Financially Smart Divorce

Divorce is never financially smart!

As a financial planner, I don’t recommend divorce. It’s bad for your finances!

However, you can go through it in the most financially smart way – to leave both of you in the best possible position.

We have seen quite a few people go through divorce.

We’ve seen some total disasters, fighting for years through lawyers with monstrous legal costs.

• A wife hiring one lawyer after another for years to keep going after her ex.
• A dentist declaring bankruptcy to avoid paying alimony.

We have helped clients go through it amicably while talking & agreeing on what to do.

• We can help identify the financially best way to divide assets.
• We can show how to minimize or avoid tax when dividing assets. Paying tax means you both get less.

I am a financial planner – not a lawyer. My insights here are based on experience about how to be as financially smart as possible.

You will learn:

• Why an amicable divorce is better.
• What to be aware of with lawyers.
• Working effectively with your lawyer.
• How to divide your assets the most effective way.
• Should you keep the house?
• What happens to the Smith Manoeuvre in a divorce?
• Should you split a pension?
• What options do you have with spousal & child support?
• What studies say about life after divorce.

Why an amicable divorce is better.

It’s rare that a couple never sees each other again after a divorce. Especially if you have kids, you will still be in each other’s lives. It’s important to be good role models for your kids. You don’t want them stuck in the middle or blaming themselves. Being able to talk amicably and try to get along makes your future life much better.

Being able to start a new life with the right outlook means you need to let go of the old one. An on-going fight keeps emotions high. You are not letting go. Hate is a form of love. Letting go means you don’t have strong emotions – love or hate.

The best divorces I have seen: The couples can talk amicably about anything, share custody, live relatively close in the same school district so kids can go back-and-forth and be in the same school (even by school bus), they cooperate on times to see the kids, they speak highly of each other to the kids, and they may even be friends in the future.

Having your lawyers fight & negotiate for you means you both get less. Maybe a lot less.

You both have rights, but you can agree on anything you think is fair. You do not have to get every last thing you may be entitled to.

Assume you will both have ½ the net worth and less cash flow from paying for 2 homes.

What to be aware of with lawyers.

• Lawyers are motivated to prolong your dispute.
• They may sound like they are on your side fighting for every bit.
• They may spend a lot of time on many details.

Working effectively with your lawyer.

• Both meet with your own lawyers to understand your rights.
• Meet with your financial planner to decide how to divide your assets effectively.
• Discuss who gets what, where you will each live, custody, and support. Decide together.
• Have one lawyer write it up. Each sign with your lawyer.

Result: You both get a decent result and a small legal bill.

How to divide your assets the most effective way.

Having your lawyers fight & negotiate for you means you both get less.

Start with a Net Worth Statement – column for each + joint.

Choose your official separation date. Sometimes it’s obvious. Sometimes not.

Get appraisal of home & pension statement from pension administrator.

Your RESP is usually considered the kids’ money, so it’s not part of the split.

RESP often remains joint or is split. Agree about future contributions.

Keep it joint & both contribute, or split it in half and each contribute to your own. With separate RESPs, you need to coordinate contributions. Whoever contributes first gets the grant.

Allocate on your Net Worth spreadsheet who will take each asset & debt.

You will need to qualify for mortgage & other debts by yourself.

For RRSPs & TFSAs: Usually keep your own. Need a court order to change. There would be legal costs.

Goal: Both be in decent financial position. Nobody should be financially destroyed. You will both need your own new plans for retirement.

Should you keep the house?

Both need to decide where you will live.

Often both want to stay in the home. At some point, you need to start separate lives.

Studies show 5 or 10 years later, usually the husband has done better. This is because the wife has the house and he has the investments, which grew faster.

House is a lower growth asset.

The last 45 years, the Toronto Stock Market TSX has had 5 times the growth of Toronto real estate. This was the best period ever for real estate & slightly below average for stocks.

Can be a good investment if there is a large mortgage.

Buy with 20% down. Leverage 5:1.

