Divorce Mediation for High-Net-Worth Couples and Couples in Debt
After more than 800 divorce mediations, one thing I have learned is that the size of a marital estate does not necessarily tell me how complicated a divorce will be.
I have mediated a marital estate worth approximately $12 million. I have also worked with couples who were approximately $180,000 in debt.
Both can be financially complicated. They are simply complicated in different ways.
That is one of the reasons I believe divorce mediation can be so effective across the financial spectrum, from couples with limited assets or substantial debt to families dividing multimillion-dollar estates.
Why Mediation Works So Well for High-Net-Worth Divorce
When a couple has accumulated significant wealth, whether the marital estate is $1.5 million, $5 million, $12 million or more, the financial discussion is rarely as simple as adding everything together and dividing the total.
Before we discuss who receives what, we need to understand what the couple actually owns.
One of the most valuable tools in my mediation process is a comprehensive marital balance sheet. It allows us to bring the entire financial picture together in one place, including:
Real estate and home equity
Bank and brokerage accounts
Individual stocks and concentrated stock positions
Retirement accounts and pensions
Deferred compensation
Business interests
Stock options and restricted stock
College accounts
Life insurance
Vehicles and other significant property
Mortgages, loans and other debt
Once we understand the complete picture, we can begin asking better questions.
Which assets may be marital or non-marital?
What is the cost basis of appreciated investments?
What unrealized capital gains may be embedded in a brokerage account?
Is $500,000 in a traditional retirement account economically equivalent to $500,000 in cash?
What are the potential tax implications if an asset is sold?
Would it make sense for one spouse to retain a particular asset while the other receives something different?
How should retirement assets and pensions be addressed?
What liquidity will each person need after the divorce?
Can the spouse who wants the house realistically afford to maintain it?
What will each person's cash flow look like after the divorce?
A dollar is not always a dollar in divorce.
Two assets can have exactly the same value on a balance sheet and very different tax characteristics, liquidity and long-term economic value.
A Good Divorce Settlement Is More Than Two Equal Columns
As both a mediator and a Certified Divorce Financial Analyst® (CDFA®), I spend considerable time helping couples understand the financial characteristics of the assets and liabilities they are considering.
A $500,000 traditional retirement account is generally composed of pre-tax retirement dollars. $500,000 sitting in a bank account is something very different.
Two investment accounts worth the same amount today may have dramatically different cost bases and potential capital-gain consequences.
A home may have substantial equity but also carry a mortgage, property taxes, insurance, maintenance and other expenses that make keeping it difficult for one spouse.
A pension may provide valuable lifetime income while providing little immediate liquidity.
The goal is not simply to make the numbers at the bottom of two columns match.
The goal is to help each person understand what he or she is receiving and how the proposed settlement may affect life after divorce.
Depending upon the complexity of the case, we may also identify questions that should be reviewed with the parties' attorneys, accountants, financial advisors, valuation professionals, pension specialists or other professionals.
The couple remains responsible for making the decisions. My role as a neutral mediator is to facilitate the discussion, help organize and understand the financial information, and assist both parties in evaluating their options.
What If There Are More Debts Than Assets?
Now consider a very different couple.
Instead of a multimillion-dollar estate, imagine that their marital balance sheet shows $180,000 of debt.
There may be credit-card balances, student loans, personal loans, vehicle loans, unpaid taxes, a mortgage or other obligations.
Their income may already be stretched supporting one household. Divorce means finding a way for essentially the same income to support two.
That financial situation can be every bit as complicated as a high-net-worth divorce.
Simply saying, “You take half the debt and I will take half,” may not produce a workable financial outcome.
Instead, we can examine the entire financial picture.
What are the interest rates?
What are the monthly payments?
Whose name is attached to each obligation?
Are assets available that could eliminate high-interest debt?
Should the marital home be retained or sold?
Can a mortgage or other obligation be refinanced?
Should one spouse assume more debt in exchange for receiving additional assets?
Which debts should receive priority?
Most importantly:
Will the proposed settlement actually work when each person begins paying the bills in a separate household?
Divorce May Provide Financial Planning Opportunities
In some circumstances, the divorce process itself creates financial planning opportunities that deserve consideration.
Retirement assets are a good example.
Certain employer-sponsored retirement plans can be divided through a Qualified Domestic Relations Order, commonly known as a QDRO.
