Divorce at Altitude: A Podcast on Colorado Family Law
Divorce at Altitude: A Podcast on Colorado Family Law
7 Key Strategies to Master Divorce Economics | Episode 211
Welcome back to another insightful episode of Divorce at Altitude. After a brief summer hiatus, hosts Ryan Kalamaya and Bret Hirsh with Obermeyer Wood return to provide a sneak peek into a presentation they did at the Family Law Institute, an annual gathering of divorce professionals in Vail, Colorado. Ryan and Brett share valuable legal and financial insights for navigating the complexities of divorce.
Episode Highlights:
- Introduction to the Family Law Institute: Ryan introduces the Family Law Institute and the significance of the annual Divorce Lawyers Conference, where hundreds of professionals, including judges, gather to discuss the latest trends and strategies in family law.
- Key Strategy #1 - The Marital Balance Sheet: Discover the importance of creating and maintaining a marital balance sheet to make informed decisions during divorce proceedings. Brett emphasizes the role of financial advisors in assisting with this critical document.
- Key Strategy #2 - Understanding Tax Implications: Learn about the tax consequences of different assets, including retirement accounts and brokerage accounts, and why it's crucial to consider taxes when dividing assets.
- Key Strategy #3 - Mortgage Qualification and Debt Allocation: Explore the complexities of mortgage qualification and debt allocation in divorce, and how a financial advisor can help navigate these challenges.
- Key Strategy #4 - Liquid vs. Illiquid Assets: Ryan and Brett discuss the differences between liquid and illiquid assets, and the importance of understanding their impact on a client’s financial future post-divorce.
- Key Strategy #5 - Retirement Accounts: Learn how to properly address retirement accounts during divorce, including the role of qualified domestic relations orders (QDROs) and the potential pitfalls that can arise.
- Key Strategy #6 - Engaging Experts Early: Discover why engaging valuation experts and financial advisors early in the divorce process can save time, reduce stress, and lead to better outcomes for all parties involved.
Key Discussions:
- Importance of Cash Flow Analysis: Brett explains the significance of cash flow analysis in divorce, particularly when dealing with illiquid assets like real estate and businesses.
- Role of Financial Advisors: Understand how financial advisors can provide long-term financial planning and support during.
What is Divorce at Altitude?
Ryan Kalamaya and Amy Goscha provide tips and recommendations on issues related to divorce, separation, and co-parenting in Colorado. Ryan and Amy are the founding partners of an innovative and ambitious law firm, Kalamaya | Goscha, that pushes the boundaries to discover new frontiers in family law, personal injuries, and criminal defense in Colorado.
To subscribe to Divorce at Altitude, click here and select your favorite podcast player. To subscribe to Kalamaya | Goscha's YouTube channel where many of the episodes will be posted as videos, click here. If you have additional questions or would like to speak to one of our attorneys, give us a call at 970-429-5784 or email us at info@kalamaya.law.
************************************************************************
DISCLAIMER: THE COMMENTARY AND OPINIONS ON THIS PODCAST IS FOR ENTERTAINMENT AND INFORMATIONAL PURPOSES AND NOT FOR THE PURPOSE OF PROVIDING LEGAL ADVICE. CONTACT AN ATTORNEY IN YOUR STATE OR AREA TO OBTAIN LEGAL ADVICE ON ANY OF THESE ISSUES.
Welcome back to another episode of Divorce at Altitude. This is Ryan Kalamaya. We've taken kind of a summer break here on the podcast, but we're back. And this week we are going to be doing somewhat of a test run or preview on a presentation at the Family Law Institute that I'm going to be giving to with And I'll introduce Brett or have him tell you a little bit more about himself and the Family Law Institute for those listeners that may not know is the annual Divorce Lawyers Conference in Vail. It's sold out this year. Brett and I are going to be presenting to we don't know exactly how many people will be in our presentation, but there will be literally hundreds of divorce professionals, judges other people for the end of August and our presentation and the topic of today's episode is titled Summiting the Financial Slopes, Seven Key Strategies to Master Divorce Economics and I'm going to be providing the legal insight and then Brett, who I'll get to next, is going to be taking the financial advisor role. Before we get into the first key strategies or first of our key strategies let me introduce our guest. He's a friend of mine. I've worked with him. And Brett can you tell the listener or the audience a little bit about yourself so they understand your background?
