IAFP 2003Considerations in Divorce

Akeela Davis, CFP, RFP, FDS, EPC

Questions about Divorce

Can I manage by myself?

How much will I pay in Child Support?

Will I be a bag lady? Will it scar my kids?

Know Your Boundaries

Let the client know your boundaries!

What can an advisor do?

Be an information source Have a list of books you can recommend Have a list of referable counselors Have a list of referable lawyers Have a list of referable mediators

A Financial Divorce Specialist

Raise questions, give information Emergency funds Insurance Tax consequences

A Financial Divorce Specialist

Raise questions, give information Revoking existing POA Preparing for separation Credit rating

A Financial Divorce Specialist

Raise questions, give information Financial statements Demystify pensions Establish tax discounting rates

Modeling

Abstract information

Visual model

The Family

Michelle Brady – 46 years Frank Brady – 47 years Married 20 years Four children ages 14, 10, 5 and 4

Family Finances (Income)

Frank – Salary $67,000/yr Frank – Dividends IRS $30,000/yr Michelle – Salary $170,000/yr Michelle – Dividends IRS $30,000/yr Michelle – Dividends ABC $70,000/yr

Total Family Income $367,000/yr

Family Finances (Expenses)

Estimated Income Tax $114,000 Michelle’s RRSP $14,500 Accelerated Mortgage $74,500 RESP $8,000 General Living Expenses $146,500

Total Family Expenses $357,000/yr

Family Assets (Joint)

Value Liability Net Asset

Residence$650,000 $300,000 $350,000 MM Fund $52,000 $0 $52,000 IRS* $525,000 $121,900 $403,100

$805,100

Family Assets (Frank)

Value Liability Net Asset

RRSP $63,000 $0 $63,000 Pension $141,000 $0 $141,000 Vehicle $15,000 $0 $15,000 Boat $25,000 $0 $25,000

$244,000

Family Assets (Michelle)

Value Liability Net Asset

RRSP $181,000 $0$181,000

MM Fund $21,000 $0 $21,000 IRS* $20,000 $0 $20,000

$222,000

Exempt Assets? (Michelle)

Value Liability Net Asset

Mutual Fund $175,000 $0$175,000

ABC* $1,600,000 $127,700 $1,600,000

$1,775,000

Proposition #1

Frank Shares in ABC growth since marriage Gets cash buyout from both businesses Keeps 100% pension Gets open mutual funds for home equity Child support payments = income only Frank gets some of Michelle’s RRSP MM split 50/50

Proposition #1 – Summary

Frank Gets $939,847 in cash and RRSP No debts 100% of his pensions Pays $16,776 tapering to $6,636 in child support Lifestyle expenses = $62,000/year Gross income = $67,000

Proposition #1

Michelle Keeps the children Gets ABC ½ ABC growth since marriage Keeps IRS Takes out loans to buyout Frank ABC/IRS Keeps home with mortgage Gets child support payments Keeps most of her RRSP MM split 50/50

Proposition #1 – Summary

Michelle $214,000 in cash and RRSP Assets $2,775,000 - $941,000 debts, plus tax

liability on businesses Receives child support $16,776 - $6,636 Debt repayments $104,868 annually Lifestyle expenditures = $98,200 Gross income +$300,000

Client Concerns and Fears

Michelle & Frank - Net Worth

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

$5,500,000

$6,000,000

$6,500,000

$7,000,000

46 51 56 61 66 71

Michelle's Age (Years)

Ne

t Wo

rth

($

)

Frank

Michelle

Client Concerns and Fears

Michelle & Frank - Liquidation

$-

$250,000

$500,000

$750,000

$1,000,000

$1,250,000

$1,500,000

46 51 56 61 66 71

Michelle's Age (Years)

Liqu

id A

sset

s ($

)

