This is a question I am asked so often, I thought an explanation would be appropriate.
Mediation
Mediation is a process where a third party, a “Mediator” helps you and your spouse settle the issues in your divorce. It is the best way to resolve your issues, costs the least amount of money and usually results in a settlement that will stick. Most optimally mediation is used in low to medium conflict divorces and where the assets to be shared are straight forward and uncontested.
The mediator is not there to make the decisions for you; the mediator will help you understand each other’s position and help you reach a compromise that is acceptable for both parties. A good mediator will often make suggestions as to how they have seen things done by other couples or where they see a way through an impasse, but ultimately, the decision is yours. Mediation is not binding so if the results are too biased one of the parties can just walk away without any harm, other than wasted funds on mediation fees. That is why mediation works and is successful; the positions reached are not horrible for either party. I phrase it that way because a good settlement is where both parties are slightly unhappy. Neither of you won or lost.
Sometimes you attend mediation with your lawyers. This happens in higher conflict divorces where the parties cannot easily talk to each other or where one party needs additional support. All of the parties, (you and lawyer, spouse and lawyer and mediator) can be in one room, the mediator can work with the lawyers and the lawyers step out to talk to the clients or the mediator can go back and forth between the parties, each in different rooms, to negotiate a settlement.
Arbitration
Arbitration is used where there is no meeting of the minds by the parties on the issues and they need a third party to make the decision for them. Arbitration is similar to going to court in that each side presents their case to the Arbitrator and then the Arbitrator makes the decision.
In arbitration an Arbitrator is hired, (typically a retired Judge or highly experienced attorney) and each side presents their arguments to the Arbitrator as to why they think their position is the best way to resolve the case. Arbitration is like a trial. Witnesses may be called and testify, under oath, and can be cross-examined. Exhibits are put into evidence. At the conclusion there are summations and the Arbitrator makes a decision. Who should get/pay a certain amount of alimony for X number of years, who should get what assets and at what value and who should assume what debts is presented to the Arbitrator until every issue is decided.
Arbitration is an excellent alternative to a trial in court. With arbitration you have more control over the process which costs you less in legal fees. If you have a trial, the judge may have to deal with more pressing issues (domestic violence/Temporary Restraining Orders) or preside over uncontested divorces while you all wait in the hall. Additionally if you use the courts it is often difficult for the judge to give you blocks of continuous time so a trial can end up spreading over many court dates. All of this is very costly in legal fees.
Arbitration is also a good idea if there is privately owned business involved and where the owners may be expensing non-business expenses to the business (personal travel/entertainment or cell phone use for example). If this is revealed to the court, the court is required to report this to the IRS which could cause tax issues for the business owner and their spouse who typically would have filed joint tax returns.
You typically should ask for binding arbitration; this is where the Arbitrator’s decision is final and binding for all parties. Going through this process when it is not binding seems like a bit of a waste of time. If it is non-binding, and one party does not like the decision they can just walk away and you have to start all over, likely this time with a trial. If money is not an issue (aka more money than brains) this is a way to see how the case might be tried by a court but the emotional toll will be enormous, even if you have money to burn, so if you use this method, make it binding so you can get on with your life.
Arbitration can be used if there are only a few things that you cannot agree upon; you would mutually agree only to deal with those issues and it could be a fairly quick process.
The level of conflict and the parties’ willingness to reach a settlement will ultimately determine if you end up with mediation or arbitration. Start with mediation and see if you can make that work. You would then move to arbitration if there is no ability to reach agreement. The Arbitration Decision or Opinion can be used as your property settlement agreement and once in hand, and you have a parenting agreement, it is fairly simple to finalize your divorce.
I recently worked with a client to assist her in negotiating a settlement of her legal bill for her divorce. Her lawyers were unscrupulous and I have not run into billing practices like this with any other lawyer clients have worked with. They over charged for just about everything; from the amount of time in meetings to telephone calls and even for the billing for the paralegal. My detailed review found over $32,000 of errors on a $90,000 bill!
I do not believe that situations like this are common but I think there are some very basic things you can do to make sure you are paying the correct amount for the services you receive.
Have a conversation with your lawyer and clarify that you will not be charged the standard .1 or .2 of an hour for non-legal work such as an email stating “Got you email I will call you at 4 to discuss”. This is a fair ask in that there is no legal content. Most good lawyers will not charge for this but watch out as the person inputting the billings may just count the number of emails and charge accordingly.
With multiple emails that go back and forth in a few minutes of each other it is also fair to ask to be charged the amount of time rather than the number of emails multiplied by the minimum “correspondence” charge. My client had 4 emails going back and forth and was charged for .8 of an hour at $425 an hour (.2 on an hour per correspondence) even through all 4 emails occurred within 4 minutes.
Also watch your telephone calls and make sure the times match. Get your phone records and sort by the telephone number and check.