Bret:And thanks Ryan for having me. I'm Brett Hirsch, originally from New York and moved out to Colorado six years ago. My background, a little unique for the wealth management advisory world. I started in the private equity and hedge fund world, and then after 15 years relocated to Colorado and started and switched to the advisory role. Obermeyer is, The preeminent, I think, wealth management firm in the state. We've got offices in Aspen, Denver, and opening bail this fall. And we work with individuals, families on all things financial, advisory, and advisory. Capital allocation and investing, helping oversee tax and estate and philanthropy, and really our clients financial sounding boards for anything that sort of touches their life.
Ryan Kalamaya:Now, listeners to the podcast have heard, we've had guests on before, including Ali Phillips, who is a partner with Brett from Obermeyer Woods, and we frequently divorce lawyers work with financial advisors because obviously financials are involved in any divorce. This presentation, our talk is gonna be really focused on providing legal professionals, divorce professionals with some guidance. Really from the kind of a high level and entry level for some of the less experienced attorneys or professionals out there. And so let's just jump right into it, Brett. What is the first tip or key strategy? From our presentation. And for those who are listening we have a video. There's the presentation and some of the slides are going to be shared. So you can check that out on YouTube or anywhere else. But Brett, for listeners what's the first thing that we recommend in terms of a key strategy?
Bret:Sure. And really, Ryan, you usually start this. It really is the marital balance sheet. This is really the key working document that we help make decisions off of. And we're, as an advisor, really here to help and assist the attorneys in creating this document. It's really important that the client tracks down statements and other financial documents that help us build this out. If you don't have the right information early enough, it's really hard to give initial advice and feedback. The marital balance sheet also informs us In terms of what we don't know, either about the client, either about what a particular asset is worth or a liability that we didn't know existed. But for us, it's really the base here in terms of helping us make decisions. Ultimately the spreadsheet also becomes the base for the financial planning work we do for the client in terms of helping them create a new life. after divorce and really understanding what their expenses are going to be and modeling that out.
Ryan Kalamaya:Yeah. And for listeners, obviously they're familiar with or should be familiar with our hypothetical divorce clients, Eric and Melanie Wolf. Whether, we're talking about Eric or Melanie the end point in terms of negotiating a divorce is going to be based on a spreadsheet and that spreadsheet we call a marital balance spreadsheet. And so frequently what we are seeing within, my firm Kalamaya Gosha, is the we're seeing the other side in particular whether it be Eric and Melanie, there's just this delay. So people will go to mediation And we will have our marital balance spreadsheet ready, but the other side doesn't. And the key strategy here is to start thinking about the end at the beginning. And I remember my trial success rate was dramatically increased when I had an attorney, a very experienced attorney say, I started thinking about my closing argument when I started preparing for trial, and ultimately that's what this is about, is you start as a divorce lawyer. For me, this is second nature and I'll start thinking about who is going to get what, And, the way that I describe it is that there's the Eric and Melanie basket, and then you start taking assets out or deaths at Debts out and putting them in the Eric column or the basket or the Melanie, basket and it's the same thing with the spreadsheet, when people see this, they really, their eyes light up and Brett as a financial advisor, when you sit someone down, whether it's a divorce or a new client, can you maybe walk listeners through the, just the high level process of where you guys go in terms of a financial plan and that process when you are first walking a client through and showing them what ultimately, you're analyzing?
Bret:Yeah, I think the key is the more we know, the more we can help. And that's why the marital balance sheet is so important because it really represents the all encompassing assets and liabilities and allows us to put things in different camps with your guidance as the attorney. And then from there, we can model out different scenarios and really understand what the client has. And when, Once we have that, we will also ask the clients for their expenses and really understanding what a client spends helps us craft a capital allocation strategy for them so that we can do the right financial plan, both in terms of investing and also better understanding and modeling their expenses.
Ryan Kalamaya:So the fix from our perspective is to engage cause often financial advisors are involved in this process. And as a divorce lawyer, it's so helpful to have a financial advisor, whether in existing, they have an existing relationship or to bring in someone new to help advise Eric or Melanie Wolfe. And. To do that early and for listeners that you know are just hearing this what we're showing on the screen here for the video is an example of a marital balance Spreadsheet and this is for eric and melanie wolf and it has the house and there's a column for you know the property in longmont colorado, which is where I am originally from and there's a house with a mortgage and, people, when they come to me, Brett, and I'm sure that, same thing for you is when they go through a divorce, they're saying someone needs to get the house. How do we deal with that? Do we, in terms of the value, do we you don't take a chainsaw and just cut it in half. So what happens is it goes into one party's column and then there's an offset for that the value. That is the first tip, but moving along, what is the second strategy or tip that we see frequently people overlooking in divorce economics, Brett?
