Are you interested in divorce mediation but concerned that your spouse may not be honest? Such fears may or may not mean that mediation is out of the question. Before you jump into an expensive litigation process, take some time to think through your options. Keep in mind that the adversarial nature of litigation can contribute to secrecy. Mediation, on the other hand, generally fosters an atmosphere of openness. Read more
In our last post, we discussed a few aspects of estate planning that a couple with minor children and a relatively simple estate might want to address during divorce mediation. Today, we will continue looking at our example couple, Deena and Greg, as they consider educational planning for their two younger children, 14-year-old Brian and 12-year-old Lindsey.
As we previously discussed in College Planning and Mediation: Part I, there are circumstances under which divorced parents In New Jersey can be held responsible for funding post high school education for children. Educational expenses typically include tuition and fees, room and board, and books and supplies. Other associated costs include things like college prep exam fees and review courses, application fees, travel expenses for college visits and necessary and discretionary expenses during college (clothing, travel, entertainment, etc.). Absent an agreement between parents about how to cover costs, a court would apply the criteria set out in the 1982 case of Newburgh v. Arrigo.
If your children are young, it might seem like a better idea to wait and address this issue later. After all, many things can change over the years, and you already have plenty to worry about. Mediation, however, is an ideal forum for addressing parental contributions to children’s higher education expenses. Courts tend to uphold agreements between parents about contributions, as long as they are specific and clear. If college is still a few years away, you can write up an agreement that provides for an income-based cost sharing plan while leaving out specific dollar amounts. Putting your plan into your Marital Settlement Agreement (MSA) allows your attorneys to review it along with your other terms. You can also include a clause agreeing to return to mediation to refine the agreement later.
Educational Contributions and Parental Income
Deena and Greg currently have very similar incomes and plan to share parenting equally. They were happy therefore, to take child support off of their current list of concerns. Nevertheless, they should be prepared for the possibility that this might change. What if one of them gets a new job or starts a lucrative business during the next few years? At that point, the less financially well-off spouse might wish they had thought about college funding sooner. They might even want to change their mind about getting a child support agreement.
To get an idea of how New Jersey courts calculate child support for parents who share custody, Deena and Greg can look at the New Jersey Shared Parenting Worksheet. The first figure in the support calculation is “gross income.” This includes both earned and unearned income. Part C of the Family Case Information Statement (CIS) includes a more detailed breakdown of what income includes. As we have previously discussed, it is usually a good idea for couples in mediation to complete and exchange at least a rough draft of the CIS, even if, as in Greg and Deena’s case, their financial situation is pretty simple. Sometimes completing the CIS reveals things that no one previously considered. Other times it simply ensures that all income and assets are taken into account.
Although the New Jersey child support guidelines do not apply to children who are in college and not living at home, they can provide insight into how parents might set up an agreement for income-based college contributions. The next step will be to decide how to budget for the planned contributions. The parents can then incorporate the contribution agreement into their MSA.
Funding Higher Education for Children
Deena and Greg do not currently have any savings designated for their children’s education. They do, however, have good salaries and well-funded retirement accounts. Greg has a traditional IRA and Deena has a 401k. In some cases, it is possible to use retirement accounts for educational expenses. Withdrawals from both traditional and Roth IRAs before age 59 ½ that are used for qualified higher education expenses are not subject to the usual 10% early withdrawal penalties. They are, however, still subject to income taxes. Qualified expenses generally include tuition, fees, books, necessary supplies and equipment, and room and board for students enrolled at least half time in a degree program.
There are, of course, downsides to using retirement funds for education, the most obvious of which is that the funds would no longer be available for retirement. It is also only IRAs that can be used in this way. Deena’s 401k would not qualify. It might be possible for her to borrow from her vested balance in the 401k to pay for college expenses. Before considering this option though, she should discuss the financial impacts with a financial advisor. Pursuing other student loan options will usually be a better choice.
Another option that is usually better than dipping into retirement savings is opening 529 plans. Although it would have been ideal for them to begin earlier, Greg and Deena still have time to do this. Each parent could open an account for each child and fund the accounts on a regular basis going forward. Any loans or retirement withdrawals would then be only back-up options. If the parents can agree on how much each of them will contribute, they can coordinate setting up the plans with the rest of their asset distribution in divorce.