Telephone calls and emails are a slippery slope because they happen frequently and usually without much thought as to the cost associated with them. My client was charged $85 for an email to her lawyer “I am here where ru?” sent while she was waiting for her lawyer at the court house. So be careful, and collect your questions until you have a few then send them or make the call.
Another way to manage your legal bill is to be mindful of the interrogatories that are sent to the other side and how yours are responded to. Ask your lawyer how to respond to them (format and length of response) and then do as much of it as you can. If you can type it up, so much the better, as it will be easier for your lawyer to review. Your Case Information Statement (NJ Courts financial disclosure document) is also another area that you can save legal dollars on. Sit with a Divorce Consultant or financial adviser and fill it out yourself.
If you have a high legal bill it may be worth taking a close look to see if your bill is accurate. If your case is ongoing and you suspect errors do this now as it will be easier to negotiate and potentially change billing practices if there is still future work to be done. Once you find errors, provide your evidence to your lawyer and ask for a reduction in the bill. If they do not agree to the reductions you can go to attorney fee arbitration rather than take them to court but I hope it does not come to that.
When it comes time to share your assets you need to be mindful of the valuation of investment accounts. If you have two accounts, both with a value of approximately $100,000 you might think that I will keep mine and my spouse will keep theirs. Sounds simple, but you need to look a bit deeper.
If one of the accounts is an active trading account and the other is used for long term investing, which is often the case with a balanced portfolio, the long term investment account may have long term capital gains inherent in the investments in the account where the other may have short term capital gains (I am being optimistic here rather than talking about losses, but the analysis is the same). This will result in a much different after tax number which you need to consider in the valuation.
Short term capital gains, when you have investment held less than one year, are taxed at your ordinary tax rate which is from 10% to 39.9% (federal tax rate) depending upon your income. Long term capital gains, investment held more than one year, are taxed at only 15% until you reach an income of over $415,050 where it jumps to 20%. That could be a big difference (19.9% of the value in the portfolio) in the tax cost associated with each portfolio.
When you consider who will keep which account, look at the income levels of each party. Will one spouse’s income be taxed at the 39% level where the other will be at the 20% level? To optimize the outcome for both of you perhaps the lower income level spouse gets the portfolio with the short term gains as their tax rate will only be 20% rather than the higher earning spouse who might pay 39.9% tax on the positions. In valuing the accounts the after tax number needs to be used.
You also need to look at your previous year’s tax return to see if you have capital loss carry forwards which might offset the capital gains associated with either portfolio; this could be used by the spouse to offset the capital gains. This loss carry forward is also a marital asset, which needs to be shared, but this is a topic for another day and is not an everyday occurrence.
The other alternative is that the spouse getting the portfolio with the short term capital gains can elect to hold everything until the portfolio shifts into the long term capital gain tax rate, which could be up to a year. This hold period can be detrimental in a trading portfolio which is geared to moving with the market so talk to your investment adviser! This strategy can also pose a liquidity problem if you wanted to liquidate the account to buy a house, pay for college or for living expenses.
Not an easy analysis so consult a Divorce Consultant to figure out the optimal solution that will net you the best result. Working tax issues into your property settlement agreement can be complicated and, in my experience, attorneys are not always aware of the possibilities to optimize your results so make sure you obtain the right financial advice before you make any decisions.
Monday was Martin Luther King Day. A time to remember a great man who had a great vision for our country.
When I hear the words “I have a dream” it makes me think about what I wish for my clients in their divorce.
The current way folks get a divorce in this country is really messed up. It is adversarial and causes everyone involved to pick fights to gain an advantage where it all could have been avoided. The system seems to reward the spouse that lies and exaggerate, particularly where children are involved. False claims of abuse or negligence; using temporary restraining orders to force one spouse out of the house are used so frequently that the family Judges on the bench are overwhelmed. How can they parse out the truth from the endless “he said she said” motions presented to them?
Not a task I envy.
Unfortunately “divorce” is a $100 billion a year industry in the US. The most frightening aspect of this is that the $100 billion is all from individuals; from life savings and children’s college funds. This “business” convinces you that you need to get experts and retain attorneys as the “winning strategy” and your only real option to succeed during your divorce.
This is wrong on every level.
Other parts of the world have a much more civilized approach to divorce. In Quebec (province of Canada) for example, the government pays for 6 divorce mediation sessions where they pay for one here. In Quebec 90% of couples get divorced using the free mediation in 3 months or less!!
Is there a simple solution to this? NO. The recent changes in the divorce laws in NJ, which took years and years to implement, did not address some of the fundamental issues in the divorce process albeit they did clarify a few issues.
My thoughts are along the lines of limiting what a lawyer can charge for the divorce. A fixed fee basis(like they do for bankruptcy). Before all you lawyers start to scream; the fees could be based on a % of assets or different if there are children or not so I am contemplating that the fees could be reflective of the degree of complexity.