Bret:I think the next one is really understanding pre and post tax. And by that, understanding an asset and understanding if you were to sell it, what the net proceeds are, meaning, paying either capital gains taxes or income taxes and at what rate, because I think one mistake people assume is that they potentially have more cash available to them or liquidity than maybe they actually do because they're not. They're not, or they're not remembering that if you sell an asset and you have a gain, there are taxes associated with that. And so the net to the client sometimes is less than they think it would be. And that's important, especially in divorce where maybe the client is going to need to go out and buy a new house. They really need to understand what cash is available to them for a down payment and thinking about it in terms of that. Perspective, I think, is helpful and that's, to me, one of the most common mistakes. I
Ryan Kalamaya:see it overlooked a lot and just for the law from a legal perspective really the court and the analysis from the Erica Melanie's perspective is whether or not there's actually going to be a tax consequence. So just as a reminder, we'll get into it later on. A division of property. So if Eric gets the house or Melanie gets the house, that is a not, that is not a tax taxable event under 1041 of the IRS code. But if Eric gets a house and is going to sell it, or there's going to be a sale or some sort of tax event, Melanie, for example, we'll get into some examples, Melanie gets a brokerage account and she's going to use that for that brokerage account for the sale or the, she's going to sell it for a down payment that then is considered and people often overlook that. And there's some. Law regarding whether or not that needs to be taken into consideration. It is, from my experience, it's often overlooked by divorce lawyers is that they often overlook the tax implications. So we have a fairly extensive case specific example, but really Brett, the takeaway from the first example of Erica Melanie, Is that the retirement account for Eric if Eric is going to get the retirement account, is the amount in his retirement account the same as Melanie? If she gets cash in in the savings account, if all things being equal, are those two assets the same? And if not, why not?
Bret:No, they're different. Cash is available today. In the Eric and Melanie example, there are significant penalties for taking money out of a 401k or IRA before retirement ages. And so really the investments in IRAs or 401k accounts really should be discounted or think, Thought of differently because that cash is not available to them today unless they were to pay not only a penalty, but then a capital gains tax on top of that, assuming that there are gains in that account. So you have to think about them differently.
Ryan Kalamaya:Yeah. So then, one thing, and we'll get into retirement accounts, dividing retirement accounts. Those are specific, if you have both parties getting on paper or on the spreadsheet, the same thing. Then when you peel back a layer of the onion or dig a little bit deeper, you realize that because of the tax implications on the retirement account, that Eric is actually walking away with. Arguably less, and it can be a substantial amount. The other example is if Melanie, for example, gets a brokerage account. And Brett, can you give an example of what a brokerage account, when we say an investment or brokerage account why, there's no restrictions. Like there are in taxes with retirement accounts because that brokerage account you know is just doesn't have the same restrictions But can you for just background can you give a an example or explain brokerage account and why? Taxes matter for a brokerage account.
Bret:So the difference between a brokerage account or what we call a taxable account and a retirement account, which is that IRA or 401k, is that the brokerage account, there's no penalty for taking money out of the account immediately, it's the client's. But we have to be cognizant of what we call the cost basis, meaning that what the client paid for the investments in that account, and then looking at what the market value is. And that difference between market value and cost basis is what is potentially taxed. It could be either taxed at a long term capital gains rate, which is lower, or a short term The client made that investment. If we go back to the question before, I don't mean to diminish the, what the value in the IRA or 401k is, because that can be very valuable. You're compounding those investments in a tax deferred way. So it eventually could be really valuable to the client. It's just the client needs to understand that those assets or money investments may not be readily available to them without significant penalty or taxes. And that's the key. Understanding what's available today versus what, could be available later.
