Assets

The Role of the Financial Professional… After 1995 If You Live in Ireland

March 12, 2021 By CDSOC

By Amy Clews, CPA, CDFA, CVA, CFE Addleman & Associates
www.addlemancpas.com

Why do we need a financial neutral in our Divorce?

The month of March is upon us, and many of us are looking forward to St. Patrick’s Day and celebrating all things Irish; however, did you know divorce in Ireland was not even legal until 1995? And if you’re struggling with the six-month waiting period in California, imagine waiting three years in Ireland where divorcing couples must live apart for two of the last three years before they can divorce.

How will a family potentially support two households both temporarily and in the long-term when finances are separate? How will an equitable settlement be achieved so the family can move forward amicably? These are only a few of the financial questions divorcing couples must consider.

In the collaborative process, the financial professional is there to help the couple address financial issues such as: 1) assisting with gathering financial documents, 2) preparing financial analyses, 3) presenting financial analyses to the collaborative team and the couple, and 4) assisting with financial planning for the future. The financial professional will help you plan for the agreements that you decide will work best for your family moving forward.

The financial professional is able to help with various financial analyses depending on your financial needs. Some of these analyses include…

Assisting with Gathering Financial Documents

The financial professional will provide a document request list that details the information and documents requested to complete your financial analyses.

Marital Balance Sheet

What do you own and what do you owe? An assets and debts analysis will help the divorcing couple determine what needs to be divided after considering the tax implications of those assets. For instance, it is important to consider a retirement account is not equal to a cash account.

Income Analysis

How much income is available to provide spousal and child support? An income analysis determines what historical income levels have been for the family. Income sources can include many items such as wages, business income, interest income, dividend income, tax-exempt income, equity awards, and other sources of income.

Needs Analysis

How much money do you need to pay your expenses? A needs analysis is essentially a budget. This budget looks at historical spending and estimates future spending as well.

Tracings

Do you have separate property that is included in your marital balance sheet? If so, tracing may need to be completed to determine the source of monies used for a current asset.

Business valuation

What is our business worth? The financial professional can help determine the value of the business and provide alternatives for owning that business going forward.

Projections

What does my financial future look like? During the collaborative process, the financial professional can assist in researching different financial alternatives to see how different agreements may affect your financial future.

The collaborative process allows you to find your solutions that serve your family. These creative solutions would not be offered in a true litigation environment. A collaborative process also keeps your financial information confidential, which can help heal your family as it moves on to the next chapter.

Five Important Financial Issues in Military Divorce

October 30, 2020 By CDSOC

By Kristine Rushing, CFP®, CDFA® Intro: There are many considerations in divorce, but those experiencing military divorce have some additional things to think about. Here are five issues military spouses should be aware of.

Along with cooler weather and thoughts of Thanksgiving, November also brings Veterans Day, providing an opportunity to honor and thank those who have served in the United States Armed Forces. For many, that service has required personal sacrifices, from family challenges to the ultimate sacrifice. Whether during war or peacetime, events such as frequent moves, multiple deployments, isolation, stress of war, injuries, and returns to civilian life can all cause stress and anxiety for service members, spouses and their children. While the military branches offer programs to support relationships, divorce becomes a reality for many. Like their civilian counterparts, military spouses will need to determine a co-parenting plan, asset and debt division, and child/spousal support. However, those experiencing a military divorce need to be aware of some special rules.

1. Jurisdiction and State Law

Generally speaking, a spouse may file for divorce in the state where either spouse legally resides, with minimum residency requirements. However, the laws and treatment of property varies from state to state and there are some other factors pertaining to jurisdiction for military spouses, especially if divorcing while the service member is overseas. When there are questions about this it would be wise to consult with a knowledgeable attorney. For the most part, all other aspects of the property division, co-parenting, and child or spousal support follow state law similar to a civilian divorce. However, the “Service Members Civil Relief Act,” or SCRA, allows active-duty service members to file a Motion to Stay Proceedings which, if granted, causes a delay of 90 days, plus possible extensions.

