GPSolo, October/November, 2008, a publication of the American Bar Association.
By Marlo Van Oorschot
Marlo Van Oorschot operates a solo practice in Los Angeles, California, concentrating in family law litigation and mediation. She may be reached at firstname.lastname@example.org.
According to the latest nationwide statistics, 36 percent of first time marriages end in divorce. In some states, the divorce rate is as high as 64 percent. For each subsequent marriage, the divorce rate is even higher. With that being said, when should someone start planning for the possibility of a divorce? For many people it starts even before the marriage; for others, it is at the first sign of serious problems in the marriage. Either way, planning for such a possibility, while not romantic, is important to the financial future of each spouse and their children.
Before Marriage: The Premarital Agreement
Premarital agreements, also known as prenuptial or antenuptial agreements, are used to opt out of a state’s law that would otherwise govern the characterization and disposition of assets and debts acquired during a marriage (and, in some states such as California, spousal support). The agreement becomes effective upon marriage. Each state has enacted its own law relating to the content of these agreements as well as the procedure for entering into these agreements. California, for example, requires the prospective spouses to provide each other with a “fair, reasonable and full disclosure of their property and financial obligations.” California also requires that the agreement be given to the other prospective spouse seven calendar days before it is executed and that each party either (1) shall have a lawyer of his or her own who will attest the person is voluntarily and knowingly entering into the agreement or (2) shall voluntarily and knowingly waive counsel.
These agreements are to be arm’s-length transactions; however, given the long timeline on wedding planning and the pressure and expense of a wedding, many lawyers question the ability of such an agreement to really be an arm’s-length transaction unless it is negotiated well in advance of the wedding. For this reason, many attorneys no longer participate in these agreements, and others have made a niche practice in representing individuals in the creation of such agreements.
During Marriage: The Postmarital Agreement
A postmarital agreement, sometimes referred to as a postnuptial agreement, serves a similar purpose as that of a premarital agreement, except that it is executed after a couple is married. In some states, such as California, there is no statutory law to provide a lawyer with direction on the creation and enforcement of a postmarital agreement; therefore, most lawyers will work conservatively and follow the statutory requirements regarding the creation of premarital agreements and basic contract law. One important difference lawyers must be aware of between a premarital and postmarital agreement is that in some states, during a marriage, fiduciary duties apply between the spouses similar to the fiduciary duties between a trustee and a beneficiary. This means there is a heightened obligation the spouses owe to each other when they enter into a postmarital agreement that they did not owe to each other prior to the marriage.
Divorce and Life Thereafter
Every couple that decides to divorce must pick a process to resolve disputes. The options are litigation, mediation, or collaborative divorce. All lawyers are familiar with the pros and cons of litigation and mediation; however, many are not familiar with collaborative divorce.
Collaborative divorce. Collaborative divorce (sometimes referred to as collaborative law) is somewhat of a hybrid between mediation and litigation because the parties must have legal representation throughout the process, yet there is a commitment by the lawyers, parties, and any retained experts that the case will not be litigated. If a party decides they do not want to remain in the collaborative divorce process and would rather litigate, then the lawyers and experts must withdraw from the case. The theory behind such an agreement is that the parties, lawyers, and experts are committed to the settlement of the case. In ABA Formal Opinion 07447 (August 9, 2007), the American Bar Association formally supported collaborative law and the ethical nature of lawyers contracting with their clients to this process provided there is full disclosure of conditions to the client and written consent. Many states and counties have specific rules about collaborative divorce cases filed in their jurisdiction.
In many states, lawyers have a professional responsibility to advise clients about alternatives to litigation. This responsibility could not be more important than in a divorce because a divorce is not just the dissolution of a marriage—it is the reorganization of a family. Litigation is a harsh, adversarial process handled in overcrowded courtrooms that often leaves the parties bitter, angry, helpless, and without the tools to manage the reorganized family. Needless to say, the cost of litigation far exceeds the cost of mediation or the collaborative divorce process.
Co-parenting and custody. There is almost nothing more difficult for a client than having to co-parent with a former spouse — especially if the reason for the divorce was differing views on childrearing. Regardless, the court usually mandates parents to co-parent and share in decision making about their children.
