Archive for Mark Hill

Divorce and Recession Fears: What’s Your Divorce Recession Risk Score?

By Shawn Weber, CLS-F and Mark Hill, CFP, CDFA

The impact of a divorce, especially a gray divorce, can be amplified and made more complex in a recession.

The headlines are troubling. Donald Trump’s escalating trade war with China, no signs of a Brexit deal in Europe and unrest in Hong Kong are all making the world’s stock markets nervous. Global gross domestic product is falling, and recession fears are rising as we approach what will be the first economic downturn since the Great Recession of 2009 in the next 18 months.

Interest rates are sending an early warning. Ever since the U.S. two-year/ten-year yield curve inverted on August 14, the news media are a flutter about a possible looming recession. Every recent recession has been accurately preceded by this economic milestone.

NOTE: If you need a primer on the Inverted Yield Curve,  read the Forbes article by Carmine Gallo, “How The Finance Prof Who Discovered The ‘Inverted Yield Curve’ Explains It To Grandma.”

Many knowledgeable financial experts believe we are heading for a recession. There’s some disagreement about timing, but there is consensus our economy behaves cyclically.

We’ve been enjoying an unusually long ten-year economic expansion. Things have been going great, but eventually the law of gravity applies and what goes up comes down. Markets periodically correct. It’s not a question of whether a recession is in our future, it’s a question of when and how deep it will be.

Family law professionals witnessed the devastating  effects of  the Great Recession on clients. While an upcoming recession is unlikely to be as staggeringly awful as in 2009, there are some important lessons for people considering a divorce in the near future.

If you fall into the “Grey Divorce” category (people choosing to end their marriage in their 50s or later), you could be even more vulnerable and need to pay extra attention. If you have created retirement portfolios and diligently invested, assumptions by you and your financial advisors regarding future returns and safe withdrawal rates may suddenly no longer be valid.

What Is Your Divorce Recession Risk?

If you own a business, a recession could have a significant impact on you and your family, especially if a divorce is on the horizon.

For people considering a divorce in uncertain financial times, understanding what happened in the last recession can inform your decision now.

Do you own a business? You have significant reason to be concerned. The 2009 experience showed us how recession can impact divorce decisions in two major areas: falling prices and declining income.

Falling Prices

Things that can go down in value include real estate, retirement accounts, stock accounts and business assets. When your assets decline in value, it impacts your divorce decisions. There simply will not be as much money to divide.

Declining Business Value: Are You Vulnerable? 

Is your business safe? Don’t answer too quickly.

In the last recession, people in the real estate and banking fields were shocked to be laid off. Next time, we see the potential for another round of U.S. business failures. It all comes down to too much debt. Since interest rates have been at historically low levels for a decade, and since banks like to lend in the good times, many businesses have become overleveraged.

The debt amassed in recent years is staggering, but even in today’s strong economy about 20 percent of U.S. companies still cannot make their loan interest payments from cashflow. The only way they can pay their interest is to constantly refinance. In a recession, this situation worsens, putting as many as another 20 percent of companies at risk. What happens if your sales drop in a recession, and you can’t get a loan to tide you over? Your company may not be as solid as you believe.

During the Great Recession, banks were not lending money.  They were even pulling existing loans, creating chaos for corporate finances. Banks are happy to lend money in good times, but in bad times they can get quite stingy with their lending. We could easily end up with nearly half of all American businesses having difficulty borrowing and unable to make loan payments. If they cannot borrow money to keep the doors open, they will go belly-up. By “they,” we could mean YOU.

Businesses of all sizes were devastated by the actions of their bankers in 2009. Companies failed, and workers were fired. In addition, many self-employed people who once ran strong, profitable businesses found they had nothing left.

In the next recession, we predict that the most vulnerable businesses will be those heavily involved in imports and exports, or in high technology. Trade wars create uncertainty which restricts buying and selling activity. With tech businesses, we are doing what America has a habit of doing: turning our heroes into goats.

How Healthy Are Your Retirement Assets?

Many people are not aware how vulnerable their retirement assets are to drops in the stock and bond markets. If the market loses value, your retirement assets lose value.

In an impending divorce, you need to assess whether your retirement plans can survive a recession. We believe you face the greatest risk if your portfolio is heavily exposed to technology companies, and businesses involved in import/export activities. Tip: if you own stock mutual funds, you are exposed.