As with civilian divorce, one of the most important decisions a couple has to make is which process to use. There are four major options: DIY/Kitchen Table, where couples sit down and reach their own settlement agreement; Mediation, where couples hire a neutral professional to assist them with the negotiations; Collaborative Divorce, where each party has their own legal representation, one or more divorce coaches/therapists, a neutral financial advisor, and perhaps a child specialist, all working together in a team approach; and Litigation, where parties cannot agree and ask the court to decide the outcome. Whenever possible, either mediation or collaborative divorce are recommended. These usually provide the most efficient process and set the parties up for more effective co-parenting and healing post-divorce.

2. Dividing Military Retirement

Military pensions are considered a marital asset and the Uniformed Services Former Spouses’ Protection Act (USFSPA) allows for division, though it is not necessarily required. Technically, it is the “disposable retired pay” that is subject to division, which is the gross retired pay less deductions for disability pay benefits and Survivor Benefit Plan premiums. Spouses may divide the pension or, instead, arrange a full or partial off-set via lump sum payment in cash or other assets to the non-service member spouse. The option for a lump sum or off-set is more common in short term marriages and requires a pension valuation to determine the present value of the off-set amount.

Those divorcing after retirement use a straight-forward coverture formula to determine the marital portion: months of marriage overlapping military service ÷ total months of military service at the time of retirement. For those divorcing prior to retirement, there is still a coverture fraction, calculated as a percentage of the service months overlapping marriage based on the total service months at the time of dissolution. However, it is applied to the hypothetical retirement benefit the service member would have received based on pay at the time of dissolution rather than actual retirement.

With the implementation of the new Blended Retirement System (BRS) in 2018, many service members receive automatic contributions and possible matching to a Thrift Savings Plan (TSP), a defined contribution account. The TSP operates much like many private company 401(k) plans do, allowing service members to leave the military with those TSP retirement benefits before serving a full 20 years, even if they choose to forego the pension benefits.

3. Getting the Retirement Division Done Right

Once the non-military spouse’s retirement benefit allocation has been determined, there are two ways in which the actual division and payment administration can take place. If qualified according to the “10/10 Rule,” the benefit payments for the non-military spouse may be issued directly from the Defense Finance Accounting Service (DFAS). The 10/10 Rule refers to the provision within the USFSPA which allows for this direct payment to a non-service member spouse as long as the pension division results from a marriage lasting ten years or more, which also overlapped service by ten years or more. A Military Pension Division Order (MPDO) must be carefully completed and submitted to DFAS. Retirement divisions that do not qualify for direct DFAS administration and payment according to the 10/10 Rule must be handled directly between the parties.

There are additional considerations for survivor benefits and disability pay. The Survivor Benefit Plan (SBP) is an annuity program allowing the service member to provide continued income to a surviving beneficiary in the event of their death. Only one beneficiary may be designated, and if the intention is to name the former spouse, it must completed in a timely manner.

Unlike the military pension, which is a defined benefit plan, division of the TSP is more straight forward. Once the amount or percentage being allocated to the non-service member spouse is determined, and after the divorce is final, the account funds may be transferred into another retirement account in the non-service member’s name, such as an IRA, with a Retirement Benefits Court Order (RCBO). It is important that the terms be defined clearly and having a professional prepare this, as well as the MPDO mentioned above, is recommended.

4. Healthcare and Other Benefits

Tricare and care at military treatment facilities, as well as commissary and exchange privileges, may be available to the non-service member spouse in long-term marriages that overlap service. The USFSPA offers Full Coverage under the “20/20/20 Rule,” and Transitional Coverage under the “20/20/15 Rule.” The full coverage rule requires the spouses to have been married for at least twenty years, the service member must have at least twenty years of creditable service toward retirement pay, and that twenty years of marriage overlap twenty years of creditable service. The transitional coverage rule provides one year of medical coverage (no commissary or exchange privileges) have between fifteen and twenty of years of marriage overlap the years of creditable service.

5. Co-Parenting, Child Support, and Spousal Support

Child support is based on state law, including factors such as custody, time with each parent, and incomes. The Leave and Earnings Statement (LES) should be used to determine all forms of compensation, including Basic Allowance Housing (BAH), the value of on base housing, and other non-taxable in-kind compensation. While service members can face penalties from their commanding officer if delinquent on support payments, enforcement is typically handled by the state court system.