Including Children in College Planning Discussions
Deena and Greg should also decide how and when to include their children in college planning discussions. Brian will be old enough for that within a couple of years. Lindsey is still young, but because of her disability, her future education may require earlier and more extensive planning. Parents often want children to understand that there is a “cap” on how much they will be able to contribute. The earlier they make this clear, the less likely a child is to become excited about possibilities that do not make sense financially. If children may need to work part time or take out loans themselves, that is another important topic of discussion.
Deena and Greg decide to build future college planning meetings into their MSA. They set three dates, the first for a meeting between the two of them, and the second and third for meetings between both parents and each child. They also agree to add additional meetings with a mediator if necessary to resolve any disagreements. A tentative checklist of topics for the meetings includes the following:
- The Child’s Educational Goals
- All Estimated Costs of the Education
- Current Savings and Future Savings Plans
- The Child’s Expected Contribution.
- Each Parent’s Expected Contribution
- Mechanics of Payment
For more detailed information on college planning and mediation, including more on the list of topics to address, see: College Planning and Mediation: Part II.
If you and your spouse or former spouse would like to discuss educational planning for children and mediation with one of our experienced family mediators, take advantage of our initial consultation and contact us today.
Couples going through divorce mediation often wish to consider financial matters beyond immediate spousal or child support and property division. Two issues that commonly come up are college planning and estate planning. Not only can such issues impact divorce negotiations, but many divorcing couples are approaching them for the first time and will benefit from the support of a mediator during the process. Even if you already have an estate plan, you will generally need to revise it during divorce. Read more
Deena and Greg, who are both in their forties, have recently decided to divorce. They are on good terms with each other, and they believe that they could resolve all of their issues amicably in divorce mediation. They are planning to meet with a mediator together before consulting with separate attorneys. One major concern is bothering them though. How can they plan financially for their children’s futures? Read more
In our last post, we talked about possible ways to achieve a modification of a divorce settlement proposal if your financial situation has changed drastically due to the pandemic. If you have not yet signed a Marital Settlement Agreement (MSA), you have options in addressing property distribution issues such as marital home or business buyouts. If you have already signed your MSA, however, your options are more limited. Read more
Way back in March of this year, which to many of us feels like eons ago, we talked about the importance of addressing the potential financial impacts of COVID-19 in divorce mediation. With the pandemic still raging, unemployment high, and the damage to many businesses ongoing, now is a good time to look a little more closely at what this might mean. Read more
Alice was surprised when her consulting attorney gave her a blank New Jersey Family Law Case Information Statement (CIS) and recommended that she fill it out before her first mediation session. “Ask your husband to complete it also,” the attorney added. “It will really help you organize your financial issues right off the bat.”
Alice took the form home and looked it over and now she is feeling a bit overwhelmed. It’s so official looking and so detailed. Alice and her husband Blake chose mediation partly so that they didn’t have to deal with all the red tape of court. Do they really need to bother with this form? Read more
In our last post, we talked about mediation and planning for college expenses. Today we will look in more detail at the categories that you and your child’s other parent should address in any financial planning meetings about college contributions. These include: Read more
When we last saw Gerry and Beth, they had decided to try marriage counseling. In the meantime, however, Beth is also meeting with an attorney to help her understand what they would need to address in a divorce. Gerry is holding off on talking to an attorney, but he has done a little research on his own. He too is concerned about how they would resolve their financial issues. Today we will consider how divorce mediation might help this couple.
As we learned in our introductory post, Gerry currently earns approximately $150,000 per year as the CEO of a small company. Beth, who spent 10 years as a stay-at-home mom, now earns $60,000 per year as a teacher. She would like to retire next year, when she will be eligible for an annual pension of about $22,000. The couple’s home, which they purchased during the marriage, is fully paid for and has a current value of about $450,000. They have joint savings and investments of $50,000, and Gerry’s 401k has a balance of approximately $800,000.
On the recommendation of her attorney, Ms. White, Beth is preparing a detailed budget and completing a New Jersey Family Part Case Information Statement. She is finding this somewhat daunting with so many decisions still up in the air. Ms. White points out that some of those decisions might be easier with expert assistance. They could start by hiring a joint Certified Divorce Financial Analyst (CDFA). A CDFA can help mediation participants project future scenarios and identify potential ways to optimize each party’s post-divorce financial situation. Hiring a joint CDFA can result in substantial savings compared with hiring separate financial experts for litigation.
