Plan Performance

Manage the Funds Podcast

Expert insight on the financial topics that impact your bottom line

Preparing for divorce: individuals


Listen as we discuss the ins and outs of finances and divorce: pre-planning steps to consider before you get married; short-term and long-term financial needs if you’re going through a divorce; steps for older divorcing spouses; pros and cons of mediation and litigation; and the importance of using professional advisors. Guest host: Leslie Satterlee, Attorney, Partner at Woodnick Law

Michael Carlin

This is Michael Carlin, President of Henry+Horne Wealth Management with the Manage the Funds Podcast. This is part two of everything you need to know about divorce and the finances behind it. We are pleased to be joined again with Leslie Satterlee, Partner at Woodnick Law Offices.

I’m real excited about everything financial, but I’m real excited about the divorce part of the conversation, because so many clients run into the office and we often see money in transition. In transition could mean a death, birth, business sale and divorce is one of the most common. We see it from both sides – a spouse who is in the know and one that is not in the know.

What I’m excited to do today is to put forth information for our public, our clients and those that are listening to begin to understand what divorce means for a financial situation. I really thank you.

Leslie Satterlee

I thank you as well. I think it’s always good when there’s the financial aspect and advice from the flip side for us too.  We have people pop in and they don’t understand the finances so, they go hand in hand.

Michael Carlin

Right, it’s something that’s not discussed enough. So, we’ve covered your resume and your greatness in the prior podcast. Leslie is the best, that I can tell you. We’ve had many happy clients that have worked with her before. We talked a little on the divorce statistics in the prior podcast, again just to reiterate about half of marriages end in divorce more specifically it’s about 45.5%, second marriages you’re looking at 2/3rds ending in divorce and third marriages are 75%. With that kind of a track record, why is anyone getting married? It seems silly that we’re not having this kind of conversation more often.

Leslie Satterlee

I often say, why isn’t there some kind of class you can take before you are married about how you handle marriage and finances. It is what it is. We are left untangling this mess once the marriage has deteriorated.

Michael Carlin

Often things are not done in the beginning so, why don’t we start in the beginning because most of the time we are in it is at the end. If we could do a public service, it would be providing education to the listeners of the podcast: it would be beneficial emotionally and financially to do things in the beginning. So, what should people be doing from a financial perspective before they get married.

Leslie Satterlee

I think the most important thing here in Arizona is to understand the concept of community property. So, community property in Arizona is any property acquired during the marriage. There are caveats to that, or exceptions to that, if you get an inheritance during the marriage that could be your separate property. The problem that parties run into is they don’t understand that there’s these different buckets. There’s your second property bucket that really doesn’t end up getting divided and shouldn’t be divided in a divorce context and there’s the community property bucket which does get divided. The problem arises when those buckets are poured out and mixed all together. So, you cannot be mixing your separate property with your community property. If you do that, it spells out big trouble in the end of your divorce.

So, understand your property, the one you had before the divorce and the one you had after the divorce. You can protect it and keep it separate. If you can’t, you need to make sure you’re documenting how much you had at the beginning of the marriage, the statements, the document and the financial records. Keep those because you might need them if something happens if a divorce occurs later in the marriage.

Michael Carlin

If you come into the marriage with savings and investments accounts, should you not rush in to making these joint accounts? Is that what your kind of saying?

Leslie Satterlee

Exactly, and it could be less obvious than that. Let’s say you have that savings account before the marriage and you continue to keep that savings account and you don’t add your spouse’s name to it but you start to deposit your pay checks in there or a portion of your paychecks during the marriage. That account could become so mixed up between your separate property pre-marriage funds and your community property joint funds that a court cannot figure out what’s community. It’s all comingled and assumed to be community property in a divorce.

Michael Carlin

We’ve had a client come in and she had half a million dollars from her aunt and it was titled in her name, but she got a lot of pressure from her spouse over time wondering why we just don’t put this in our name. What’s the big deal? We’re not getting a divorce. So, she does it. They had it in a joint name. They created trusts. So, the divorce came and she was saying it’s just my asset from my inheritance, but it didn’t go that way. That’s not how the asset was split because it was split in half.