Like child support, spousal support, also called alimony, is determined according to state law. The USFSPA, however, limits the amount paid to a former spouse directly through DFAS to 65% of disposable retired pay, including up to 50% of pay for pension division and other garnishments such as alimony and child support. Considerations for the spousal support order may include the length of the marriage, the earning capacity of each spouse, age, and health.

While most of the issues facing military spouses in divorce are the same as their civilian counterparts, these specific concerns do need to be addressed carefully. Spouses should take advantage of the various resources available and consult with an attorney who specializes in military divorce when needed. Again, one of the most important decisions a divorcing couple must make is which process to use. Whenever possible, work together and consider mediation or a collaborative team approach, including attorney-mediators, a financial advisor, such as a CPA, CFP® or CDFA®, and therapists and/or coaches to provide accurate legal information and the best chance for effective co-parenting and healing post-divorce.

To all members of the U.S. Armed Forces, we honor you this Veterans Day and thank you for your service in defending our nation and protecting our freedom.

Do I need a financial specialist as well as a lawyer for my divorce?

April 19, 2019 By CDSOC

By Cathleen Collinsworth, CDFA®, MAFF®
www.cccfda.com
949.262.3692

Do I need a financial specialist as well as a lawyer for my divorce? Won’t I be paying twice the money for two professionals to be doing the same work? As in all questions relating to divorce, the answer is, “It depends.” If the marital estate consists of assets such as a residence, retirement accounts, investments, and or credit card debts, you should consider hiring someone to assist you in fully understanding all the financial issues relating to the marital estate.

Misinformation and misconceptions about the divorce process can be detrimental. Many have false expectations that they will be able to secure a divorce settlement allowing them to continue with their accustomed style of living. Financial divorce analysis helps to ensure a good, stable economic future and prevents long-term regret with financial decisions made during the divorce process.

The financial work provided by a lawyer is not the same as that provided by a trained financial professional specializing in the divorce process. In addition, being a CPA or a CFP does not mean that individual has specific training in family law financial matters.

As you go through the divorce process, finding the right professional to help you can become challenging. Do your homework.

Find a financial analyst who has experience in family law.
Find someone who knows that there can be significant tax implications when the parties divorce.

A Certified Divorce Financial Analyst (CDFA®) is someone trained in finances who has also taken financial courses specifically designed for the knowledge relating to divorcing couples.

Remember Assets Are Not Equal

Example 1:

Swapping a $50,000 interest in a joint savings account is not the same as receiving a $50,000 interest in a 401(k) plan.

There are no tax consequences to withdrawing the money from the savings account.

There will be current tax consequences as a result of withdrawing money from the 401(k) plan: You will pay ordinary income taxes on the amount withdrawn and, depending on the circumstances, you can pay a combined 12% penalty.

Example 2:

Swapping the family residence with $100,000 of equity with a stock account that currently has a $100,000 capital gain is not equal. If the family residence is sold there could be no capital gains tax owed because there is a $250,000 ($500,000 if married) capital gain exclusion relating to the sale of the family residence.

Stock with a cost of $100,000 is sold for $200,000. Gain of $100,000 could be taxed as high as 23.8% for the Federal Government or $23,800 thus leaving cash available of $76,200.

As you navigate through the divorce process you can make better decisions when you are fully informed of the impact of your financial decisions going forward. The decisions you make now can impact your future financial status.

As you can see, not hiring the right financial professional can be costly. Don’t roll the dice and hope for a good outcome.

Please do not hesitate to call if you have further questions, comments or would like additional information.

