The financial and investment impact of divorce

With the Market at Historical Highs, Now What?

With the Dow up almost 15% measured from days before the November 8th election to the middle of February, which is equivalent to an annualized return of almost 60%, the question becomes is this the time to reassess the way your retirement savings are allocated. Here are ten facts which don't always make their way to main street, but have significant impact on that question.   Federal tax receipts have gone negative for the first time since the last recession. Job growth at S&P 500 companies has turned negative for the first time since the last recession. The U.S. trade deficit in 2016 was the largest in four years. The latest labor report indicated the largest decline in average weekly hours since the recession of 2008. The economy, eight plus years past the Great Recession, has grown at an anemic rate of only 1.5%-2%. In fact, President Obama's term as president will go down as the only presidential term in modern American history never to have had a year where the economy grew at least 3%, and he had two terms to achieve this. The price to sales ratio today for the S&P 500 is amongst the highest ever recorded. The price to earnings ratio averaged over a ten year period is almost at its 1929 level, exceeds the level reached prior to the Great Recession, and has only been higher at the peak of the dot com period in 2000. The Federal Reserve has propped up asset prices over the last nine years through printing money to purchase mortgages and bonds held on the balance sheets of banks in order to create a market for these securities, thereby reducing interest rates far below where the free market would likely have set them. They are now reversing course by both raising interest rates, and just as importantly, reducing the size of their balance sheet, which will also cause interest rates to rise. The U.S. dollar has risen considerably over the last year. This makes U.S. exports that much more expensive and increases the trade deficit. The market is pricing in all the positive elements of President Trump's campaign economic policies, including mainly massive tax reduction, infrastructure spending, and deregulation. For whatever reason, it is ignoring the negative consequences of what he simultaneously has promoted, namely tariffs, protectionism, isolationism, and scrapping trade agreements. The market for some reason is also ignoring the geopolitical risks associated with a Trump administration. Instead of focusing on tax policy, infrastructure projects, and areas where regulations could be modified to promote more economic growth, so much of the President's first month in office has been riddled with crowd size, assault on the media, botched travel policies, tensions with important allies and trade partners including Mexico, Australia, China, and the U.K., and a resignation of a high cabinet appointment with ties to Russia that provides impetus to investigate the President's potential knowledge or involvement. The amalgamation of these events impact the President's focus and undermine the likelihood that all of his economic agenda will be supported by Congress. The euphoria in the market is also ignoring provocations from Iran, North Korea, and Russia as well as the costs of military engagements especially in a period of lower tax revenues.     We are living in an unconventional world mired with extreme uncertainty, all of which are currently being dismissed by the market. In such an unconventional world, one should not approach his or her investments or investment management with conventional tools. The euphoria in the stock market today is reminiscent to me of similar emotions and confidence in real estate before the implosion. Notwithstanding the lowest interest rates in recorded history and the rally in asset prices, most people's homes today are still pretty far below their valuations reached a decade ago. History may not necessarily repeat, but it rhymes. I am always happy to help with outside the box thinking and strategies most appropriate for current market conditions and risks. Wishing you all the best,   Greg Gann           The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted.

Buy Gold in Euros; Not Dollars

The S&P500 is at an all-time high. Will this last? Over the last two years, new highs have been erased with corrections, resulting in a market that until Brexit was trading sideways, and going virtually nowhere.

Britain voting to rescind its membership within the European Union was supposed to be a really bad thing. Yet, subsequent to what has been considered a devastating election outcome, markets have rallied. In the U.S., the market has broken out of its two year trading range. And, it seems as if a new all-time high is hit almost every day post Brexit. What gives? The only conclusion is that once again the market is interpreting bad news as good news in hopes of more easy monetary policies and low interest rates for longer.

The very same monetary policies and authorities who created inflated housing and stock markets before the 2008 crash are back at it. But this time, it is with vengeance. Interest rates around the world have never been lower. In fact, bonds issued by about a third of all the world’s developed countries issue negative interest rates. You have to pay Switzerland, Japan, and Germany for the privilege of lending them money. No thank you very much.

