Mr. Smith has made, on average, about 250k per year for the last 3 years. Mrs. Smith has been a stay at home mom. Mr. Smith owns a small business that has been shut down for the last 6 weeks and he has furloughed 3 of his employees. He hopes to get a PPP loan but hasn’t heard anything from his lender. Oh, they also have 2 furnished rental properties that they rent through AirBnB and while they were generally pretty predictable, have also sat empty for the last 6 weeks and who knows when that will change.
They’re now getting a divorce. How in the world are we going to estimate his income available for support? How are we possibly going to accurately value the rentals? Amidst all the current economic uncertainty, what’s the couple to do to arrive at a fair settlement?
“Build a settlement agreement that addresses every possible ‘what if’ scenario.”
Become The Divorce Hero
Enter the story’s superhero – YOU!!! It is exactly times like these when we can be instrumental to couples trying to wade through the quicksand of divorce negotiations. We can provide exactly the kind of financial brainstorming that this situation requires. We can build a settlement agreement that addresses every possible “what if” scenario.
I love to structure adjustable support agreements where each spouse has a target level income and every year, they capture the prior year’s incomes and adjust accordingly. For example, since his historic wage has been 250k, and we know things are tight not, let’s give him a target income of 200k. We’ve done wife’s expenses and she plans to go back to work. She thinks she can earn 30k and needs an additional 40k to cover her expenses, so we’ll give her a target total income of 70k. Year one, husband will pay support of 40k. At the end of that year, we look at wife’s earnings. For every dollar over 30k that she earns, her support will drop by 60 cents. Note that it’s not dollar for dollar. She has to be incented to earn more otherwise why should she bother. When she works harder, 40% of whatever she earns is hers to keep. After year one, she earned 40k. Year 2 husband will be 34k in support.
The Other Side
Then we have the other side of the equation to protect husband. Since his target income is 200k, we also check his income at end of year and if it is less than 200k, he will reduce support by 40% of the difference. Notice the same thing works in reverse. He has to be incented to get his earnings back up where they belong, or he is going to feel the pain more than her.
Keep In Mind
Fair warning, attorneys freak out at this kind of creativity and obviously it takes a cooperative couple to make agreements like this but it’s this type of environment where creativity like this may be the only way you’ll ever reach agreements.
If you like diving in to the ART of being a divorce financial planner like this, consider joining me on June 19 and 20 in Phoenix for my next Business Blastoff event. We’ll be talking all things Divorce!