Watch For Falling Real Estate Prices

Recent strength in the real estate market should not blind people to the reality of dropping prices. Current market strength is a result of the incredible low interest rates available. Although experts predict interest rates will remain low, even modestly higher rates can make real estate unattractive or even unaffordable. Many marriages have a significant amount of their net worth in the family home. When prices fall, there is less to divide, and sometimes not enough to live on.

Are Your Financial Assets in the Recession Crosshairs?

In a recession, nearly anything can happen.

In a recession, anything you own can decline in value. In some cases, property you count on selling and dividing in a divorce settlement won’t sell at any price you can accept. If your assets or employment are vulnerable to market forces, you may want to reconsider the timing of your looming divorce.

Loss of Income and Cash Flow

Are you vulnerable to a loss of cash flow due to recession?

Typically, recessions mess with people’s ability to pay their bills. With recession and divorce, people lose their liquidity in two key ways: loss of financing and loss of income. Additionally, when people already overspend, a loss of income or financing makes life all that much harder.

Preparing For A Loss of Access to Financing

In the last recession, banks became unwilling to make loans, including real estate and business loans.  Consider BEFORE a recession hits whether to borrow money now while lending is available. In 2009, we advised clients to pull money from their line of credit before the bank cancelled the line. It was good advice, because the clients were able to ensure they had cash before it became inaccessible.

What If Your Income Drops?

Consider carefully whether your business or your employer could be in the crosshairs. In the upcoming recession, the most vulnerable businesses will be those involved in the tech industry, manufacturing, farming or retail. Remember, if it costs more money to bring in or send out from the United States, manufacturers who rely on foreign trade will suffer and jobs will be lost.

Can You Handle a Change In Your Current Lifestyle?

If you enjoy spending money on luxury items to maintain a lavish lifestyle, it could come to a screeching halt in a recession – especially if a divorce is involved.

Many of our wealthier clients suffer from “affluenza.” People are feeling flush, consuming more and saving less. A recession will likely reduce income for many of these people. Costs will increase due to ongoing trade wars.

After a divorce, both clients will consume more. Two households cost more to maintain than one. When there is less money to go around and things cost more, families with higher spending patterns are hit much harder.

How will you balance your own needs together with the needs of your children? Will you be able to afford expensive activities for the kids like riding lessons or club sports? Something will have to give. How can you best prepare now?

https://www.surveymonkey.com/r/DivorceRecessionRisk

Take our Divorce Recession Risk Assessment Test

Is there a divorce in your near future?  Worried about the effect of recession on divorce could impact you? Learn your level of risk for suffering a serious financial hit if you divorce during a financial recession. It might change your thinking about your circumstances and how you want to proceed in the best interests of your family.

Guest Blogger Mark Hill, CFP®, CDFA

Mark Hill Divorce Financial ExpertA nationally-recognized speaker on the financial aspects of divorce, Mark Hill is the founder of Pacific Divorce Management.

With nearly 40 years as a financial planner and the last 20 years specializing in divorce, Mark is a wizard at cutting through the complication of the divorce finances. Mark is a luminary in the Collaborative Practice movement and brings his unique blend of financial expertise and dispute resolution skills to even the toughest divorce situations.

Pacific Divorce Management educates and provides guidance so divorcing couples can make informed decisions without feeling insecure about the consequences of those decisions. They gather, organize and evaluate the data and then tailor services to the clients’ needs.

At Weber Dispute Resolution, we love teaming up with Pacific Divorce Management to bring our clients superb financial advice for a secure future.  To learn more about how Mark Hill and Pacific Divorce Management can help you with your divorce case, visit PacDivorce.com or give Mark a call at 858-257-4612.

 

Read also:

Divorce Is Different On Rough Economic Seas – How a Recession Affects Divorce

Does Divorce Mediation Work for Complicated Financial Issues?

 

Why Waiting Can Cost You: Racing the Clock to Keep Your Alimony Tax Deduction

The deadline to preserve your alimony tax deduction in California before the end of 2018 is fast approaching.

by Mark Hill, CFP, CDFA and Shawn Weber, CLS-F

With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), the deductibility of alimony or spousal support on federal taxes is set to sunset on December 31, 2018. If you plan to divorce or are in the process of a divorce that will not be completed before the end of 2018, this could cost you a lot of money.