© 2018 Cathleen Collinsworth, CDFA®, MAFF® Cathleen Collinsworth is a CDFA®, Certified Divorce Financial Analyst, and a MAFF®, Master Analyst in Financial Forensics, who has been practicing as a sole practitioner in Irvine since 2000. She has been retained as a forensic accountant and expert witness to provide services in family law for 20+ years. As a member of Collaborative Divorce Solutions of Orange County (CDSOC) since 2007 she has provided services as a Neutral Financial Specialist and team facilitator. Cathleen has served on the Board of Directors of CDSOC and served as the President for 2016-2017. She has extensive training in mediation and the interdisciplinary team model of collaborative practice and frequently mentors’ collaborative practitioners. She has authored articles, presented seminars, been a guest speaker and has prepared instructional videos in the field of finances and family law during the last 20 years. She currently serves on the Collaborative Divorce Education Institute’s Leadership and Training team and is a frequent trainer at the annual conferences of Collaborative Practice California, the International Academy of Collaborative Professionals, the Association of Family and Conciliation Courts, and other professional conferences throughout California. In 2015 Collaborative Practice California (CP Cal) awarded Cathleen the Eureka Award, which recognizes those who have made significant contributions and demonstrated an abiding dedication to establishing and sustaining Collaborative Practice in California. Cathleen also serves as a CP Cal Delegate and is a member of the International Academy of Collaborative Professionals (IACP). A detailed list of her training can be found at https://www.collaborativepractice.com/members/2328. For additional information, please visit her website at www.cccdfa.com.

Dividing Stock Options and Restricted Stock In Divorce

September 1, 2016 By CDSOC

by Thea Glazer, CFP®, CDFA™, MS Accounting
Glazer Financial Advisors, Laguna Hills, California

Stock options and restricted stock may be part of the marital estate. And they are some of the more complex assets. This brief overview provides a basic understanding of the factors you need to take into consideration. It does not go into all the many tax and technical issues that are aspects of equity compensation. Seeking professional guidance for your specific circumstances is always a good idea.

Many companies grant their employees equity compensation in addition to their salaries, commissions and cash bonuses. Equity compensation is non-cash compensation representing a form of ownership interest in a company. Among the most common are employee stock options and restricted stock or restricted stock units. In divorce, stock options and restricted stock are property to be divided. The employee’s separate shares are often also considered as income in the calculations of support.

Employee Stock Options (ESOs)

An employee stock option is the right given by an employee to purchase a specified number of shares of the employer’s stock for a specified price and for a specified time. There are two types of ESOs, Incentive Stock Options (ISOs) and Nonqualified Stock Options (NQs). The primary difference is that ISOs have an advantageous tax treatment explained below.

Stock options have a Grant Date, Exercise Price, Vesting Schedule and Expiration date. Example: Company ABC grants John Smith 3,000 non-qualified options on January 4, 2015 at a grant price of $10.50, a four-year annual vesting schedule and an expiration date of January 4, 2025. That means that John can exercise (buy) the 750 shares of stock annually on January 4 from 2016 through 2019. He does not have to exercise any shares until January 3, 2025. If he doesn’t exercise by the date of expiration, they will expire and be worthless.

Taxation of Stock Options Nonqualified stock options are taxed at the time of exercise as ordinary income. The amount taxed is the difference between the grant price and the fair market price. Most companies sell enough shares to cover the withholding tax and release the net shares or proceeds if the shares were simultaneously sold. If the shares are held once exercised and sold later, there may be capital gains tax as well. Unless shares are about to expire, most people exercise and sell simultaneously.

Incentive stock options are not taxed when they are exercised. If the shares are held for at least one year from exercise and two years from grant date, the gain is taxed at the advantageous long term capital gains rate.

Restricted Stock (RS) and Restricted Stock Units (RSUs)

Unlike stock options, restricted stock and restricted stock units are actual stock. There is usually no purchase price and, if there is, it is very, very nominal (one cent). Holders of restricted stock have voting rights while holders of restricted stock units do not. Restricted stock units cannot be “underwater” which happens to options when the grant price exceeds the fair market price so they are much less risky. Grants of restricted stock usually have about one-third as many shares as do options. Restricted stock grants have a grant date and vesting schedule. There is no expiration date and usually no grant price.

Taxation of Restricted Stock

Once a share of restricted stock vests, it is released. Upon release, the fair market value less any purchase price is taxed as ordinary income. Most companies sell enough shares to cover the withholding taxes and release the net shares. There is no decision making needed by the employee like there is regarding when to exercise options. Once restricted stock vests, it is automatically released. Many employees continue to hold the net shares until a time they need the cash, feel the stock has reached a good selling price or want to diversify their portfolios.

Transferability of Stock Options and Restricted Stock

Some plans allow NQs to be transferred to the former spouse of the employee, but the majority do not. It is very rare to see ISOs transferable. If they are transferred, they may lose their status as ISOs and fall under the tax rules for NQs.

