Financial Backdrop
We learned when first meeting this couple that Katherine earns over $100,000 per year as a pharmaceutical sales rep, while Julian earns about $55,000 per year as a chemist. They live in a home that Katherine purchased on her own approximately one year before their marriage. It is currently worth about $350,000, with a mortgage balance of about $150,000. The home remains in Katherine’s name only, even though she and Julian have been sharing household expenses and mortgage payments since their marriage. Julian and Katherine also have joint savings and investments totaling about $20,000. With respect to retirement assets, Katherine has a 401k with a balance of $80,000, which she started contributing to before marriage, while Julian has a SEP IRA with a balance of $20,000, which he opened during the marriage.
Some of the issues raised by this scenario may require expert assistance to resolve. If Katherine and Julian can reach a level of trust that allows them to use joint experts, as opposed to the separate experts they might need in litigation, they can almost certainly save money pursuing mediation.
Let’s look at the issues one at a time:
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 Katherine) to the lower-earner (in this case Julian) would be appropriate. Sometimes couples with income discrepancies need a vocational expert to see if the lower earner is underemployed and should either consider a job change or be imputed with higher income. Julian, however, appears to be fully employed at an average or higher salary for his education and experience. This couple can therefore look directly to the New Jersey alimony statute to try to reach mutual agreement regarding whether or not alimony is appropriate, and if so, for how long and in what amount.
The alimony discussion may also intersect with the rest of their financial discussions. For example, alimony might be a negotiating tool when discussing property distribution, or vice versa. Mediation would be an excellent forum for this type of discussion.
The Family Home
Katherine and Julian may have several issues to resolve regarding the family home. The first is the question of value. While we previously stated the home’s current value to be “approximately $350,000,” this is not an exact number. If, for example, Julian believes the value to be $375,000 while Katherine believes it to be $325,000, they will need to reach a compromise. Some couples choose to spend a few hundred dollars on a licensed real estate appraiser to get an accurate valuation. Other couples feel competent to collect neighborhood comps on their own, perhaps with the help of a friendly real estate agent.
The next question about the family home is whether it is marital or separate property. As we have seen, Katherine purchased the home on her own before she and Julian married, and she is still sole owner on the deed. This would make the home her separate property, rather than marital property subject to equitable distribution in divorce. Nevertheless, since their marriage, Julian and Katherine have paid the mortgage on the home together out of a joint account into which they both deposit earnings. Julian therefore has a financial claim to some part of the home’s value. If Julian made any improvements to the home during the marriage, or if he personally maintained the home, he may have an additional claim as well.
Valuing Julian’s total claim may require the assistance of a financial specialist, such as a jointly-selected CPA. If necessary, a licensed real estate appraiser can make a retroactive appraisal to help the couple reach consensus on the value of the home as of the date of marriage.
Retirement Accounts
The issue of marital versus separate property will also come up when this couple looks at their retirement accounts. Julian opened his IRA during the marriage, so the entire balance is marital property. Katherine, however, opened hers prior to marriage, meaning that some percentage of the balance might be her separate property. Defined contribution plans like IRA’s and 401k’s are closely tracked, so separating marital from separate value is generally relatively easy. The value of contributions prior to marriage, including passive appreciation on that amount, would be Katherine’s separate property. The value of post-marriage contributions, including passive appreciation on that amount, would be marital property subject to division. Tax considerations and limitations on withdrawals require retirement assets to be valued separately from other assets. A jointly-selected CPA can handle all of these issues.
Many divorcing couples ultimately decide to divide retirement accounts rather than try to offset imbalances with other assets. If this couple decides to divide Katherine’s retirement account, they will need a Qualified Domestic Relations Order (QDRO). QDRO’s can be complex, and expert preparation by a QDRO attorney is imperative.
Potential Role of a Certified Divorce Financial Analyst
There are multiple intersecting financial issues up for negotiation in this case. Katherine and Julian may therefore want to consider hiring a Certified Divorce Financial Analyst (CDFA). A CDFA can help inventory current assets and liabilities and identify potential ways to optimize each party’s post-divorce financial situation. Mediation is a great vehicle for using this type of joint expert.
Contact one of our experienced mediators today for an initial consultation about addressing financial matters in mediation.