IAFP 2003
Considerations in Divorce
Akeela Davis, CFP, RFP, FDS, EPC
Questions about Divorce




Can I manage by
myself?
How much will I pay in
Child Support?
Will I be a bag lady?
Will it scar my kids?
Know Your Boundaries

Let the client know your boundaries!
What can an advisor do?





Be an information source
Have a list of books you can recommend
Have a list of referable counselors
Have a list of referable lawyers
Have a list of referable mediators
A Financial Divorce Specialist

Raise questions, give information



Emergency funds
Insurance
Tax consequences
A Financial Divorce Specialist

Raise questions, give information



Revoking existing POA
Preparing for separation
Credit rating
A Financial Divorce Specialist

Raise questions, give information



Financial statements
Demystify pensions
Establish tax discounting rates
Modeling

Abstract information

Visual model
The Family




Michelle Brady – 46 years
Frank Brady – 47 years
Married 20 years
Four children ages 14, 10, 5 and 4
Family Finances (Income)

Frank – Salary
Frank – Dividends IRS
Michelle – Salary
Michelle – Dividends IRS
Michelle – Dividends ABC
$67,000/yr
$30,000/yr
$170,000/yr
$30,000/yr
$70,000/yr

Total Family Income
$367,000/yr




Family Finances (Expenses)

Estimated Income Tax
Michelle’s RRSP
Accelerated Mortgage
RESP
General Living Expenses
$114,000
$14,500
$74,500
$8,000
$146,500

Total Family Expenses
$357,000/yr




Family Assets (Joint)
Value



Residence
MM Fund
IRS*
Liability
Net Asset
$650,000 $300,000 $350,000
$52,000
$0
$52,000
$525,000 $121,900 $403,100
$805,100
Family Assets (Frank)
Value

RRSP
Pension
Vehicle

Boat


Liability
Net Asset
$63,000 $0
$63,000
$141,000 $0
$141,000
$15,000 $0
$25,000 $0
$15,000
$25,000
$244,000
Family Assets (Michelle)
Value



RRSP
MM Fund
IRS*
Liability
Net Asset
$181,000 $0
$181,000
$21,000 $0
$21,000
$20,000 $0
$20,000
$222,000
Exempt Assets? (Michelle)
Value


Liability
Net Asset
Mutual Fund $175,000
$0 $175,000
ABC*
$1,600,000 $127,700 $1,600,000
$1,775,000
Proposition #1

Frank







Shares in ABC growth since marriage
Gets cash buyout from both businesses
Keeps 100% pension
Gets open mutual funds for home equity
Child support payments = income only
Frank gets some of Michelle’s RRSP
MM split 50/50
Proposition #1 – Summary

Frank






Gets $939,847 in cash and RRSP
No debts
100% of his pensions
Pays $16,776 tapering to $6,636 in child support
Lifestyle expenses = $62,000/year
Gross income = $67,000
Proposition #1

Michelle








Keeps the children
Gets ABC ½ ABC growth since marriage
Keeps IRS
Takes out loans to buyout Frank ABC/IRS
Keeps home with mortgage
Gets child support payments
Keeps most of her RRSP
MM split 50/50
Proposition #1 – Summary