Spousal support used to be deductible under previous law

Under the previous law, spousal support (or alimony) is deductible from income for the support payor and taxable to the support recipient.  This let parties save money on Uncle Sam’s dime. Typically, the support payor would be taxed at a higher rate than the support recipient because of the disparity of income. By transferring the tax burden from the support payor to the support recipient, the support payor had higher net spendable income and could afford to pay more. This usually ended up in a win-win circumstance for the parties.

Changes to spousal support deductions under the new 2019 law

Commencing on January 1, 2019, spousal support paid under new orders will not be deductible to the support payor and will not be taxable to the support recipient. This rule will apply to alimony payments required by “divorce or separation instruments” executed after December 31, 2018.

A “divorce or separation instrument” as defined by 26 U.S. Code § 71(b)(2) “means –

(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,

(B) a written separation agreement, or

(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.”

Example from a higher income case

In negotiations husband and wife had agreed that spousaI support would be set at $12,000 a month. Because husband will be in the combined 46.3% tax bracket post-divorce, the after-tax cost to him will be $6,444. However because wife will be in the combined 34.3% bracket she will net $7,884 after tax.  When the new law is in force and husband can no longer deduct his payment it would cost him $1440 more to get her the same amount of spendable money. The differential will be even greater if wife goes ahead with her plan to buy a condo next year and thus receive the deductions for mortgage interest and property taxes.

Of course the reality of divorce is that there is rarely enough money to go around and the result of this change is going to be that payors will end up paying more and payees will end up receiving less.

An additional impact of this change that we believe is not well understood is that because in California the software that calculates child support uses after-tax income as the input number used for income available for support, child support numbers will also be reduced.

Is your divorce grandfathered into the new 2019 rule? Maybe not!

However, a divorce or separation instruments in place before January 1, 2019, but modified after this date, will remain under the current rules allowing for deductibility.  They would only be subject to the TCJA, if the modification expressly provides for the TCJA to apply.

What does this mean for people in the midst of a divorce today?  To preserve the possibility of the alimony payment tax deduction, you MUST have a divorce instrument entered by a court before the end of 2018.

Your judgment MUST be entered in 2018 to be deductible.

Although it is unclear exactly how the IRS will interpret this rule, we believe it is crucial that the divorce instrument be entered before the end of the year to preserve deductibility forever (or at least until the rule is changed again).

A huge concern is that the courts are very much behind in the processing of judgments of divorce or legal separation.  Time is of the essence.  If a couple does not have a completed judgment to submit prior to middle of November 2018, there is a very strong likelihood that it will not be accepted by the court in time.  Thus, the parties would lose the benefit of deductibility because there divorce or separation instrument would not be enterd before 2019.

Let Weber Dispute Resolution and Pacific Divorce Management help you keep your alimony tax deduction into 2019,

To help parties maximize what they have to spend for themselves and their kids after divorce, Weber Dispute Resolution is teaming up with Pacific Divorce Management to offer an expedited to process.

Pacific Divorce Management, one of the premier advising firms in San Diego for financial issues in divorce, will work with parties to gather financial data to complete the State mandated Declaration of Disclosure Forms.

Weber Dispute Resolution, a leader in divorce mediation and legal dispute resolution, will prepare the necessary forms to open a divorce case and will work hand in glove with Pacific Divorce Management to prepare the necessary divorce or separation instrument necessary to satisfy the IRS requirements for deductibility.

If it is impossible to conclude the entire divorce prior to 2019, the parties could enter into a partial stipulated Judgment for spousal support that would meet the requirements for the alimony deduction.  The couple would then have the following options:

  1. Work with Pacific Divorce Management and Weber Dispute Resolution in an out-of-court alternative dispute resolution setting to complete their divorce or legal separation (for example, mediation or collaborative practice).
  2. Work with other professionals in an out-of-court alternative dispute resolution setting to complete their case.
  3. Litigate their divorce or legal separation with other professionals.

Whether you choose to complete your divorce with us or choose to go another way, we want to help all parties involved in a late 2018 divorce be aware of this change, and take advantage of the tax laws for deductibility of spousal support payments before it goes away forever.

Don’t delay – contact us today to save your alimony tax deduction:

Weber Dispute Resolution: 858-410-0144

Pacific Divorce Management: 858-509-2330