial Planner, the Divorce Counselor and the clients the CPA created other property settlement options that kept taxes and risk low.  Found a business broker to value the business for $1,000.
• Mediator – After consulting with the Divorce Counselor, the Financial Planner and the Certified Public Accountant the Mediator presented all options to the clients and mediated a mutually beneficial binding Marital Settlement Agreement.

Costs Avoided and Actual Cost

Contested divorce with attorneys and valuation experts with testimony
2-4 years

$95,000 - $250,000

DKYM2 Actual Cost
of Divorce

60 days

$8,400