RS and RSUs are not transferrable.

For non-transferable shares of options or restricted stock, the employee holds the shares on behalf of the non-employee spouse and exercises on his/her behalf or transfers released shares. There are IRS acceptable ways to allocate the taxation so the non-employee spouse is taxed at his/her rate rather than that of the employee.

Division of Equity Compensation in Divorce

Both stock options and restricted stock shares are divided by formulas. The most commonly used ones are Nelson and Hug.

The Nelson formula is: Date of grant to date of separation ÷

Date of grant to date of exercise or release

The Hug formula is: Date of hire to date of separation ÷

Date of hire to date of exercise or release

The reason the grants were awarded determines which formula is applicable.

Valuation of Stock Options and Restricted Stock

It is rare to value the options rather than to divide the shares. That is because the value is constantly changing so it is imprecise at best. In order to correctly value the options, the following factors are in the variables of a complex formula, the Black-Scholes formula that is used in valuing stock options:

Grant price
Grant date
Date of expiration
Vesting schedule
Current stock price
Volatility of the stock price

Sometimes valuing the options is the only way to effectuate the property division by offsetting another asset. However, dividing the shares divides both the risk and reward to both spouses. I believe it is preferable when possible.

Collaborative Divorce Offers Flexibility

In Collaborative or mediated divorce cases, there is far more flexibility in dividing assets. Unequal divisions are also acceptable if the parties agree and have reasons to do so. In court, such flexibility is not nearly as possible. This is another great reason to consider alternative dispute resolution such as Collaborative Divorce to allow you to make the best decision possible for your circumstances, rather than a decision forced upon you by a judge.

Community Property and Separate Property: What’s the Difference?

July 19, 2016 By CDSOC

by Sara E. Milburn, Attorney at Law
Milburn Family Law, Laguna Beach, California

Many of my clients come into my office with the mistaken belief that after a long marriage, everything they own together is community property, and they are going to leave the marriage with one half of this property. Sometimes it is a shock for them to learn that is not necessarily the case.

Property issues in a divorce can be very complex. These are the basics to help you start working through your decision-making process.

Separate Property

In California, separate property is defined by Family Code 770. Separate property of a married person includes all of the following:

All property owned by the person before the marriage,
All gifts or inheritances received.
The rents and profits the separate property earns.

Where this can become confusing is when the spouse who owns the separate property uses his time and talent (called “community effort”) to cause an increase to his or her own separate property. This must be more than a diminutive amount of time or effort. The court has wide discretion here. If the separate property was a stock account and the spouse was a day trader then there would be considerable community effort and the increase in value of the stock might be part community property. If it was a stock account that was managed by a financial advisor with only minimal decisions made by the spouse that would probably not give the community any interest in the increase in value of the stock account.

Community Property

Except as otherwise provided by California law, community property is considered all property acquired by a married person during the marriage. The exception is property specifically identified up front as separate property. Examples include property owned before marriage, gifts or inheritances as long as the source of funds to acquire the asset was community funds (i.e., earnings by either or both spouses during the marriage).

Co-Mingled Property

If separate property and community property in the way of money or investments are both deposited into the same account or asset owned jointly by the spouses, it may create issues of tracing. A forensic accountant with specific expertise will need to become involved.

Separate Property: Stock Accounts or Bank Accounts

If one spouse owns stock in a public company, or has a bank account that remains in his or her name as a separate account, and no community property earnings are placed into their separate account, then no matter how much the account balance grows through earnings or interest, the other spouse will have no interest in that investment.

Separate Home Before Marriage

With people getting married at older ages, and with numerous second (and third and more) marriages, this is a common situation. One of the spouses may own a home in their own name at the start of the marriage. They may never add their spouse’s name on the title to the home. In this situation, the home remains the separate property of the spouse who owned the home prior to the marriage, as his or her sole and separate property. This is true even if the couple lived in the home 30 years during their marriage.

The community might receive a portion of the equity if the mortgage was paid down during the marriage. There is a formula that is used (called “Moore-Marsden”) but the house remains the separate property of the spouse who owned the home before marriage. If the spouse who owned the home prior to marriage does add his or her spouse’s name to the title on the property, the non-owner spouse would be entitled to half of the appreciation in value of the home that took place AFTER his or her name was added to the title.