What this would do is to stop the back and forth letter writing and the inflammatory claims that sometimes happen. Lawyers would tell their clients “no, not doing it; not worth the paper or, you will not win that one” and the conflict would subside. So often I have heard lawyers say that they were just doing what their clients wanted. If there was only a fixed amount of fees, lawyers would push their clients to settle and settle fast. I have personally seen multiple cases where the battles stop when there is no more money for legal fees. I have heard more than one lawyer say that once the money is gone people are ready to settle. Really! Once people are bankrupt they are ready to settle?
Additionally, if the fixed fee was paid up front, in advance, it might make more folks inclined to go to mediation as a way to get their divorce done.
A question I would like to ask is how much do lawyers walk away from due to debt forgiveness/compromises on the bill or from bankruptcy? I would guess that it is a lot. I know that the spouse of a client of mine left her lawyer with an unpaid bill of over $296,000 in her bankruptcy. That amount could have bankrupted the legal firm let alone caused severe hardship for the lawyer.
This has turned into a rant and I apologize for that. It is just that I have seen too many cases where families spend everything they have to fight over their right to see their children. A pissed off spouse uses the children as a way to extract money. What if the court automatically awarded 50/50 custody, in all cases, unless an infant was nursing under the age of one? Only way that changes is if one spouse says can’t do 50/50. No more fight there.
This could change everything. Parents know they have equal time with the children and the rest is just money. It would take the emotion and sting out of divorces. How would things change?
Last year was tough, no question. You are caught up in your divorce and you feel like you are drowning. Not a way to live.
When you start down the path of a divorce the process can become all encompassing. The critical decisions you need to make are about situations you have never faced and for which there are rarely clear answers. Your friends provide advice, well meaning, but not always on point and often colored by their own divorce experience. Your lawyer will advise you as to what is typical in a divorce but they will expect you to make the decision. Money is always an issue, even if you have buckets of it, it never seems like enough.
What I am attempting to say is that it is hard. Really Hard!
So what can you do to shift your life so that you can have at least a few minutes a day that are joyful and happy?
Focus on you. Your needs and your future; stop thinking about your soon-to-be-X, the decisions you need to make and your children, at least for a few minutes each day.
A few easy suggestions;
Pamper Yourself – Buy some wonderful hand cream with essential oils and message your feet and hands before you go to sleep. (Yes for the guys too – get sandalwood or rosemary scented and enjoy) The pressure on you feet will be relaxing and the smell of the cream will be soothing.
Meditate – Get a CD form the library and download it to your computer or download one on to your phone and take a few minutes to calm you mind. It will be hard at first to stop your thoughts racing but it will be worth it. When you calm your mind decisions will be easier to make. If the thought of meditation is a little out there for you; pray or sing (in the shower or your car). You need to just focus your thoughts to get the benefits.
Make your home beautiful. Hire a Divorce Decorator and let her bring some joy into your home. When you walk into your home and feel happy about your surroundings it will bring you joy. Worth the investment even if you can only afford to paint a wall and buy a few beautiful pillows from a thrift shop.
Get some exercise. The endorphin’s that are released during exercise will make you feel great. Go for a walk or go to a class at the gym, walk a dog (yours or your neighbor’s). Dance or go take a Zumba class, from the internet if all else fails.
You need to take care of yourself; mentally and physically. If you can care for yourself you will be better able to help your children and you will feel so much better.
So promise yourself that you will do something nice for yourself every day.
In a divorce, the assets that you have acquired during the marriage are shared and, in most cases, this means that one of you will transfer funds out of your name to the other’s name or that funds in joint names will be transferred to an account in a single name. This situation covers financial assets and real estate and businesses you may own.
The key to avoiding taxation on these transfers is to make sure that the correct procedures are followed. The tax authorities recognize that a divorce is merely a sharing of existing assets so they have established a set of rules to allow for a tax free transfer.
Financial assets have the most tax consequence so you need to follow the rules to avoid a tax issue in April. If you have a 401K you are transferring to your spouse, need to have a Qualified Domestic Relations Order (“QDRO” pronounced “quad-row”) and the correct forms from the financial institution holding the 401K. The QDRO is required under ERISA (“Employee Retirement Income Savings Act” – pension rules and regulation law) to give the pension company the authority to transfer the assets to an alternative party (your spouse).
The court will give you the QRDO and once received you fill out the forms from the financial institution the transfer can be done tax free. Sometimes the firm holding the assets may have a QDRO from they like to see so it pays to call and ask the question rather than have you attorney automatically draft the documents.
If you do not get a QRDO, and the appropriate forms, the pension plan will not likely transfer the money or, if they do agree to transfer, the funds there will be a tax consequence to the receiving party.
The transfer out of a 401k without the right documents will result in the receiving party being taxed on the gross amount of the funds transferred at their normal tax rate on income. In addition if the receiving party is younger than 59.5 years old, there will be a penalty associated with the withdrawal of 10%. Not a good result!
So while it may seem like a tiresome thing to do, getting the correct documents will result in funds getting to you tax free and you will not be facing a tax bill in April.
As always, if you need assistance with preparing for you divorce or structuring you property settlement agreement, reach out to set up a free consultation.