Michelle






$214,000 in cash and RRSP
Assets $2,775,000 - $941,000 debts, plus tax
liability on businesses
Receives child support $16,776 - $6,636
Debt repayments $104,868 annually
Lifestyle expenditures = $98,200
Gross income +$300,000
Client Concerns and Fears
Michelle & Frank - Net Worth
$7,000,000
$6,500,000
$6,000,000
$5,500,000
$5,000,000
Net Worth ($)
$4,500,000
$4,000,000
Frank
$3,500,000
Michelle
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$46
51
56
61
Michelle's Age (Years)
66
71
Client Concerns and Fears
Michelle & Frank - Liquidation
$1,500,000
Liquid Assets ($)
$1,250,000
$1,000,000
Michelle
$750,000
Frank
$500,000
$250,000
$46
51
56
61
Michelle's Age (Years)
66
71
Underlying Numbers
Michelle's Financial Sheet
Age
46
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
Net Salary
2.00%
$ 106,782
$ 108,918
$ 111,096
$ 113,318
$ 115,584
$ 117,896
$ 120,254
$ 122,659
$ 125,112
$ 127,614
$ 130,167
$ 132,770
$ 135,425
$ 138,134
$ 140,897
$ 143,715
$ 146,589
$ 149,521
$ 152,511
$ 155,561
$
$
$
$
$
-
Other
Income
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
89,258
70,000
70,000
70,000
70,000
70,000
CPP
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2.00%
8,928
9,107
9,289
9,474
9,664
Child
Living
Expense
Support
Expenses
Mortgage
Adjustment
14 Years
3.00% 20 Years
$ 16,776 $
98,806 $ 104,868 $ 52,500
$ 16,776 $ 101,770 $ 104,868 $
$ 16,776 $ 104,824 $ 104,868 $
$ 16,776 $ 107,968 $ 104,868 $
$ 14,076 $ 111,207 $ 104,868 $
$ 14,076 $ 114,544 $ 104,868 $
$ 14,076 $ 117,980 $ 104,868 $
$ 14,076 $ 121,519 $ 104,868 $
$ 10,764 $ 125,165 $ 104,868 $
$ 10,764 $ 128,920 $ 104,868 $
$ 10,764 $ 132,787 $ 104,868 $
$ 10,764 $ 136,771 $ 104,868 $
$ 10,764 $ 140,874 $ 104,868 $
$
6,636 $ 145,100 $ 104,868 $
$
$ 111,453 $ 104,868 $ (38,000)
$
$ 114,797 $ 104,868 $
$
$ 118,241 $ 104,868 $
$
$ 121,788 $ 104,868 $
$
$ 125,442 $ 104,868 $
$
$ 129,205 $ 104,868 $
$
$ 118,581 $
96,148 $ (14,500)
$
$ 122,139 $
$
$
$ 125,803 $
$
$
$ 129,577 $
$
$
$ 133,464 $
$
-
Cash Flow
$
9,142
$
8,313
$
7,439
$
6,516
$
2,843
$
1,819
$
740
$
(394)
$
(4,898)
$
(6,151)
$
(7,466)
$
(8,847)
$ (10,294)
$ (15,940)
$
13,834
$
13,308
$
12,738
$
12,123
$
11,460
$
10,747
$ (135,801)
$ (43,032)
$ (46,514)
$ (50,102)
$
34,144
Liquid
Assets
5.00%
$ 26,000
$ 36,442
$ 46,578
$ 56,345
$ 65,678
$ 71,805
$ 77,214
$ 81,815
$ 85,512
$ 84,889
$ 82,983
$ 79,665
$ 74,802
$ 68,248
$ 55,720
$ 72,339
$ 89,264
$ 106,465
$ 123,911
$ 141,567
$ 159,391
$ 913,394
$ 916,032
$ 915,319
$ 910,983
RRSP
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
7.50%
188,900
217,568
248,385
281,514
317,127
355,412
396,568
440,811
488,371
539,499
594,462
653,546
717,062
785,342
858,743
937,648
1,022,472
1,113,657
1,211,682
1,317,058
1,415,837
1,522,025
1,636,177
1,758,890
1,767,684
Real Estate
Equity
3.00%
$ 1,814,000
$ 1,916,518
$ 2,023,189
$ 2,134,238
$ 2,249,902
$ 2,370,438
$ 2,496,120
$ 2,627,245
$ 2,764,130
$ 2,907,115
$ 3,056,569
$ 3,212,889
$ 3,376,501
$ 3,547,867
$ 3,727,485
$ 3,915,894
$ 4,113,676
$ 4,321,461
$ 4,539,934
$ 4,769,832
$ 5,011,959
$ 4,185,663
$ 4,311,233
$ 4,440,570
$ 4,573,787
Net Worth
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,028,900
2,170,527
2,318,152
2,472,097
2,632,708
2,797,655
2,969,903
3,149,871
3,338,013
3,531,503
3,734,014
3,946,100
4,168,365
4,401,456
4,641,947
4,925,881
5,225,411
5,541,584
5,875,527
6,228,456
6,587,187
6,621,081
6,863,441
7,114,779
7,252,454
Underlying Information

Assumptions about



Interest rates
Tax rates
Inflation rates
Another Scenario
Michelle & Frank - Net Worth
$7,000,000
$6,500,000
$6,000,000
$5,500,000
$5,000,000
Net Worth ($)
$4,500,000
$4,000,000
Frank
$3,500,000
Michelle
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$46
51
56
61
Michelle's Age (Years)
66
71
Another Scenario
Michelle & Frank - Liquidation
$2,000,000
$1,750,000
$1,250,000
Frank
$1,000,000
Michelle
$750,000
$500,000
$250,000
Michelle's Age (Years)
70
68
66
64
62
60
58
56
54
52
50
48
$-
46
Liquid Assets ($)
$1,500,000
Summary – Michelle’s Concerns

Impact on children?
Summary – Michelle’s Concerns


Can she make it on her own?
What would her retirement look like?