Tailoring Mediation: Eric and Eva Address Financial Issues

divorce assetsIn our last post, we saw Eric and Eva address their child custody issues in mediation, with surprisingly positive results. Today we will look at some of the financial issues they will need to resolve before finalizing their divorce. These include alimony and child support payments, identification and distribution of marital property, and division of retirement assets.

Financial Backdrop

As we learned in our introductory post, Eric is a corporate attorney who earns approximately $200,000 per year. Eva is an artist—primarily a painter—whose earnings have averaged about $30,000 per year. They own a home together, purchased during their marriage, with a current value of about $450,000. Their remaining mortgage balance is about $150,000. They have joint savings and investments of approximately $100,000. Eva also has a separate investment account which she opened several years ago after inheriting $150,000 from her father. She has kept this money separate, and it is now worth close to $200,000. Eric has a defined benefit retirement account through his employment, while Eva has no retirement assets.

Alimony

This couple has a significant discrepancy in income, which raises the question of whether or not alimony payments from the higher-earner (in this case Eric) to the lower-earner (in this case Eva) would be appropriate. Eric’s attorney advised him that under the revised New Jersey alimony statute, he could have to pay alimony for as long as the length of their marriage, or up to 15 years. The attorney then pointed out that even though Eva had experienced some success as an artist, her income had been stagnant for years. She also had a college degree, and the children were getting older. Under those circumstances, the attorney suggested, it might be worthwhile for Eva to have a vocational analysis. If there was something she could do that would allow her to earn more income, but also required some additional training or education, Eric could consider contributing to the cost.

Much to Eric’s surprise, when he raised this issue at mediation, Eva informed him that she already had a plan. While setting up her own website, she had gained some proficiency in Adobe Photoshop and become interested in learning coding and other skills that would allow her to start a web design business. She had already found a part-time two-year certificate program that would help her gain skills while building up a portfolio. Eric thought this sounded like a good plan. Their mediator helped them construct an alimony schedule that included both payments for the program and built in step-downs to align with anticipated increases in Eva’s income over time. After also discussing the impact of available assets on Eva’s need for alimony and Eric’s ability to pay it, as well as the interaction between alimony and child support, they were able to agree on a tentative alimony payment schedule.

Child Support

Eric and Eva’s mediator explained that the New Jersey Child Support Guidelines were very specific, and that if they followed those Guidelines, they would be able to come up with a pretty good estimate of what a court might award. Because the parties’ temporary child custody agreement gave Eric approximately a 43% share of parenting time, they decided to use the “Shared Parenting Worksheet.” After completing this worksheet, they were able to reach a tentative agreement on child support in just a couple of hours.

Marital vs. Separate Property

The couple agreed that both the family home and Eric’s retirement account were clearly marital property subject to equitable distribution in divorce, as neither spouse had any ownership interest in either before the marriage. They also agreed that the $150,000 inheritance Eva received from her father—now grown to nearly $200,000—was her separate property. This is the normal rule for an inheritance, and since Eva kept this money separate, there was no issue regarding commingling with marital assets.

The Family Home:

Eric initially urged Eva to sell the house with him and divide the profits. Eva, however, was able to convince him that it might be more reasonable for her to keep it. She pointed out that other living options would end up costing nearly as much, while also increasing disruption for the children. Fortunately, after only minimal negotiation, they were able to agree on a $450,000 current value for the home. They also agreed that there was no reason not to divide the value equally. After deducting the $150,000 mortgage balance, this left each of them with approximately $150,000 of equity.

Eva hoped to use most of her inheritance to buy out Eric’s share. The mediator advised her to talk to an accountant first. She needed to consider what the tax effects would be of selling off such a large share of her investment. She might also want to compare the effects of using the investment funds with other potential options, such as refinancing. Eva agreed to do this before the next session.

Retirement Accounts:

The mediator then told them that since Eric’s retirement account is a defined benefit plan, they would likely need to consider different options for handling payments, even if they agreed that each of them is entitled to 50%. Defined benefit plans provide monthly payments upon retirement based on predetermined formulas. The formulas take into account factors such as age, years of employment and salary. Before retirement, an actuary can estimate the value. If Eric and Eva want to divide the account, they will need a Qualified Domestic Relations Order (QDRO). QDROs are complicated and must be handled by an experienced QDRO attorney. The mediator suggested that both parties discuss the account with their attorneys. They could then decide what kind of expert assistance they would need to be sure it was properly handled.

Because Eric and Eva had several complicated financial issues, it took them three mediation sessions to fully resolve them. At that point, however, they were ready to finalize their divorce.

Are you interested in talking to one of our experienced mediators about how to address financial issues in your own divorce mediation? Contact us today for a free consultation.

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