Ryan Kalamaya:So the brokerage account, so if you have a hundred shares of Apple in the retirement account, if you're 45 like me, I, if I withdraw that money the sales, I liquidate the Apple stock and take the sale proceeds, then I'm going to be taxed at my, As ordinary income, which could be 30%, 35%, depends on the income for that for me or Eric Wolf in that particular year. And if it's early, there can be any, in addition penalties and a higher kind of a tax rate, but then that's, Different than in a brokerage account, if I take the proceeds from the Apple stock, really what we need to think about is did I buy the Apple stock when it was before, Apple came out with the iPod and iPhone, or did I just buy it last year or yesterday? Because. I might owe taxes if there has been a gain. And really what we need to think about is how much are those gains when we're allocating that. Particular asset, that brokerage account and going back to whether or not we're going to, there's going to be some tax consequences if Melanie is not going to liquidate that brokerage account, then Eric can arguably say, listen, it's whatever the share price, if it's 500, 000 overall in that brokerage account, it's 500, 000. But if Melanie says. I need money. This is the only asset that I have and I have to live off of that. Then she has to, if she's going to liquidate it, then we're going to get into taxes. But those scenarios are really fact specific, but a lot of times people overlook it. And the fixed Brett is what in terms of taxes in the marital balance spreadsheet.
Bret:It's really just getting the advisor involved. There's so many nuances. There's so many different specifics. The key to remember also is understanding what tax bracket the client is in. And if this sale is going to potentially put them into a different tax bracket for one year, because now all of a sudden they have higher income than they would normally have. They're also now paying a higher rate versus maybe selling the assets in the brokerage account a year later when they're not selling the house in the same year on top of the dual income if it's a, if Melanie and Eric are both working. So it is really specific to the client and Bring the advisor and the advisor is here to help and strategize and we can really help in mediation or in at court with the attorney and helping coming up with the right strategy here.
Ryan Kalamaya:Yeah. And before we get into our third and next strategy, I think it's helpful for listeners to understand that the divorce lawyer, they're really focused on getting Erica Melanie. And yes, we are thinking about long term and one of the most enjoyable parts of what I do as the divorce lawyer is helping people think about what is your future going to be like, but I can't talk, about the future too much because I'm so focused on the current situation. Situation, whether it be their kids and what the parenting plan is, but Brett, can you maybe speak to what a financial advisor, how you might have a different prism by which you are looking at Eric and Melanie as a client and their financial future that might be a little bit different than, mine as a divorce lawyer.
Bret:Yeah, and I think our lens is a little longer term. We are there to help during that, that, that period of conflict, if you will, but it's through the lens of what is this client's life look like when we're through this and making sure that the client is set up to be as successful as possible as a newly single person. And that's the lens that we're thinking about and coming up with a financial plan that now is different than when the client was previously married. It, it has their, there are key differences, two homes, things like that. So really thinking about it from that lens, from our vantage point is incredibly important.
Ryan Kalamaya:And I think a related point is the compensation structure. The attorney is paid by the hour. So as much as I want to talk about the future and I will do that, there, I have to go through a cost benefit analysis about talking to my client and saving them money. Whereas Brett Financial Advisors, you're looking at the longterm and your compensation is based on the assets under. Management, can you maybe speak to that a little bit and how it might help a divorce lawyer going through advising a client, given, what we talked about, you said, it really depends on the client. So if I'm somewhat limited with, the hourly structure that I have in how much I can spend, in terms of time with the client, why might that be a little bit different, from your perspective when it comes to, getting the clients. Long term objectives, figured out.
Bret:Yeah, and I can be specific to the way our firm thinks about it. There are some key differences among different firms in the industry, but we charge a simple management fee on a client's assets that we charge quarterly in arrears, meaning after the fact. The work we're doing up front here, oftentimes if it's a new client that we haven't been working with before. We're essentially a free resource for the attorneys, and we're, this is an investment on our behalf. We do this work with a commitment from the client that they're going to work with us at a later point once the assets are separated, if it happens to be a new client. But this is all included in our annual management fee. We do not charge hourly, and really it's an investment that we're making into the client. Upfront knowing that eventually the client will work with us and that client will hopefully be with us for, a very long time.
Ryan Kalamaya:Indeed. And if we get to our third kind of point that is the neglecting debt allocation and mortgage qualification. Work and i'll just I think it's a nice segue because you know the mortgage qualification work Super specific it's changing all the time and it's not the best use of my time as an attorney to really dig into these issues and so you know if I have a financial advisor working along with me as part of my, eric's team and melanie's team then you know You Brett, as a financial advisor, you can really walk them through. So maybe can you give a little bit more context and some nuances to what we're talking about here on this point?