Leslie Satterlee

There are a lot of presumptions that pop up with gifting separate property when you either add someone’s name to an account or financial asset or like I said, you comingle that asset. You have to be careful with that. There are certain assets that you can’t prevent that from happening. Think about your 401(k). It’s not where you’re going to stop contributing once you get married. That’s why documenting how much was in there on the date of marriage is vitally important.

Michael Carlin

Right, because what we’re trying to do is take a snapshot at that date of marriage. Say my 401(k) was X and I got divorced and my 401(k) is Y and here is the difference. We are establishing giving someone half of the difference here in Arizona.

Leslie Satterlee

Correct. A lot of people don’t understand that, and they need to be aware before entering a marriage that a lot of times title for property is very important yet misunderstood. So, how you are owning a house with your spouse will determine how its divided in a divorce. The most important asset that you need to make sure the title is exactly the way you intend it to be is your house. With a lot of other assets, it doesn’t matter whose name a bank account is in. It only matters where the source of money came from. With a house with real property, titling becomes very important. People don’t understand that.

Michael Carlin

Let’s spend a minute or two on that. It seems clear to me that a couple gets married. They had nothing and then over time they go and buy a house together. They’ve accumulated that asset. They buy a house together. There’s no giving an advantage over anyone else.

Leslie Satterlee

What about the scenario when one spouse has bad credit? So, they can’t and don’t want to be on the mortgage because they are going to get docked with interest rates or whatever else. So, the parties are looking at getting a mortgage in one person’s name. A mortgage in one person’s name – the title company might say okay, why don’t we do this as the house in one person’s sole and separate property. They’re married but it’s one sole and separate property. The other person says okay, we’re just trying to qualify and get a better rate on our mortgage. I’ll sign the deed over to you right now. Guess what? That money that bought the house was community in nature and the person who signed off on the house who said I don’t have any interest because of the disclaimer deed just gave away that asset to the other spouse. All just to save some money and they didn’t know they were doing it.

Michael Carlin

That makes me very sad. Let’s say you’re the spouse that did that. Can you unwind stuff like that or are you fighting an uphill battle?

Leslie Satterlee

You might be fighting an uphill battle unfortunately. There is an out because you could argue that since that house was titled, there are still community monies that went to pay down the mortgage and the principal. So, there’s a community claim to equity in the house, but the actual characterization of the property will probably be separate property.

Michael Carlin

So, can I ask – what if we have a couple, it’s a second marriage, one spouse owns a house then the other spouse moves in to the house. Are there rules you would give to that spouse who owned the house to make sure that property stays on their sole and separate balance sheet?

Leslie Satterlee

Obviously, number one – be careful about doing anything with the title. Keep it in your sole and separate property name. Don’t do anything to transfer it over to the community. The second one – if you want to try to prevent any kind of community interest claim, you’re going to have to see if you had enough sole and separate pre-marriage assets in a bank account to be paying the mortgage from there instead of a new bank account or wages or income earned during the marriage paying down the mortgage. That’s really the issue.

Michael Carlin

So, we are saying that, I owned the house before the marriage? Yes, it had a mortgage on it and the mortgage is just in my name but my wages that I earned while we were married that was community property and I’m using that community property to pay the mortgage.

Leslie Satterlee

So, it creates the ability for the spouse to be making a claim for community interest in basically the production of the principal of the house and the growth and equity of the house. You need to balance if it’s worthwhile to be using your separate property funds to do that versus a potential community lean theory on it.

Michael Carlin

What is a community lean theory?

Leslie Satterlee

It’s a separate property asset that the community has some sort of separate claim or lean on the equity in the house based upon what the community has contributed in. There are specific math formulas based upon case law that determines exactly what that is.

Michael Carlin

So, before you get married, we want to make sure that you are having financial discussions – whether you own your business or not – but you’re going to have plain, clear discussions about finances, prenups. Were you recommending that its part of the path?

