Working with financial neutrals

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One of the most difficult problems a divorced couple may face is the division of marital property. Each spouse makes a list of everything they own and what they owe. This is known as the net worth statement. Then the court – or the spouses – must decide which property is separate (which that spouse keeps) and which is marital (or joint) and must be divided.

As you can imagine, this can be emotional and a source of conflict.

Assets like bank accounts are relatively easy to work with – you can look at a bank statement and know their value. However, there are other types of assets that may require a professional appraiser as their value is not obvious. This can be a company, the single-family home or a pension. (Yes, pensions are considered marital assets!)

What are financial neutrals?

It is useful and common for couples in mediation or collaborative processes to use financial neutrality to make informed decisions. Financial neutrals are employed by each spouse and have a professional relationship and obligation to each spouse. They can help keep all of the important documents and information in one place and generate reports that the team can use to make informed decisions. You can predict how a particular decision will affect each spouse in the future. You can analyze the tax advantages or disadvantages of a particular decision. They can help educate a spouse who has little experience in making financial decisions. You can meet with the couple to educate them.

When do you need financial neutrality?

Let’s get back to our fictional divorce friends Lonnie and Chris. They bought their house together during the marriage and there was no question that it was marital property. They agreed that Lonnie would stay in and buy Chris out. How do you know how much Lonnie owes Chris?

In the case of a judicial divorce, everyone would hire their own appraiser. After all, Chris has an interest in a high, Lonnie in a low, since the value of the house affects the purchase price.

In our scenario, however, Chris and Lonnie are in the mediation, so they have one neutral professional real estate appraiser who will help you to determine the market value of the house. The appraiser will inspect the house, look at its condition and determine if it conforms to the code (it is!). Then the appraiser looks for comparable sales and houses in the market. You will perform a detailed analysis of the current housing market in the area and review public records to see if any liens exist on the property. You could comment on the neighborhood itself, surrounding schools, and access to shopping, public transportation, and things to do as it can affect home value. The expert prepares a report and should explain his results to both sides. Ratings are almost always based on a number of assumptions that should be made explicit. For example, when evaluating a restaurant, it can be assumed that people will still be able to eat inside. We have learned that this assumption, which would have been taken for granted before March 2020, does not necessarily always have to be the case. By jointly presenting their findings to both parties, Chris and Lonnie will have the opportunity to ask questions and learn more about the reviewer’s process and assumptions. The appraiser is more likely to produce a truthful and fair review because they are neutral.

Chris and Lonnie not only saved time, stress and money by having two reviews, but also that the reviewers had to clarify the differences between their results. This is often the subject of court hearings and can be very stressful for everyone involved.

In this example you have used a neutral appraiser, but neutrals can also be Certified Divorce Financial Analysts or Certified Financial Planners. Financially neutral people familiar with the tax code (e.g. accountants) can also help the divorced couple find a solution that will maximize their tax benefits.

I have found many times that it is very beneficial – and ultimately cost effective – for couples to be financially neutral. Definitely worth talking to your spouse!

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