Michelle

Frank

Underlying Numbers

Michelle's Financial Sheet

Age Net SalaryOther Income CPP

Child Support

Living Expenses Mortgage

Expense Adjustment Cash Flow

Liquid Assets RRSP

Real Estate Equity Net Worth

46 2.00% 2.00% 14 Years 3.00% 20 Years 5.00% 7.50% 3.00%46 106,782$ 89,258$ -$ 16,776$ 98,806$ 104,868$ 52,500$ 9,142$ 26,000$ 188,900$ 1,814,000$ 2,028,900$ 47 108,918$ 89,258$ -$ 16,776$ 101,770$ 104,868$ -$ 8,313$ 36,442$ 217,568$ 1,916,518$ 2,170,527$ 48 111,096$ 89,258$ -$ 16,776$ 104,824$ 104,868$ -$ 7,439$ 46,578$ 248,385$ 2,023,189$ 2,318,152$ 49 113,318$ 89,258$ -$ 16,776$ 107,968$ 104,868$ -$ 6,516$ 56,345$ 281,514$ 2,134,238$ 2,472,097$ 50 115,584$ 89,258$ -$ 14,076$ 111,207$ 104,868$ -$ 2,843$ 65,678$ 317,127$ 2,249,902$ 2,632,708$ 51 117,896$ 89,258$ -$ 14,076$ 114,544$ 104,868$ -$ 1,819$ 71,805$ 355,412$ 2,370,438$ 2,797,655$ 52 120,254$ 89,258$ -$ 14,076$ 117,980$ 104,868$ -$ 740$ 77,214$ 396,568$ 2,496,120$ 2,969,903$ 53 122,659$ 89,258$ -$ 14,076$ 121,519$ 104,868$ -$ (394)$ 81,815$ 440,811$ 2,627,245$ 3,149,871$ 54 125,112$ 89,258$ -$ 10,764$ 125,165$ 104,868$ -$ (4,898)$ 85,512$ 488,371$ 2,764,130$ 3,338,013$ 55 127,614$ 89,258$ -$ 10,764$ 128,920$ 104,868$ -$ (6,151)$ 84,889$ 539,499$ 2,907,115$ 3,531,503$ 56 130,167$ 89,258$ -$ 10,764$ 132,787$ 104,868$ -$ (7,466)$ 82,983$ 594,462$ 3,056,569$ 3,734,014$ 57 132,770$ 89,258$ -$ 10,764$ 136,771$ 104,868$ -$ (8,847)$ 79,665$ 653,546$ 3,212,889$ 3,946,100$ 58 135,425$ 89,258$ -$ 10,764$ 140,874$ 104,868$ -$ (10,294)$ 74,802$ 717,062$ 3,376,501$ 4,168,365$ 59 138,134$ 89,258$ -$ 6,636$ 145,100$ 104,868$ -$ (15,940)$ 68,248$ 785,342$ 3,547,867$ 4,401,456$ 60 140,897$ 89,258$ -$ -$ 111,453$ 104,868$ (38,000)$ 13,834$ 55,720$ 858,743$ 3,727,485$ 4,641,947$ 61 143,715$ 89,258$ -$ -$ 114,797$ 104,868$ -$ 13,308$ 72,339$ 937,648$ 3,915,894$ 4,925,881$ 62 146,589$ 89,258$ -$ -$ 118,241$ 104,868$ -$ 12,738$ 89,264$ 1,022,472$ 4,113,676$ 5,225,411$ 63 149,521$ 89,258$ -$ -$ 121,788$ 104,868$ -$ 12,123$ 106,465$ 1,113,657$ 4,321,461$ 5,541,584$ 64 152,511$ 89,258$ -$ -$ 125,442$ 104,868$ -$ 11,460$ 123,911$ 1,211,682$ 4,539,934$ 5,875,527$ 65 155,561$ 89,258$ -$ -$ 129,205$ 104,868$ -$ 10,747$ 141,567$ 1,317,058$ 4,769,832$ 6,228,456$ 66 -$ 70,000$ 8,928$ -$ 118,581$ 96,148$ (14,500)$ (135,801)$ 159,391$ 1,415,837$ 5,011,959$ 6,587,187$ 67 -$ 70,000$ 9,107$ -$ 122,139$ -$ -$ (43,032)$ 913,394$ 1,522,025$ 4,185,663$ 6,621,081$ 68 -$ 70,000$ 9,289$ -$ 125,803$ -$ -$ (46,514)$ 916,032$ 1,636,177$ 4,311,233$ 6,863,441$ 69 -$ 70,000$ 9,474$ -$ 129,577$ -$ -$ (50,102)$ 915,319$ 1,758,890$ 4,440,570$ 7,114,779$ 70 -$ 70,000$ 9,664$ -$ 133,464$ -$ -$ 34,144$ 910,983$ 1,767,684$ 4,573,787$ 7,252,454$

Underlying Information

Assumptions about Interest rates Tax rates Inflation rates

Another Scenario

Michelle & Frank - Net Worth

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

$5,500,000

$6,000,000

$6,500,000

$7,000,000

46 51 56 61 66 71

Michelle's Age (Years)

Ne

t Wo

rth

($

)

Frank

Michelle

Another Scenario

Michelle & Frank - Liquidation

$-

$250,000

$500,000

$750,000

$1,000,000

$1,250,000

$1,500,000

$1,750,000

$2,000,000

46 48 50 52 54 56 58 60 62 64 66 68 70

Michelle's Age (Years)

Liq

uid

Ass

ets

($

)

Frank

Michelle

Summary – Michelle’s Concerns

Impact on children?

Summary – Michelle’s Concerns

Can she make it on her own? What would her retirement look like?