Leslie Satterlee

I would say the most common instances of prenups would be subsequent marriages. Maybe it’s your second, third or fourth. That’s very common. Either you own a business, or you have significant assets going into the marriage or you are anticipating or have already received inheritance from family. Those are usually the instances where prenups come into play. There could be prenups even if both parties don’t have any assets or don’t anticipate having any assets. They just know that they don’t want to have to worry about this in case a divorce comes around.

Michael Carlin

You are more than likely not to have a divorce when you have a prenup. Has a study been done on this?

Leslie Satterlee

Of the prenups I’ve helped with, I haven’t seen anyone come back around here to get divorced.

Michael Carlin

I want to skip over to the part where divorce is approaching. When they walk into my office, some of the things I tell them, let’s get our arms around where you are right now. So, I tell people lets go on www.freecredit.com. You go and grab this holistic list of your accounts, credit cards and your history so you get a snapshot of where your finances are, but there’s probably a lot of things that you recommend that they do in terms of we’re here, it’s happening, before we start to prepare.

Leslie Satterlee

Right, definitely try to get your documents together and do as much research as possible about what you have is a very important tool. Apart from the credit report, the tax returns are a wealth of information. You can see what kind of 1099 income you have which might lead to interest and dividends and accounts you didn’t know about. There’s just a lot of information that you can get from a tax return. So, if you can grab some of those, I highly recommend getting that.

Other than that, you do want to start thinking about how things are going to happen moving forward. If you know that your spouse is the one thinking of divorce, you want to start watching your bank account. It’s not unheard of that a bank account gets drained right before a divorce is filed because someone is nervous about where the money is going to go. I would never advise clients to do that. It can come back to bite you in a not so pleasant place later. You also want to look for an uptake in spending and see if there are any abnormal things on with the finances.

Michael Carlin

I’ve had client situations where was a bank account with considerable amount money – more than six figures in it – and one spouse emptied the entire account and put it into their own separate account and the banks let him do it. The very first time I saw it happen, it took me by surprise. How can you take this joint account and take all of the money out? My client is using this money to pay all the bills and to live? How does this happen?

Leslie Satterlee

People should know that it doesn’t mean that the money is off this table for the divorce. It’s still going to be traced and divided even if you put it into your own name. I would caution any one from doing anything but removing half of the balance. Even then it could cause problems because of auto bills coming out. Trying to keep the peace with making sure that you both trust each other through the process because if you want to get to an amicable resolution, which I know it doesn’t always happen, but it’s certainly not going to happen if you monkey around with the finances.

Michael Carlin

The key is: gather the data. Now, you find yourself in the position where you understand some basics. Now you need to figure out mediation or litigation. We talked about it in the prior podcast. We heed your words and your wisdom about mediation in many cases is a better path. Litigation in some cases a little more difficult. So, let’s talk a bit about attorney litigation on the individual side it’s such a hard process.

Leslie Satterlee

It is hard, and when you have high assets, or you have a lot more assets than the normal run of the mill people, going to mediation is still a better option. I would advise, at a minimum, have a consultation or advice before doing it. I think having an attorney present at mediation is very helpful when you have more complex issues on the table. Just so you understand the role of the mediator is to help you come to agreements, not to give you any legal advice.  They are the neutral person in the settlement negotiations.

Michael Carlin

So, they only have to say, do we agree? It doesn’t have to be a perfect resolution.

Leslie Satterlee

Exactly, they are only trying to get you to come to an agreement. That’s one of the things that we didn’t touch upon in the prior podcast is when you have high asset parties, mediation is often the place where you have more experienced people in those asset cases. You go to the judge who has 900 cases. Very few of those are cases with assets because they settle before they get to the judge’s door. Imagine this, if you are the out spouse and you have a very high-income wage earner on the other side, someone who owns his own business, and you’re asking for spousal maintenance award of over $7500. Let’s say you’re asking for $10,000 a month. You are asking a judge who makes that same amount of money or less to order you spousal maintenance

Michael Carlin

Their context for understanding that is challenging. By the way, out spouse and in spouse – in spouse is the person is the person who understands the finances and may be the primary wage earner; out spouse is the one who would have a little less of that. First of all, I did not realize most high asset cases don’t ever hit the judges desk.

