Maximizing the Role of the Financial Neutral

Times are changing. More and more couples are choosing to avoid the litigation system to negotiate their divorce settlements, and even those with attorneys settle out of court 90% of the time. The demand for mediation and Collaborative Divorce has risen steadily in recent years and the need for financial expertise has never been more critical.

Instead of hiring advocate representatives, using a financial neutral is less expensive and can be more effective in educating the parties involved about the financial intricacies of their case and helping with cash flow and net worth projections to being clarity to an often-confusing process. A financial neutral naturally creates an atmosphere of cooperation and an effort to fine mutually satisfying agreements.

Why Clients Need a Financial Neutral

Often divorce professionals, attorneys or mediators are unclear as to why a financial neutral should be consulted. It’s critical that we help them understand the importance of our role and the potential cost of errors. There are often financial subtleties that are overlooked, such as the proper identification of retirement assets. People think they know what they have, but there are so many kinds of retirement savings vehicles that it’s nearly impossible for the layman to keep track of them all. Sometimes there are lump-sum withdrawal options; sometimes there aren’t. Sometimes you can keep an ex-spouse as beneficiary; sometimes you can’t. Sometimes the plan can be divided; sometimes it can’t. Sometimes it’s fully taxable; sometimes it’s not. You can see how, without knowing for sure what you’re dealing with, it would be very easy to make decisions about your property division that would be a source of regret in the future.

Most commonly ignored or neglected is evaluating tax liabilities of each asset. If one spouse gets a fifty thousand dollar asset that will have no taxation when sold and the other gets a fifty thousand dollar asset that will be taxed as ordinary income when sold, how do you think he’s going to feel when that fact comes to light well after the ink has dried on the divorce decree?

Another common challenge for divorcing couples is how to handle stock options or restricted stock awards that are only partially vested. Those plans can rarely be divided, so if thy are to be “split”, the employee spouse has to hold the shares in construct trust for the non-employee spouse and they have to be managed and monitored for up to 5 years into the future. As vesting occurs, the division is then executed—after some very complicate tax withholding and equalization. This is a receipt for disaster if not handled properly.

Marriage historically was a lifetime commitment and divorce was a rarity. Not anymore. It’s common for people to e married 2, 3 or even 4 times during their lives. Because of this cultural shift, the need for separate property tracing continues to escalate.

When you get married in your forties, you almost always come to the marriage with assts. Sometimes those assets are “presumptive gifts to the marriage” and sometimes not. Since some are always individual assets, it becomes necessary to unwind the amount that existed at the tie of marriage, and usually the gains on that initial value as well vs. the new contributions made during the marriage and the gains on that portion.

Given the new tax laws, a financial neutral can also help provide clarity on who should claim the children to maximize the child tax credits, plan for financial aid later, and optimize the filing status of each parent. There are some very beneficial strategies for divorcing parents to maximize financial aid available to their children for college.

Many divorcing couples have one spouse that owns their own business, and if they are mediating or doing a collaborative divorce, a financial neural can help with evaluating the business and educating the parties as to a range of value and potentially avoid a costly, formal business valuation.

Key Benefits of Hiring a Financial Neutral

  • Avoiding financial errors
  • Neutrals focus on a win/win scenario for both parties
  • Their main role is to educate
  • You don’t know what you don’t know

Typically a financial neutral will be part of a meeting with the couple in a joint session with either the mediator or each party’s attorney. During that meeting, the professionals can help the financial neutral by allowing them to guide the meeting and by asking questions on behalf of the clients that thy might no think to ask.

Another negotiation meeting has been held and decisions have been made, the professionals can support their clients further by reinforcing those decisions and reminding their clients the reasons why they made them. So often during divorce, the stress levels of the participants result in a lowering of cognitive processing, so memory can be affected as well as their ability to process information. Hearing things multiple times can be helpful.


Source = Nancy Hetrick / Smarter Divorce Solutions