The July issue of the Felder Report illustrated how the inflation of asset prices relative to disposable income has never been higher, including the dot com and housing bubbles. For the last five quarters in a row, the cumulative earnings reported by the companies within the S&P 500 index have declined. World trade is compressed. And, gold which is a fear indicator has been by far one of the most superlative places to invest this year.

Because of the rise in gold prices this year, there has been tremendous demand for investing in the precious metal. Most Americans invest in gold denominated in dollars. There is generally a well -established relationship between gold and the U.S. dollar. The weaker the dollar, the stronger prices for gold go. Because of subpar GDP growth in the U.S. as well as other measures that do not indicate a strong economy, the U.S. dollar for the last year has declined.

The market is pricing in almost no chance for any significant interest rate increase in the U.S. before the end of 2017. All of this has led to a weaker dollar, and a boon for gold denominated in dollars. By loading up on gold expressed in U.S. dollars, investors are knowingly or unknowingly making a bet on when interest rates in the U.S. will rise and the inherent strength of the dollar. This to me is a big bet. Many of the same market participants who didn’t expect Britain to leave the EU are now betting on how far out the Fed will go before raising interest rates.

The stock market is trading in a way that is ignoring the fundamental weakness of the underlying economies. It is betting on more monetary stimulus and continued almost zero interest rate policy out to the distant future. Investing is about taking calculated risks. It should not be about gambling. This cycle has transpired longer than I imagined. Just like real estate that was appreciating from 2000 to 2007 at a rate far in excess of peoples’ wages, this cycle has gone for a long time.

I don’t know if the stock market can be compared to the housing market of 2005, or if it is more akin to the market of 2007, but for me, the mixed messages are disconcerting. There are many investments whose performance is agnostic to the direction of the market. One of these is gold. However, unlike the majority of U.S. investors who are allocating to gold denominated in dollars, I believe that notwithstanding our challenges, the U.S. is by far the strongest economy on the globe. I also feel that Europe is a grand experiment that is becoming undermined. For these reasons, where I am allocating to gold, I am doing so expressed in Euros. I believe these will appreciate not only with respect to appreciation of gold, but also relative to that appreciation compared with any depreciation in the Euro. I believe in the long term strength of the dollar, and I also believe that interest rates will rise sooner than the market is pricing. I also believe that the Euro will lose ground because of the fundamental weaknesses and challenges within the region. For all of these reasons, I want my gold measured in Euros, rather than dollars.

Unusual times call for outside the box thinking and strategies.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings and may not be suitable for all investors. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no assurance any of the trends mentioned will continue in the future.

Why the Lower Wage Earner Should Request a Prenuptial

While it is certainly the case that I have female clients who earn more than their husbands, it is much more common, especially in a second marriage that the husband is the larger breadwinner. This reality is impacted by the fact that often the second wife is younger than her husband and therefore she didn’t have as a long an earnings history as her husband.

Especially for second (and subsequent) marriages, there are many reasons why the older, more established and financially secure spouse (husband) would want a prenuptial agreement. As the relationship deepens and the discussion of marriage ensues, broaching the subject of a prenuptial is front and center on the top wage earner’s mind. After all, his friends, relatives, and counsel all have his ear. Regardless how secure he feels in the relationship, there are still these voices in his head that come from these external sources which may make him question how much her interest in marrying him is related to financial security.

Instead of waiting for him to initiate the conversation, I suggest that it is in the best interest of the wife to suggest the prenuptial agreement before he does. After all, it is likely the million-pound gorilla underlying the wedding plans. I admit that there is some reverse psychology behind this suggestion. However, it could put the wife in the driver’s seat. He may be astounded that this was her idea which could make him agree to a whole lot more in the agreement than he would otherwise.  If there is going to be a prenuptial in any case, it is best to position oneself in the most opportune negotiating stance.

Incorporating psychology and outside the box thinking are what I most enjoy about my marital and divorce financial planning practice.