Leslie Satterlee

They don’t. That’s why you want to think about where am I filing? Here in Maricopa County alone there are four different courthouses. There is one in Mesa, Surprise, North Phoenix and downtown. There are courthouses that hear more of the high asset cases than others. If you are potentially able to file in another county, we’ve had cases where they’ve been on the outbound counties where there are no experts, no business valuators, there are no forensics accountants. So, the likelihood of them hearing or experiencing these cases or complex issues is very low. Even having a qualified mediator in those counties is going to be difficult.

Michael Carlin

So, before you get all excited and charged up to say I’m litigating, I’m taking this person to court and we’re going to battle it out, I’ve had enough and I’m hiring a lawyer, I’m not going to mediation. Hold on. We’re telling you to breathe and if you’re listening to this podcast, it’s the first step to saying mediation has a lot of value in the divorce process.

Leslie Satterlee

Absolutely.

Michael Carlin

Now you’ve gone through mediation or unfortunately litigation. We hope you’ve had counsel at the beginning and throughout that process. Before the divorce goes final, there are a lot of things financially that people need to do to figure out the short term, the long term and all of that stuff. One of the things that we would have people do is we would have them use is a bunch of different applications. We have one at Henry+Horne Wealth Management, and Mint is another, where you have software where you’re doing your banking where it pulls in all of your expenses. One of the things that we don’t want people to be surprised about is your finances may have been very comfortable when married and all of the sudden you’re not going to be adequately prepared for what’s next.

Leslie Satterlee

It’s the concept of scales of economy. You have a certain number. A set income that you have and now you are dividing it between two different expenses. Yes, you really do need to understand that, and you need to know what your expenses are. Understand that because that’s going to play into potential support issues as well.

Michael Carlin

It does? Because again, I think what we’re referring to, if I’m not wrong, is the better you understand your own expenses, it’s going to give you and your support team your best effort to explain how much you need.

Leslie Satterlee

So, here in Arizona, there is the concept of spousal maintenance. It’s also referred to as alimony or support. With that, you have to qualify first. You have to show your income or your assets available to you are insufficient to cover your reasonable needs, or you have a physical or mental disability that prohibits you from working or you have a marriage of long duration and you’re not expected to go back to the workforce

Michael Carlin

Is the duration more than 10 years?

Leslie Satterlee

In Arizona, there’s no set year limit.

Michael Carlin

Oh no. Welcome to Arizona.

Leslie Satterlee

It’s up to the discretion of the judge, which again becomes vital in consulting with an attorney who has experience. There’s no formula. There’s no set if you have this, then you’re entitled to this. It’s all discretionary.

Michael Carlin

So, what you’re doing then is, one spouse is saying listen, if you have your stuff in a software, this is what my travel budget is all the way to my food, all the way to my utilities, the kids’ expenses, all that kind of stuff. The more data you have, and I’m sending you all that data here to say here are my needs, then you’re helping make the case for to getting out of the support.

Leslie Satterlee

So, if you’re able to qualify, then you do look at all of those other factors. What is your ability to make income, what is your spouse’s ability to make income, what are your expenses and what are their expenses? How much does it cost to have health insurance because that’s usually going to have to be broken up and maintained separately and on and on. There’s a handful of different factors that the courts look at, so understanding the expenses is huge.

Michael Carlin

Let’s say you’re the out spouse. The out spouse is not someone who is always in the know. Can you help explain lifestyle? What if that person is used to taking two really nice vacations a year. Is that a “so what?” Is there really something to that? What if that person is used to nicer cars? Is that too a “so what?” Do they have to get used to something less?

Leslie Satterlee

So, one of the factors that the courts look at is the standard of living during the marriage; however, you have to understand if you’re breaking up income into two people, you’re not going to be able to enjoy the same luxuries that you did before. So, does it mean that you have to cut out all that stuff? No. Does it mean that you’re going to have to budget and be a little more frugal? Yes. It’s hitting that happy medium of having some of that in there but understanding that if you’re asking the court, and again this goes back to mediation versus the litigation concept – if you’re asking for your extravagant car payment to be included in your expenses for spousal maintenance, it might be tough to get a judge to agree to a reasonable living expense.