Depending upon the plan and the circumstances, a spouse or former spouse receiving retirement assets under a QDRO may be able to roll eligible amounts into an IRA or another eligible retirement plan. In some situations, the alternate payee may instead receive some or all of the distribution in cash. A taxable QDRO distribution to a spouse or former spouse generally is not subject to the additional 10% early-distribution tax that otherwise can apply to early distributions from qualified retirement plans. The distribution may still be subject to ordinary income tax.
That distinction can create an important planning opportunity when a couple has substantial retirement assets but very little cash and significant debt.
For example, rather than automatically leaving both spouses carrying high-interest debt for many years, the couple may want to evaluate whether retirement assets could be incorporated into the overall settlement in a way that creates liquidity.
That does not mean cashing out retirement savings to pay debt is automatically the right decision.
The income-tax consequences, loss of future retirement growth, interest cost of the debt, cash-flow needs and remaining retirement resources all need to be considered.
There is another important distinction: IRAs are different from qualified employer retirement plans. An IRA interest can generally be transferred between spouses or former spouses incident to divorce without the transfer itself being taxable when properly structured. However, the special divorce-related exception to the additional 10% early-distribution tax that applies to distributions from qualified plans under a QDRO does not have a comparable application to an early IRA withdrawal simply because the withdrawal is related to a divorce.
These distinctions are exactly why financial analysis can be so important before the settlement is finalized.
Where CDFA® Analysis and Mediation Come Together
This is where my work as a Certified Divorce Financial Analyst® (CDFA®) complements my role as a divorce mediator.
We are not simply putting assets and debts into two columns until the numbers are equal.
We can look at how the pieces interact:
Cost basis. Taxes. Debt. Interest rates. Retirement assets. Home equity. Liquidity. Cash flow. Maintenance. Child support. Insurance. Future financial needs.
And ultimately, we can ask the question that matters:
What might each person's financial life actually look like after the divorce?
For a high-net-worth couple, that may mean carefully considering how to allocate investments, retirement assets, pensions and real estate while recognizing differences in taxation, liquidity and future value.
For a couple who is deeply in debt, it may mean identifying ways to reduce high-interest obligations, preserve retirement security where possible and create two sustainable household budgets.
Both require thoughtful financial analysis.
Children Add Another Kind of Complexity
Approximately 85% of the divorce cases I mediate involve children.
For those families, some of the most important decisions have nothing to do with the size of their estate.
Parents need to address parenting time, decision-making responsibilities, holidays, vacations, school, extracurricular activities, communication and how they will share the costs associated with raising their children.
A $12 million balance sheet does not make those conversations easier.
Having few assets does not make them less important.
Mediation Is About Understanding Before Deciding
Whether I am working with a couple dividing a multimillion-dollar estate or a couple trying to manage substantial debt, my starting point is fundamentally the same:
Understand the entire picture before making decisions.
What do you own?
What do you owe?
What are the characteristics of those assets and debts?
What are the potential tax consequences?
What does each person need?
What are your priorities?
What might each household look like after divorce?
And, if you have children, how can you create arrangements that allow your family to move forward?
After more than 800 mediations, I have worked with couples across a remarkably broad range of financial circumstances.
The numbers change. The complexity changes. The solutions change.
But the value of having a structured process in which both people can become informed, evaluate options and make their own decisions does not.
Whether your marital estate is $12 million, $1.5 million, $150,000, or your balance sheet is $180,000 in the red, mediation provides a place to understand what you have, understand what you owe and thoughtfully determine where you go from here.
Divorce mediation is not defined by the size of your estate.
It is about having the information, professional resources and structured process necessary to make thoughtful decisions about your family and your financial future.
Important Disclosure
The information provided in this article is for general educational purposes only and is not intended as legal, tax or individualized financial advice. The Center for Divorce Resolution and Sharon Count, when serving as mediators, act as neutral facilitators and do not represent either party or provide legal advice. Parties are encouraged to consult with their own attorneys, tax professionals, financial advisors and other appropriate professionals regarding their individual circumstances.
Tax laws, retirement-plan provisions and individual circumstances vary. Any strategy involving retirement assets, QDROs, distributions, transfers, debt repayment or tax consequences should be evaluated based upon the applicable plan provisions and the parties' individual legal, tax and financial circumstances before implementation.
CDFA® and Certified Divorce Financial Analyst® are certification marks of the Institute for Divorce Financial Analysts® (IDFA®).