Bret:Yeah, there's so many different layers to this point, and I think it's an important one. I think it really comes down to if the client is not going to keep the marital home and what the client's life looks like and where home will be after divorce. I think one of the common mistakes we see is people assume that they'll be eligible for A mortgage, particularly say a woman who works from the home who hasn't had a sort of defined income over the last few years, newly single without an income, that can oftentimes be challenging to, for a banker to underwrite as a client. So for us, our job as an advisor is to get there in early start speaking with different banks. to make sure that our client understands what the consequences are for maybe giving up the marital home as it relates to a mortgage or also working with the client on potentially strategizing with the attorney about maybe the soon to be ex can stay on the mortgage for some period of time so that they can in this higher rate environment, keep a low interest rate mortgage on the house without refinancing. There are lots of different strategies, but We have to talk about them and we have to work through them together.
Ryan Kalamaya:Yeah. And I think that going back for me if Melanie, if she's in the house and she knows that she's going to have to refinance the house, soon, or if she's going to move out and, buy in her goal is to buy something, that's something I'm going to work hand in hand with a financial advisor to really give her that. Sophisticated, thoughtful guidance, but then there's things that we can do during the divorce that will help her qualify down the road. And it could be separating a bank account. So if Melanie, traditionally Eric and Melanie had a joint checking account, ultimately in the divorce, they will eventually have separate accounts. Let's do that now. And then there could also be another option of getting temporary spousal maintenance from Eric. To Melanie, because the bank likes seeing the regular income into Melanie's separate account. And so there are things that we can do on our end during temporary orders or afterwards, but then also if we move. Along, then we also have to consider debt because it is over, looked a lot of times in a divorce. So for example, if Eric and Melanie didn't have, they didn't pay taxes for a couple of years and there's back taxes, I can tell you that I've seen the IRS, they don't care. Who agrees to what in the divorce agreement, they're just going to get paid, but then you gotta get into Brett and we have an example is who is actually going to be in a position to pay the debt. There's a difference between Melanie borrowing 100, 000 from her parents and is she likely going to be in that position to pay back her parents, but then What about the car loan or credit card debt? If it's credit card debt, we need to look at the cash flow. Who is likely going to be paying that debt. And we need to really adjust or think about what her life is going to be like. If she's going to take credit card debt and a car loan, then we need to really look at the cash flow. And so the fix is what Brett?
Bret:It's really understanding all the debt that is out there, creating what we call a debt waterfall, meaning we want to pay off certain debts before others. And third, incorporating that in the financial plan and making sure that there's the cash flow to support whatever debt remains outstanding after divorce.
Ryan Kalamaya:So Melanie, she may not be sophisticated and understand that if her credit card, debt is 18 percent or 20 percent versus a car loan at 5%, if she's going to make a payment or to go and make an overpayment, which one should she do? And that's a financial advisor can help walk her through that. And it's part of that. That kind of basic educational process that oftentimes occurs because it, my observation is that frequently there will be one party in a divorce that traditionally during the marriage took care of the finances. If we're getting into our next scenario or next tip and that's, you illiquid assets, I have seen, parties overreach even if they are the controlling financial parties. But, but before we get there, Brett what should we consider when it, what are we talking about when we're discussing liquid versus illiquid assets? What's an example of liquid versus illiquid assets?
Bret:So liquid are things that you can easily sell. There are things that include cash, bonds. Stocks, those are all considered liquid assets. Illiquid assets are things like homes businesses, and then other certain types of investments, whether that be in private equity or hedge funds or a variety of other asset classes. But more often than not, it tends to be real estate or businesses.
Ryan Kalamaya:And when we develop a financial plan for Eric and Melanie, we need to take into consideration the liquidity for each party. Because if Eric, for example, we have a scenario where there's a$1.5 million home with a mortgage of$500,000. So the net home, the net value is a hundred thousand dollars. I'm sorry, a million dollars. Then there's also a million dollar brokerage account. We already established and talked about what a brokerage account was. There's some retirement, credit card debt, some money, a substantial amount of money in savings, 950, 000. But then there's a couple more illiquid assets. There's a closely held business. You mentioned that was an illiquid asset. So if we assume that Eric, for example, has a business that's worth a million And then Erica is the beneficiary of a trust that's valued at 500, 000. Brett, if he is I want to get the house because I want to provide consistency, I can afford it. The, the mortgage might be in his name, only his name. And, it's a sweetheart mortgage. He could say, listen, I want to keep the family home and I get the business. What is, what are the concerns as a financial advisor, if you are advising Eric in that scenario?