Michael Carlin

I had one client who had a spouse who said that their annual food need was over $4,000 a month. Wow, are you training for body building? It was a grossed-up look back at all the whole foods and all the expensive restaurants. Stuff like that doesn’t hold up. Maybe there are cases where that does happen. When you’re trying to gather all your information, you’re trying to figure out all the expenses and what’s your next move. We have two different kinds of spouses. Sometimes it’s a dual income and in some cases, it’s not. Are there any kinds of rules of thumb that help a person figure out what life is going to look like financially? Can they count on half of everything?

Leslie Satterlee

On the assets, again so long as they’re characterized as community property, then they can assume it’s going to be half of whatever is community property. Talking with a financial planner and understanding that half of everything could mean that a big chunk of this could be tied up in retirement assets. It might not be available to you right away or if you tapped into that, you’re going to pay penalties in taxes on top of it. So, how much is liquid versus illiquid funds? How much do you have to live off, and what can you invest and maybe grow or get dividends from or interest in the future? Those are all very important considerations.

Michael Carlin

We spend a bunch of time with clients because you’ll have investments in businesses that are still forming and still growing. They’ve invested in a small biotech, or they’ve invested in something totally new or different, and they’re broker account portfolios. Again, some in retirement, some not. It is a delicate balance to figure out to say well listen, you could be splitting some of these assets, but it wouldn’t do you any good or you could be giving up some high growth assets as well.

Leslie Satterlee

Yep, or maybe you’re not thinking about the tax consequences of the assets you’re receiving. Is there going to be capital gains that you’re going to have to pay on some of this stuff? Are there taxes that you need to pay that you’re not taking under consideration? If you’re not taking that into account, it might look like it’s a 50/50 split. You take that all into account and one party ends up getting screwed.

Michael Carlin

To the same degree before you say, I don’t want that particular asset because the valuation came in very low. The valuation tells part of story. It doesn’t always tell you what growth prospect is. Again, one of our clients was one of the early investors in Offerup. If you’re not aware, it’s an app kind of like Ebay where you can sell or buy very quickly and easily. The company exploded but on the valuation of that asset, when that came in for the divorce, it came in low. Our client was the spouse on the other side. The one spouse was in the know. The in client said, oh go ahead – I’ll take this asset and you don’t worry about it. It really isn’t worth anything that we can sell it. Encouraging the spouse to not worry about it. You really need a plan and team in place to help you evaluate some of these things.

Leslie Satterlee

With some of these assets that are tough to valuate because they are brand new, or they are so tied up, or you have such a minority interest that getting any substantial value out of it and the divorce context may be hard, you can think about creative options where you can continue to somewhat hold on to it jointly even after the divorce. Then you have to think of all the implications of setting up partnership agreements or otherwise what you’re doing when someone wants to get out of the business or sell their shares. Those are creative type of options that you can consider.

Michael Carlin

Creative options are going to come when you hire professional expertise. Frankly that’s a good portion of the value that a good team brings you. So, as the divorce happens, you’re going to want to open up your own credit cards, your own bank account just in your name to start to establish credit and get some of these other records and beneficiaries taken care of.

Leslie Satterlee

You want to start separating out everything. There are some areas that you’re going to need to be careful. Before a divorce has started, you have a little more leeway to do things such as removing money, selling things and taking someone’s name off of insurance or beneficiary designations.  Once the divorce has started, you have to be careful. Automatically what goes into effect is the preliminary injunction. The preliminary injunction says, okay parties, neither one of you can do anything to sell, hide or get rid of any assets while this divorce is pending unless there is an agreement and you can’t do anything to change beneficiary designations. You can’t take someone off of health insurance. You can’t take them off of your 401(k). Those types of things are no nos. With some divorce planning, you might be able to do some of those. Again, whether or not it’s advisable is a case by case basis.

Michael Carlin

Be careful before you change any beneficiaries to soon. Right?