Approaches to sharing custody. There are two types of custody: legal custody and physical custody. Legal custody generally involves decisions regarding the health, welfare, and education of the parties’ children. Physical custody involves questions of where the children physically live and how much time they spend with each parent. The decision of how legal and physical custody of the children are shared is dictated by what is in the children’s best interest. The best interest standard is clearly broad and leaves the court with enormous discretion to make such a determination. Although there is guidance in the law regarding what is in a child’s best interest, determining the best interest for each child is fact specific and will vary not only from case to case but sometimes even from child to child within the same family. An example of how the best interests of two children in the same family can be different is when one child is disabled and the other is not, thereby giving rise to very different needs for each child. Often a lawyer and his or her client will consult with a child development expert to help assess the best interests of the child now that the child’s parents are getting divorced.
Custody is an area of the law where planning can be the linchpin to a party achieving future goals about where the children live, where they go to school, and how a parenting plan may develop. In determining custodial rights based on the best interest of the children, often a court’s paramount concern is for continuity and stability of the children, frequently dictated by the status quo just prior to the dissolution action. Parties should keep calendars or logs of the time each parent spends with the children as evidence of the status quo and beyond, thereby avoiding the “he said, she said” syndrome. It is also helpful if most communications between the parties take place by email and that verbal communications are confirmed by email where the communication is important to the party’s overall goals regarding the children.
Traveling with children. In California when a divorce or paternity action is filed, automatic restraining orders take effect that prevent either parent from traveling out of the state with a child without first having obtained the written consent of the other party or a court order. Other states may have similar requirements. Regardless of a state’s law, federal law requires the consent of both parents to obtain a passport for a child. Therefore, planning is critical if either party wants to travel with a child. The traveling parent should provide the travel itinerary, including contact information, to the other parent so the child can continue to have regular and continuing contact with the other parent.
Relocating with children. When a parent wishes to move with the children, a “move away” case ensues. Where children will live is dictated by what is in the children’s best interests. This is a highly complex area of the law that is usually not decided by the court without a recommendation of a mental health professional appointed by the court. Unlike the court, the mental health professional will have the opportunity to interview the parties, the children, the children’s teachers, doctors, and any other person who is deemed important by the mental health professional. The decision about whether or not a parent should be allowed to move with the children over the objection of the other parent will depend upon many factors, including the current custody arrangement, how bonded the children are with the parent who is not moving, and whether there is a detriment to the children as a result of the proposed move. Given this information, a party that wishes to move with the children or a party that wants to prevent the move of the children can benefit greatly from early planning. For example, the moving parent will need to have a well-thought-out plan for the proposed move, including where he or she and the children will live, where the children will go to school, who will be the children’s doctor(s), employment prospects, and costs of living in the new location. The parent who objects to the move must work to keep involved in the children’s lives, including their schooling, medical care, and friends, and maintain a high level of custodial time with the children.
How to reduce conflict. Reducing conflict between the parties is critical to a successful co-parenting arrangement. For many parents, co-parenting requires skills that must be learned by participating together in co-parenting classes or working together with a therapist who can help them hear and understand each other and can mediate a resolution to disputes. A therapist can also teach the parties tools to effectively handle future disagreements. Both parties must be committed to reducing the conflict and understanding the negative impact their disputes have on their children. If one party will not, or cannot, see the importance of co-parenting, then it is highly advisable that the party who has this insight take steps to gain the tools to manage the conflict to the degree possible. This is best done through participation in a group parenting class or individual therapy, which can start even before a dissolution action is commenced.
Property. Generally speaking, a state is either governed by community property laws or marital property laws. In community property states there are two types of property to be addressed in a divorce: community property and separate property. Community property is all earnings and accumulations acquired during the marriage plus any rents, issues, profits, and losses thereon; separate property is all earnings and accumulations acquired before marriage, after separation, or during the marriage by way of gift, bequest, or devise. All community property gets divided equally between the spouses. In non-community property states, property acquired during the marriage is “marital property”; however, it is not necessarily divided equally. In New York, for example, an “equitable distribution” of the marital property occurs using statutory guidelines, which may result in an unequal division of the property.