Bret:Yeah, so the key if I were working with Eric there is helping him understand cash flow. Meaning, he's got to pay the mortgage on the house. He's got to be able to pay for his lifestyle and where is that coming if as part of the divorce, he's now putting aside or Melanie is taking more of the liquid assets that are more easily available to be sold. Eric needs to understand what that exactly means as it relates to his cash flow. The other thing that's really worth highlighting for the attorneys here is the more illiquid an asset is, typically the harder it is to value. So really making sure that we understand through the use of Third party appraisers oftentimes what an asset is worth. And there are different levels of illiquidity a home, for example, while considered maybe an illiquid asset could be sold in 12 months. Whereas a business that may not be able to be sold in 12 months or at all. So understanding the different depths of illiquid assets is also
Ryan Kalamaya:important. And I think emotionally too, this is something I have to deal with as a divorce lawyer is I can Look at Melanie and say, listen, you're getting brokerage accounts. You're getting the savings account. You're getting a ton of liquidity and like a financial advisor. You'd say, this is great. Like she's got a lot of options, but emotionally, she's going to feel like he got everything. Everything that's tangible because people, they really seize on the house. For example, that's an emotional consideration. It's we've, Allie Phillips talked on a previous podcast episode, Brett, one of the most common mistakes I hear is people taking a house that they cannot afford and that kind of is on this point in terms of illiquidity and it being. A mess, there, Melanie, she's going to say I, I just have these paper assets, but it's, I think, helpful to have a financial advisor talk about what her options are, but then, tying it back to one of our previous points is that if she gets a substantial brokerage account and she's going to use that brokerage account to buy a house because she's going to liquidate that and use that as the down payment. We got to take into consideration taxes. And as a financial advisor, you can walk her through, Hey, capital gains are low right now. Historically, you have a low income. It makes sense to to use that in a brokerage account, as opposed to the savings that aren't. That there's not going to be really any major tax implications. And you as a financial advisor can really help her decide what should she use and also what her budget is on that house, but it's going to matter for that liquidity or illiquidity that, is post decree.
Bret:Yeah, I think that's totally right. And to add one layer of that, it's evaluating what's in the brokerage account, is it in the S& P 500 index, which we consider to be lower risk, or is it in, is the entire brokerage account in three stocks? That we tend, that we happen to be in riskier sectors or more cyclical sectors and could have real downside consequences based on whatever macro environment we're in. So it really is a multi layered approach to understanding where risk lies.
Ryan Kalamaya:Yeah. And before we move on to the next point, which is failure to address retirement accounts, the other thing you mentioned, Brett, and I totally agree with the more illiquid an asset is generally the harder it is to value in the kind of key example. There's two of them in our previous example. One is a trust interest which a lot of Eric will come to me undoubtedly and say, How can you value, if my dad is going to die in 20 years, how can you value what that interest is? And there can be a lot of disputes on that. Same thing with the business business valuations. We've had podcast episodes on both trust interests and business valuations, but they are a point of conflict. Now, if we talk about the private investments, the hedge funds the Private credit, those sorts of things, venture capital, if Erica Melanie have invested in venture capital funds, then instead of valuing those one fix or option is to equally divide them in kind that is if you can, but then it also is going to matter Brett for you in terms of your advice on that the liquidity, because then your financial plan, it Melanie may get a substantial distribution, a capital distribution from, the venture capital firm in two years, but she can't use that to buy a house. And so that's going to come into the financial plan that we develop. But moving on to failure to address retirement accounts properly. Can you give listeners a little bit of an idea of what we're talking about here?
Bret:Yeah, I think that here is just really understanding the, what the retirement account is, how it's invested and what the rules are as it relates to taking distributions on it.