Leslie Satterlee

Well, when you’re married the spouse would have to sign off on it. So, that’s going to be a big red flag if you ask your spouse to do that.

Michael Carlin

For older spouses, we call those gray divorces. Those types are more common and I’m seeing clients that have been married 30, 40 years getting a divorce. As jarring as that is emotionally, we aren’t still dealing with child custody issues.

Leslie Satterlee

No. We’re not, but we are dealing with issues that delve into how are we going to pay for expenses for long-term care. Maybe the divorce is happening because there are issues with someone being sick and they’re trying to do what they can to protect assets. That becomes an issue. Better planning for how you’re dividing up retirement assets. Usually with these older divorces, there are pensions involved. Obviously Social Security is already in play.  So, there are different considerations that come into play when you have older divorces with older couples.

Michael Carlin

So, that is where forecasting what your finances are going to look like and how they evolve comes into play. It’s important for everyone involved to understand the finances that you have. Your ability to work a long time is reduced, so what you see and what you have is critical that you manage and understand it correctly. I see issues where people may have to turn back to the workforce.

Leslie Satterlee

Or, they have retirement plans and that need to be postponed now. That’s an unfortunate consequence of this because you’re figuring out how to support two different households at this point and there might still be qualification for spousal support.

Michael Carlin

Let’s refresh. In Arizona, what’s the typical spousal maintenance situation look like in gray divorces? Is it half the years you’ve been married?

Leslie Satterlee

When you’ve had a long-term marriage in older couples, there is one or two things that happen. One, if you’re near the age of retirement, they might give a duration of spousal maintenance to retirement age, then assume at the point they will be drawing on their retirement assets and have Social Security income. The other common order might end up being that it’s an indefinite term and that sounds very scary because it’s open-ended and it sounds like forever. No one likes that. What it really means is, we don’t know what the end date is going to look like, so the person who is paying the obligor will have to come back to court and ask the court to modify or terminate once they’ve stopped working or something has changed with their ability to pay. The reason why they do this – it’s hard even if you put a duration of half the marriage on a 40-year marriage. That’s 20 years and they may be in their mid-90s at that point, so that doesn’t make sense. If you end up getting an indefinite term, that would be the problem. So, negotiating and sometimes it’s better knowing the duration than not knowing the duration.

Michael Carlin

You probably run into situations where they say, I’m retired, I’m retiring now. I can only imagine some of the games that go on. Okay, I think what we’ve done is broken down what you should be prepared for emotionally, mentally and financially should you be preparing for a divorce. Do you want to help sum it up in terms of what people need to do? We have all kind of different things beginning, middle and end components.

Leslie Satterlee

One, get your support system in place. Your support system can include emotional support as well. I am not a counselor. I don’t provide the mental health aspect. Pay someone cheaper than me for that. So, get your team together. That also means looking at your finances and understanding your finances. What do they look like with assets being divided? What do they look like with income being divided? What are we looking at for support? Figure all of that out – at least understanding helps tremendously with the discussion on how we are going to divide it.

Michael Carlin

Get the information and data.

Leslie Satterlee

Make sure you are consulting with all the right people. It could be the tax attorney, bankruptcy attorney, corporate attorney or financial advisor. You never know who you’re going to talk to in a divorce context.

Michael Carlin

The last topic I would like for you to touch on is the mood or the communication with your ex-spouse. How you handle yourself that may end up dictating how expensive and financially difficult and how financially and emotionally demanding it is. In terms of the emotional aspect of it and your behavior and words of wisdom there?

Leslie Satterlee

It’s a big factor. Obviously, it’s emotional and you’ll want to unleash your anger on the other side. It’s rarely going to turn out the way you want it to. You probably won’t feel better after doing that. So, keep things civil, straight forward and to the point. You don’t need to be dragging in emotions at this point when you’re talking about the divorce litigation. This is not the place to do it. You’re really looking at this from a business point of view.

Michael Carlin

You’re amazing Leslie. You did it again. Leslie Satterlee from Woodnick Law. Go to www.woodnicklaw.com. Thanks for listening and we will talk to you soon.