An important issue in a divorce is the character and division of the property. Property includes, but is certainly not limited to, real property, vehicles, antiques, collections, jewelry, financial accounts, investments, business interests, life insurance policies, pensions and other retirement vehicles, intangible assets such as copyrights and patents, tax refunds and liabilities, and debts whether secured or unsecured. Each item must be valued, taking into account, where appropriate, any actual or possible tax implications and any future rights, benefits, and obligations that might be associated with the asset and liability. This process often involves the retention of various experts to assist with preparing the case for settlement or trial:
- Appraiser: Determines fair market value of real property, art, antiques, collections, and investment jewelry.
- Actuary: Determines present value of defined benefit pension plans; allocates separate and community property interests in retirement plans.
- Pension lawyer: Prepares a Qualified Domestic Relations Order, which is necessary to divide an Employee Retirement Income Security Act (ERISA) pension plan.
- Business/corporate lawyer: Advises on and assists with the division or sale of business interests.
- Accountant: Advises on tax issues relating to the divorce and prepares separate tax returns for a party.
- Forensic accountant: Determines a party’s cash flow available for child and spousal support; traces separate property funds into and out of assets; determines the value of tangible and intangible business assets (assuming they have specific expertise in this area of work).
At the beginning of each divorce case, a client also should be advised to seek the help of an estate planning lawyer to revoke any family trusts held with the spouse, to change beneficiaries of an existing individual trust or will, or to prepare an interim will pending the finalization of the divorce. This is important because, in the event of a party’s death during the divorce, it is unlikely the party would have wanted his or her share of the property accumulated during the marriage to be received by the spouse, as well as a portion of the separate property.
Once the property has been identified and valued, the lawyer must work to understand the client’s goals and desires. Often, however, what clients want in a property settlement is not congruent with what they can afford or need for their future security. This often leads to a difficult and protracted discussion that is dependent on the lawyer and other professionals educating clients about what their financial future might look like.
The classic scenario is the wife who, as primary custodial parent to the children, wants to keep the family residence, even if this means she must allow her husband to be awarded many, or all, other assets (liquid assets, IRAs, retirement plans, business interests, etc.) to ensure an equal division of the assets in a community property state or an equitable division in a marital property state. In such a scenario, the wife must be educated about whether or not this division of assets is truly in her longterm financial interest. This arrangement saddles a wife with an asset that does not generate any income, whereas the husband receives assets that grow; to make matters worse, husbands historically have much greater earning capacity than wives. As a result, the husband’s future net worth soars owing to his earnings and the growth of the assets he was awarded in the divorce, while the wife’s financial picture declines because she is not able to grow her wealth through income or assets.
It is important both that the lawyer who handles divorces be well versed in all aspects of a possible property division and that other professionals such as accountants, actuaries, appraisers, and financial planners are consulted to provide clients with guidance in making the best decision they can by balancing wants versus needs.
Support and monthly budget. Child and spousal support is an important component of the dissolution of marriage. Although each state may have different laws about how support is calculated and what the time period for payment of each type of support may be, there is no question that it is more expensive to maintain two households than one. This often means that after the spouses have separated, and for some period thereafter, both spouses’ lifestyles may need to be reduced and/or budgeted differently. Post-dissolution, each spouse may very well need a financial management plan.
As part of the financial management plan, each spouse will have to make difficult choices about where to live, in what activities to participate, work hours and rates of pay, where to eat, where the children attend school, and proper management of assets to ensure an appropriate rate of return on assets. If the spouses are older, the financial plan must take into account possible pension distributions, Social Security benefits, skyrocketing insurance premiums and medical expenses, and the future loss of child support when the children are older. Of course, the tax impact of all these decisions must be considered.
Although many lawyers are able to assist a client in many of these decisions, the best practice is to retain an investment advisor, certified public accountant, or financial planner to help clients budget their lives now and into the future. This helps clients to understand the future impact of decisions made today.
Family law is different than most, if not all, areas of the law in that the case is not necessarily over just because a judgment of dissolution is entered. Child support, child custody, and often spousal support (depending on the law of a particular state) are modifiable. The issues litigated in the dissolution are often revisited with slightly different facts until the time when the court’s jurisdiction over theses issues has terminated. If lawyers and clients wish to modify a judgment with regards to these issues, they must do so by way of a court order to ensure the enforceability of the new agreement.
For better or worse, divorce is part of the fabric of our society. Although divorce is always a difficult life transition, the transition can be made smoother with a little planning.
Published in GP Solo, Volume 25, Number 7, October/November 2008 © 2008 by the American Bar Association. Reproduced with permission. • 3 All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.