Ryan Kalamaya:Yeah. We talked a fair amount about this one earlier, but one fix for the retirement accounts is if we're talking about 401ks and IRAs. Then, we can divide those as a separate asset class. Usually if Eric, for example, has more retirement funds than Melanie, then what we can do is true up or equally divide just. Those retirement accounts and whether a Kudro, which is applicable for defined benefit plan or a 401k then, that, that is a next step. And usually the attorney is going to have to deal with that. But they can slip through the cracks. So one of our tips, Brett is what, how can financial advisors help with the division of the retirement? Accounts.
Bret:Yeah the retirement accounts are usually easy to value because we get statements. So really there's nothing to dispute as it relates to what it's worth. The real pain is just banging your head against the wall as it relates to the bureaucracy and administration of splitting these accounts, transferring these accounts. It's really hours of work, oftentimes on hold using, calling various financial institutions, making sure you have the right documents. And, you don't want your attorney, it's a huge pain. It's a, For the client to have to do it is, I wouldn't wish it upon anyone. Pick a financial wealth management advisory firm that has enough resources in it so that the client service team can work on your behalf to transfer these documents and retitle them if necessary because it is a bureaucratic pain in the butt.
Ryan Kalamaya:It is. And as an attorney, I will say that it's also ripe or a category where malpractice can occur very frequently. Preparing your own kudro, there are specialists out there, but one thing, or I guess a couple of tips on that one is the, a lot of attorneys, they frequently overlook what happens to either contributions during the interim time you get a deal done, it takes some there's a delay in getting the decree, but then if you're waiting on a Kudro, a qualified domestic relations order, sometimes those can take two months, three months. And so what happens, Brett, we're this week, we had a huge market day on, on Monday. And so what happens with gains or losses during that interim phase? Are we talking about a specific dollar amount? What happens if that dollar amount. Falls below what Melanie was supposed to get. Is it on a percentage basis? Are we going to just divide this 50 50? Then, then they equally divide any gains or losses over that market future. But. It oftentimes just slips through the cracks because the attorney's just you got to work with Melanie. You need to open up your own account and then, work with with Eric on getting it done and people are like, so done after their divorce, the last thing they want to be dealing with are. Just the bureaucratic, machinations of dividing a retirement account that they most often are not going to be able to use right now because of the penalties and fees that we talked about. So it is something that can really slip through the cracks and having a financial advisor help. Just marshal that through and really it's a lot of hand holding and so that is something that, there's a real benefit to having a financial advisor. Anything else on retirement benefits Brett, from your perspective?
Bret:No, I think what you said as well said, I think it's really the details that can fall through the cracks. Contributions, distributions, the transfers, retitling them properly. Really, you want someone who's done this before, who spends a lot of time. Our firm has people devoted to this who are working with our custodians. It's, you want it to be done correctly and done the first time because it is a huge pain to change it. There, as you mentioned, there are tax consequences for not doing it correctly. And you really want to work with someone who has experience.
Ryan Kalamaya:Yeah, and the final point on the retirement benefits and just as a, another example of why, Eric and Melanie is likely going to benefit from a financial advisor is that if there is a division of retirement benefits, most often that is done in cash. So if there is 500, 000 in a retirement account, and they're going to equally divide it in order for Eric to transfer 250, 000 in that account. Oftentimes what happens is there is, a liquidation that is not taxable because it's a retirement account, but Melanie, then the kind of key point is that Melanie and it's even if there is some sort of in kind transfer, Melanie has to figure out what should she invest. The 250, 000 in. And so often there is starting a new and she is going to need some help often in making that decision, especially if it's in cash. Does she do dollar cost averaging? What is she invested in? Does she just. Take one day and put it into the market. Those are the sorts of questions that as a divorce lawyer, we're not getting into. And as, financial advisor, Brett, that's really where add value. And you know that's something that you is right within your wheelhouse. But then if we come to our final point, This is mostly for the lawyers is the, and it's for, if Eric and Melanie are going through a divorce on their own, they could spend hours. One thing I've realized the longer I do this is that the more experienced divorce lawyers, they, if there is a house, if there is a business, if there's something of material value. They unless the party's at the very beginning you have a pretty good idea Are they going to be able to agree on this? Do they think that the house is worth did they just get it appraised? If not, just go get the appraisal because it could spend I could i've tried in my you know earlier days I tried to convince the other side, the house or the business was worthless or was worth you know a 10x and because there's an incentive because of the marital balance spreadsheet. It all goes back to there. And so if you engaging in experts early and people are always reluctant to incur costs, and I understand that, but often those costs for an appraiser, real estate appraiser in particular, but a business valuation expert, it's worth the money to go get it valued instead of arguing about how much it's worth. Go get evaluation expert. Does that mean it's, that's the end of the story? Oftentimes, no, but at least there's a starting point where people can engage in mediation. And if you get someone that is reputable it often saves a substantial amount of time, stress, and money when you just hire an expert early early on, but as a financial advisor, you can certainly, Brett, weigh in on, for example, those private investments or the hedge funds or other things that have the potential of an in kind division. And also, Brett you have some experience in, the business valuation and some of those, aspects and can help walk Erica Melanie through. Why it makes sense to engage with an expert as opposed to just fighting over it. Because sometimes you'll be helping both Eric and Melanie as the financial advisor that they both had, and you can walk them through almost as a mediator about why that might be, helpful for both of them on that particular point.
