In the May 25 issue of the Northern Nevada Business Weekly, the article on collaborative divorce by family law attorney Lauren Berkich presented an excellent overview of the methodology and benefits of the collaborative divorce model. In her article, Ms. Berkich explained how the family business could be saved from the effects of the divorce by the use of the collaborative process as opposed to the typical litigation process where the disposition (and/or value) of a business is usually decided by a judge.
While reading Ms. Berkich’s article I began thinking of some points that I wanted to make that expand upon the discussion of dealing with financial issues relative to the collaborative process. As a financial professional (CPA, business valuator and Certified Divorce Financial Analyst) who originally became involved with collaborative divorce in 2005, I would like to share a little information, based on my perspective, about the treatment of financial issues in the collaborative process. But first, a little background information.
The collaborative divorce (“CD”) movement was introduced in 1990 by an attorney in Minneapolis named Stu Webb. The process caught on over time and is now used in most states — in some states more than others, and in Canada. In Nevada, CD first came into being in Clark County. It later took hold in Washoe County, which was in 2005. Since its inception in Nevada, interest in CD has waxed and waned for various reasons, but now that more attorneys and other professionals, as well as the general public, are becoming more familiar with the CD process and its benefits, interest in Nevada has been growing.
The typical CD model consists of an attorney for each spouse, a coach for each spouse (a mental health professional, who can provide emotional support but not therapy), a financial professional (CPA, CFP, CDFA, etc.), and often a child psychologist when the divorcing spouses have children, especially young ones. Not all CD matters necessitate a financial professional (and/or coaches). For example, if the marital estate is relatively small, then the need for a financial professional to be involved in the process is probably unnecessary.
Before any of the attorneys, mental health professionals or financial professionals can become a CD practitioner, they must have gone through a training process consisting of various sessions covering all aspects of CD, and must have met certain experience requirements. CD is a very different process than the typical process of divorce and requires specialized training as well as a particular mindset. It must be noted that the divorcing couple makes all the decisions. The other members of the team only provide advice and support as necessary.
The main purpose of the one financial specialist used in the CD process is to arrive at the most desirable, or least undesirable, financial resolution for both parties. There can be a myriad of factors that need to be considered in arriving at the optimum situation for both spouses, given such considerations as the size and composition of the marital assets and liabilities, the income of the spouses, each spouse’s living expenses and the financial needs of the children.
The financial specialist gathers all available financial information, speaks with the spouses individually, and works with the other professionals involved in the CD process to arrive at a plan that is equitable, feasible and acceptable by each of the spouses. As part of that plan, the financial professional may prepare projections that illustrate, under different sets of assumptions, what each spouse’s financial situation will look like in, for example, one year, three years, five years and 10 years from the present. Although some or all of the assumptions used currently may not become operative in the future, this type of analysis may help the spouses during the decision-making process by giving them some degree of comfort that the decision they made was based on the best case scenario(s) at the time.
When determining such issues as how property is to be divided and the amount and duration of spousal support, in terms of equity, feasibility and the spouses’ future financial viability, factors that need to be considered include the liquidity or non-liquidity of assets; the values of the assets, e.g. a business, real property; whether assets will be subject to income taxes if sold in the near future or when realized in later years, e.g. 401(k) plans or IRAs; the nature of the existing debt; to what extent, if any, either spouse owns separate (non-community) property; and the earnings of each spouse.
Other financial persons may need to be hired if a financial issue is not within the scope of the financial professional’s expertise. For example, a real estate appraiser is usually needed when real property is involved, a business valuator would be needed to value one or more business if the financial professional does not have a valuation background, or an actuary may be necessary to value pension or certain deferred compensation arrangements. None of these professionals is a part of the CD model, but they are only outside consultants who would be needed even if the divorce were not a CD.
As Ms. Berkich points out, the CD process it “is not right for every divorce.” However, it can be an amicable way for the divorcing parties to resolve financial issues without the contentiousness that frequently occurs in the typical divorce situation.
When divorcing spouses do not have the benefit and support inherent in the CD process, the emotional stress of the divorce is greater and the additional funds that are often expended for litigating the case through the court system, including the cost of opposing financial experts and other experts, will likely result in a situation that is much less desirable for both spouses than their having used the CD process.
Richard Teichner, the managing member of Teichner Accounting Forensics & Valuations, PLLC, is a CPA whose primary areas of practice are providing forensic accounting and business valuations services as an expert witness and consultant in business litigation and family law matters. He can be contacted at firstname.lastname@example.org.