Separate Home Purchased During Marriage

It is possible for one spouse to use their separate money to buy a house by themselves and for themselves alone during the marriage, and take title in their own name as their separate property. If there is a mortgage loan on the property-it may create a community interest in the separate property home due to the debt obligation.

Using Separate Property As a Down Payment on a Community Property Home Purchase

If an individual sells his or her separate property home purchased prior to the marriage, and uses the proceeds to help buy a new home with both spouses’ names on the title as the legal owners, the spouse who owned the separate property before marriage can still set aside the amount invested as a down payment as his or her separate property. There is an absolute right to reimbursement of separate property. See California Family Code 2640.

This is an example of how it might work. Wife “Melissa” owned a townhouse before her marriage to “Mario.” Melissa sells the townhome for $300,000. She and Mario then buy a new single family home for $700,000. She uses the $300,000 from the townhome as the down payment. Then Melissa and Mario take out a mortgage loan for the remaining $400.000. Ten years later, Melissa and Mario get divorced. They sell the house for $850,000. After paying off the loans and fees, Melissa and Mario have $620,000. Melissa receives her original $300,000 down payment off the top. Then Melissa and Mario split the remaining $320,000, receiving $160,000 each. Melissa receives $460,000, and Mario receives $160,000.

Separate Property: Business

When a business owned by one of the spouses grows in value during the marriage there are two conflicting cases in the law which define how to apportion the profits.

Under the Pereira case definition, “a fair return” on the separate property investment is given and the balance of the increased value is allocated to the Community Property because the time and talent of the spouse is Community Property.

Under the Van Camp case definition, the court would determine the reasonable value of the community’s service, and allocate that amount to the Community Property and allocate the balance to the Separate Property.

If this seems confusing or complicated, you are right. It can be very complicated. This is why it’s essential to rely on trustworthy advice from legal and financial advisors who have expertise in property division as the result of a divorce to help you understand your options and your rights under the law. It is worth investing in this guidance to help you avoid costly mistakes due to unfamiliarity with your best options.

When 50/50 Isn’t Always Equal in a California Divorce

June 6, 2016 By CDSOC

by Diana L. Martinez Collaborative Lawyer and Mediator, Law and Mediation Office of Diana L. Martinez

California is one of nine “community property” states as it relates to divorce. This means that assets and debts acquired and incurred during your marriage will be divided equally upon divorce. Exceptions exist for specific items received during marriage that are deemed “separate property” under the law. This includes gifts and inheritance.

This is one of the most misunderstood concepts in divorce law. Spouses often believe their divorce will be easy if they just split all of their property in half, or “50/50.” While strong emotions present a barrier to resolving issues during a divorce, not far behind is the misunderstandings by couples about the concept of what is “fair” when it comes to dividing up assets and liabilities.

From extensive experience as a mediator, consultant, and Collaborative Divorce lawyer, I am a strong advocate for giving spouses a greater voice in the outcome of their divorce. I am also a strong proponent of ensuring divorcing spouses have as much information as possible to make the best decisions moving forward.

Although the courts are required to enforce the laws, spouses in a divorce, with few exceptions (typically related to minor children) are not limited by the law; they can create their own, unique, agreements, based on their goals and values. Laws controlling the division of assets and debts, the amount you receive or pay in support, and the amount of time granted with your children exist to guide you IF you and your spouse are not able to resolve these items together. If you can’t resolve your differences, a judge will make the decisions for you. He or she is required to enforce the law, regardless of your personal goals and values.

You and your spouse may have some understanding of the law. But in negotiating your agreement, you may be better served by accepting less than the law allows in return for a greater benefit elsewhere. The benefit could be a better co-parenting relationship, or the opportunity to reduce or eliminate spousal support. It may even be the creation of balance where the laws aren’t able to provide it.

Annette and John Peterson provide a case study worth discussing as an example. The Petersons were able to resolve all disputes in their divorce except one: Annette’s pension benefits of approximately $100,000. This roadblock stalled the Petersons’ divorce for six years, from February 2010 until the California Supreme Court rendered its decision in January 2016.