Bret:No, I think what you said is right. There are, the earlier you can engage outside experts, the better because you, it's just more efficient as it relates to the process. You know what the asset is, maybe on the marital balance sheet, you've now put it in yellow and you'll just come back to when you have a valuation and plug it in as opposed to debating what it's worth. I think there's certain assets that The, we, there are good networks of people that do a good job evaluating, whether that's real estate, maybe businesses. I think where the harder to value things that may be unique, a more nuanced approach, someone with more experience as it relates to GP stakes in venture capital firms and hedge funds. And those types of ownership stakes are oftentimes the areas that we find. The non expert or the spouse that is less familiar with that potentially get hurt later down the road because they just didn't appreciate what that could have been worth, based on cash flows that are really hard to predict over the next 10 years. But the person who's part of that firm has a better sense of what those could be. It's obviously hard to exactly define, but I think understanding that and explaining that to the client, because then maybe the argument is, and I've seen you do this in the past with mutual clients really well, is just splitting those. Because then you take the fight out of it and whatever the asset ends up being worth, the clients are splitting it 50 50 anyway. And that's a good way to not spend hours upon hours fighting about what it is and how much it's worth up front.
Ryan Kalamaya:And I think that goes into having a holistic approach because if you understand your client's objectives, you understand the tax implications, you do the marital balance spreadsheet at the very beginning, and you get an idea of your client's goals, then you might have some flexibility. If you see that instead of focusing on just that house or that business or what, the private investment in a vacuum, when you have everything. Laid out, then you can make those decisions. If Melanie is going to get plenty of liquidity and she's open to having, a new house, then she might be okay having that in kind division, which saves her stress. It saves her money. If I'm financially, it makes, it's good. And that might be different than, Hey, we just need to get this business valued because it's going to go on Eric's side of the ledger. And that's going to allow Melanie to achieve her number one goal of keeping the house. And those two scenarios are totally different. But it takes a financial advisor and a divorce lawyer working together to understand the client's priorities. It's like the Rolling Stones. You can't always get what you want, you find that you get what you need. And so you, it's for me in the financial advisor, someone like Brett, understanding what is that the client needs, like what are the priorities? Erica Mellon, you're not going to get every single thing in their divorce. And so it's understanding and being strategic about it. And so it, it revolves taxes, it involves retirement accounts, involves all the things that we just went over. And that's just a starting point, but hopefully that's helpful for people understanding some of the mistakes that we often see in some of the solutions that at least for us. Help Eric and Melanie move to a new and better life. But Brett, always a pleasure. We're going to bring it to a close, but thanks for presenting with me. Really looking forward to Family Law Institute. We get to schmooze with other divorce lawyers who, people, you know they're like, Oh my God, you guys must be all like to the conversations and everything just needs to be awful. Cause you guys deal with fighting people, but it's a good community. And looking forward to helping other professionals improve their practice. But Brett, thanks for joining me on this episode. I hope someone out there learned something.
Bret:Thanks for having me.
Ryan Kalamaya:hey everyone. This is Ryan again. Thank you for joining us on Divorce at Altittude. If you found our tips, insight, or discussion helpful, please tell a friend about this podcast. For show notes, additional resources or links mentioned on today's episode, visit Divorce at Altittude dot com. Follow us on Apple Podcasts, Spotify, or wherever you listen in. Many of our episodes are also posted on YouTube. You can also find Amy and. Law or 9 7 0 3 1 5 2 3 6 5. That's aaa.