Let’s look one at a time at the issues facing Beth and Gerry:
Because the New Jersey alimony statute (NJSA 2A:34-23) does not provide formulas, but instead simply contains lists of factors, mediation is a good forum for presenting alimony arguments. Spouses who work out their own solutions can save a great deal of time and money that they would otherwise spend arguing in court. For example, Gerry and Beth might be able to agree on a graduated payment schedule based on anticipated changes in their future incomes. Their alimony discussion could also intersect with their discussions about property distribution.
Amount of Alimony
Like the first two couples in this series, Gerry and Beth have a significant discrepancy in income. This means that Gerry is likely to end up paying Beth some amount of alimony. Beth assumes that she will receive enough to maintain the marital standard of living. Ms. White cautions her that this would be true only if Gerry could afford to pay this much without lowering his own standard of living. There is also the additional complicating factor of Beth’s decision to retire next year, at 62. This would be entirely voluntary, rather than prompted by a lack of ongoing employment opportunities, ill health, or some other factor beyond Beth’s control. Even if Beth stops working, Gerry can therefore argue that alimony should be based on her $60,000 salary, rather than on the $22,000 pension. This could reduce payments by several thousand dollars per year, significantly impacting Beth’s post-divorce lifestyle.
Duration of Alimony
Unlike either of our first two couples, Gerry and Beth have been married for more than twenty years, allowing a New Jersey court to order “open durational” alimony, meaning an award without a set ending date. There would be a rebuttable presumption, however, that alimony would end when Gerry reaches full retirement age, in only three years. Beth could challenge this based on the factors listed in the statute. These include the parties’ ages, health, and other available assets and income; the degree to which an alimony recipient has depended economically on the other spouse; whether the recipient has reached retirement age and has had an opportunity to save adequately for retirement; whether the recipient has exchanged other claims, such as property rights, for more alimony; and any other factors that a court may deem relevant (NJSA 2A:34-23j (1)).
Distribution of Marital Property
Neither Beth nor Gerry appears to have any separate property of significant value. Their home, joint saving and investments, and retirement accounts or pensions are all marital property, as they were all purchased or funded entirely during the marriage. They would, however, have some decisions to make regarding the equitable distribution of their marital property.
The Family Home
Beth has already indicated that she would like to move to New Hampshire, so it could be up to Gerry to decide whether or not they will sell the family home. Since they bought it during their marriage, they could each begin by claiming half the value. There is nothing to prevent either of them, however, from arguing for a different division. New Jersey statutes include a factor list for this as well (NJSA 2A:34-23.1). If they sell the house, they can simply divide the proceeds. If Gerry wants to keep it, however, they will need to agree on an exact market value, so that Beth can get a credit for her share. They could hire a licensed real estate appraiser for this, or they could simply collect some comps on their own. Gerry might then consider taking out a new mortgage to buy out Beth.
Beth asks Ms. White why Gerry couldn’t just give her a portion of his 401k in exchange for her share of the house. “He probably owes me part of the account anyway,” she surmised, “since he has $800,000 saved already.”
Ms. White’s response is that retirement assets need to be valued differently than other assets. There are also open questions, she points out, about the appropriate ages of retirement for each of them, as well as about the potential impact of social security payments. Beth’s own pension would be higher if she waits until 65 to retire, and it isn’t realistic to expect Gerry to pay for her decision not to wait. “$800,000 might sound like a lot,” she notes, “but it wouldn’t maintain even one person at your current lifestyle.”
“We should just sell the house then,” Beth proposes. “We’ll each have plenty of money after that, because we’ll each only have half the expenses we had before.”
“That’s a common misconception,” Ms. White comments. “One person could need 80% or more of the amount that two people need. You lose the benefit of many shared expenses.”
Beth leaves Ms. White’s office in deep thought. She is beginning to question whether or not retiring next year is really such a good idea. After all, she still enjoys her job. Maybe, she thinks, she should just spend a few weeks in New Hampshire this summer and reconsider everything.
Beth and Gerry still have many things to work out. Our series, however, ends here. As we moved through these stories, we saw two out of three couples decide that they wanted to pursue marriage counseling before deciding whether or not to proceed with divorce mediation. In our next post, we will take a closer look at marriage counseling. When is it appropriate? How is counseling different from mediation? Is there such a thing as “divorce counseling?” Stay tuned as we address each of these questions.
Are you interested in talking to one of our experienced mediators about how to structure your own divorce mediation? Contact us today for an initial consultation.
In 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. Read more
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