In retrospect, after nearly six years of legal fees, lost time from work, and stress, Annette and John might have preferred finding a compromise outside of the contested court process. State laws governing pensions and federal laws governing Social Security created the sense of imbalance that Mr. and Mrs. Peterson fought so hard to correct, as each, individually, deemed most “fair”.

In California, pension benefits are community property when earned during marriage. Pension benefits are a form of deferred compensation for services rendered. Non-financial contributions to pension benefits, or “service credits,” are also considered “a form of deferred compensation for services rendered” and, therefore, community property.

But Social Security benefits are separate property under federal law. Federal law preempts state law. Social Security is not transferable, nor can it be assigned by the wage earner. There are, however, derivative rights upon divorce if:

you and your spouse are entitled to receive Social Security;
your marriage lasted 10 years or longer;
the ex-spouse did not remarry;
the ex-spouse is age 62 or older; and
the benefit the ex-spouse is entitled to received based on his/her own work is less than the benefit he or she would receive based on his/her former spouse’s work.

If each requirement is met, an ex-spouse could elect to receive either all of his/her own Social Security, or one-half of his/her former spouse’s Social Security, but not both.

As an employee of the County of Los Angeles, Annette did not contribute to Social Security. Instead, the County contributed to a defined pension plan for Annette through the Los Angeles County Employees Retirement Association (LACERA). As an attorney in private practice, John contributed to Social Security through mandatory payroll deductions.

Annette’s LACERA benefits totaled between $200,000 and $216,000. Based on Social Security calculations, John’s Social Security benefits totaled $228,000. Annette attempted to argue that the laws governing LACERA pensions and the laws governing Social Security created unequal benefits. Annette and John would split her LACERA benefits in their divorce (approximately $100,000 to each). But John would keep all of his Social Security benefits.

The trial court ruled in John’s favor, creating an actual 150% windfall for John ($328,000 from 50% of Annette’s LACERA and 100% of his Social Security). Annette asked the California Supreme Court to correct this unfair situation, suggesting the court give John less than half of her LACERA pension benefits.

The Supreme Court let the trial court’s ruling stand, citing the requirement under California law that community assets be divided equally in a divorce. Since Social Security is not a “community asset,” the court correctly divided the community assets and could not deviate from that equal division, even when it creates an unequal division overall.

But the Supreme Court pointed out that it was completely within Annette and John’s power to create their own, more equal solution, even though the court under the law could not.

So let’s go back to Annette and John’s original circumstances. What was the value to John if he had agreed to give Annette all of her LACERA benefits, instead of insist on following the state law giving him a far greater share? What would have been the value to Annette to propose an alternate payout to John to resolve this issue?

As of 2010 in California, the average cost of a divorce where the parties were represented by lawyers was approximately $50,000 each. This amount is on the low end for a contested divorce in Orange County, and it does not include the legal fees for an appeal. Over the period of six years, based on 2010 estimates, Annette and John would have spent more than $100,000 each. Resolving your divorce early and collaboratively can save on legal fees, lost work time, and other intangible and emotional costs.

Managing emotional trauma and stress for yourself and your family offers priceless benefits, far beyond feeling a sense of entitlement or unfairness. Attorneys frequently fail to focus on these practical impacts because they are hired as legal advisors and guides, not as therapists. Attorneys are not equipped to help people through their fears; they are not trained mental health professionals.

Alternative (also known as “consensual”) dispute resolution models often incorporate legal and non-legal professionals to help educate and guide couples through unexpected emotional landmines, often resulting in less, or better managed, conflict, and better informed and well reasoned results.

For example, the Collaborative Divorce model incorporates guidance from a “divorce coach” to help manage the emotions of divorcing spouses, often saving the spouses tens, if not hundreds of thousands of dollars, as well as years of stress embroiled in a contested divorce, and the subsequent modifications to orders after trial. The outcomes tend to be far more satisfying to both spouses, and result in fewer or no additional hearings after judgment to modify those orders.

Making decisions based on accurate legal and financial information, as well as balancing the practical impact on your family and finances often results in far greater and lasting benefit for you and your family. Sometimes, there is too high a price for the short-term gain of getting everything you can under the law.