Compare:

$1 million in property vs. $1 million in the stock market. Stock market wins.

$200K down on $1 million property vs. $200K in the stock market. Real estate wins.

$200K down & mortgage on $1 million property vs. $200K down & investment loan on $1 million in the stock market. Stock market wins.

What happens to the Smith Manoeuvre in a divorce?

Smith Manoeuvre is a mortgage and usually stays with the home.

Smith Manoeuvre includes investments that are non-registered, which usually are best to go to the person that was claiming it to avoid tax.

If it does not go to the same person that has been claiming it, then there is a deemed disposition. Some tax owing. You both get less.

Effectively, assets are sold to claim capital gain. Then the other spouse can take over Smith Manoeuvre interest deductions & investment growth in the future.

If you have the investments in joint names for estate planning purposes, but one spouse has been claiming the Smith Manoeuvre, you can switch everything to the spouse that has been claiming it without a deemed disposition or tax costs.

If the spouse that has been claiming Smith Manoeuvre is not keeping the house, you can get a new home or credit line to take over Smith Manoeuvre credit line. The credit line should still be tax-deductible if you transfer the tax-deductible credit line to a new credit line on your new home.

Example: Jennifer takes home. Michael has been claiming Smith Manoeuvre. He gets a $100K credit line (on his new home or ULOC) & keeps the Smith Manoeuvre investments & debt.

If you have been claiming Smith Manoeuvre jointly, you can keep half each without triggering capital gains & while maintaining tax-deductibility.

If one person takes it over, there is a deemed disposition on half the investments. Then that person can continue to claim both interest deductions & capital gains.

Think through who wants to have the Smith Manoeuvre. The Smith Manoeuvre is very helpful for saving for retirement without using your cash flow. One spouse can take over the existing Smith Manoeuvre, but the other spouse can start it, as well. Both can do it separately on their separate homes.

Should you split a pension?

Get a pension valuation from the pension administrator.

You can get half the actual pension when paid at retirement or half the value in assets now transferred to your RRSP or locked-in RRSP.

Asset split sometimes adjusts for tax, since the pension is before tax.

If you take ½ the pension payments, you are dependent on your ex and when he/she retires.

Usually better to not maintain financial ties. ½ pension payments in the future maintains ties.

Usually best to take half the value to a locked-in RRSP (LIRA). Not all pensions allow this.

What options do you have with spousal & child support?

Usually, get the support amounts from your lawyer.

Child support & spousal support have a formula lawyers usually use: https://www.divorcepath.com/canada/spousal-support-calculator 

Spousal support:

Guideline: The paying spouse’s support is presumptively 40% of his or her net monthly income, reduced by one-half of the receiving spouse’s net monthly income. If child support is an issue, spousal support is calculated after child support is calculated.

Child support:

Look-up table: https://www.justice.gc.ca/eng/fl-df/child-enfant/fcsg-lfpae/2017/pdf/ona.pdf 

With joint custody, the higher income person may still have to pay child support.

Lump sum instead of support is often better. No longer have financial ties.

Lawyers will sometimes write support at $1. Risky.

Any support can be renegotiated in the future, so there is always risk of more legal battles. I have seen $1/month support be changed years later to $5,000/month.

Lump-sum spousal support: Calculated by multiplying the monthly amount owing by the number of months for which support is payable, & then discounting for tax consequences and other factors.

Lump sum: Agreed as part of the asset split.

Best outcomes: Support payments maintain financial ties. Best outcomes:

Spousal support: Get your lawyer to calculate a buy-out and include it when dividing your assets.

Child support: Sharing custody 50/50 and agreeing to a small amount or no child support.

Note: I am not a lawyer. This is all financial advice only. Plus insights from my experience helping many couples through divorce.

Most amicable: Talk amicably about anything. Joint custody. No support payments or on-going financial ties. Live in the same school district. Kids go back & forth, while still going to the same school & taking the school bus.

Ed