 

 

 

Divorce financial planning is a fee-only process that does not involve investment advice or securities transactions. All information provided herein is financial and educational in nature and should not be relied upon as legal or tax advice.  You should consult with your tax advisor or attorney regarding specific tax issues.

College Financial Assistance and Divorce

Many divorces occur concurrently with the last child leaving home for college. The questions to ask is how this will affect The Free Application for Federal Student Aid (FAFSA), and what are the respective financial planning opportunities.

FAFSA

Every year the U.S. Department of Education awards about $150 billion to help students pay for college. This federal student aid is awarded in the form of grants, work-study funds, and low interest loans. There is also aid from state government, scholarships, tax credits, and aid for the military.

For purposes of FAFSA, custody is established according to which parent the student lived with the most through the year. If the child when home lives mostly with his mom, then his mom’s financial information is all that FAFSA considers. Although the dad’s income might be high enough to preclude federal student aid, if the dad is not the custodial parent for purposes of FAFSA then his income is irrelevant and frankly not considered. If the couple were still married and/or still cohabitating, then his income would be factored into the equation.

Let’s say the mom is a social worker who earns $50,000/year while the dad is a surgeon who earns $350,000/year. Had the couple remained together, they would not have qualified for any federal student aid. However, upon divorcing, the mom as the custodial parent may qualify for such aid. Her assets and income, including any alimony would have to be revealed and factored in to determine the extent of eligibility, but the dad’s income would be ignored. I am involved with a case that meets this fact pattern. Mom will become the custodial parent. Her income is a small fraction of her husband’s. And, although she is likely to receive alimony, it might behoove the couple to engage collaboratively in divorce financial planning to transfer more of the husband’s retirement plan savings to the wife in exchange for less alimony as a way to support the educational financial planning opportunities.  The reason for this is because assets in a qualified retirement plan or IRA are excluded from FAFSA calculations. Therefore, if the wife can support herself on her salary and/or with additional but modest alimony, and if through the divorce agreement and transfer of enough assets from the husband’s retirement plan both she and the husband can live comfortably in retirement, then this might be a way of qualifying for federal student aid that would not otherwise have been available.

Remarriage and FAFSA

Although the dad’s income might be excluded from FAFSA calculations, if the wife remarries, her second husband’s income will be considered in arriving at any FAFSA eligibility. FAFSA looks at household income. Even though the step-dad might not share a biological bond with the student, his contributions to household income are relevant. Notwithstanding a prenuptial agreement to the contrary, the federal government still considers the step-parent as a source of support. This could possibly present a financial justification to delay a remarriage until after the child graduates from college.

Private versus Public Colleges

Most state universities use FAFSA to determine aid eligibility. However, many private colleges and universities use their own formulas to determine how much of their own available aid to award beyond what might be accessible through FAFSA. It is very common for private institutions to consider the income capacities of the custodial as well as the non-custodial parent as well as the earnings of step-parents. Not only are private tuitions significantly higher than those of public institutions, but additionally, they do not provide the same opportunities with respect to divorce and tuition planning. 

 

 

Divorce financial planning is a fee-only process that does not involve investment advice or securities transactions. All information provided herein is financial and educational in nature and should not be relied upon as legal or tax advice.  You should consult with your tax advisor or attorney regarding specific tax issues.

 

 

 

Itemize Before Re-Marrying

As sensible as it may be to secure a pre-nuptial agreement, particularly in a second or subsequent marriage, there are obvious emotional and personal issues that might prevent the party who would most benefit from the agreement to refrain, feeling uncomfortable even broaching the subject. I get that. It is easy for well-meaning friends, family and counsel to direct our lives. But ultimately, it is our life, and we have to weigh the pros and cons, and deal with the consequences.

As a low-hanging fruit concept for those who for whatever reason are not inclined to go down the pre-nuptial route, I suggest at least having both parties sign off as to the inventory of the assets each party is bringing to the marriage and value of those assets.

This isn’t asking either spouse to waive his or her interest in marital property or even the growth during marriage of non-marital property, which are common arguments against a pre-nuptial. Nor does it necessarily have to involve fees or other professionals.  Nonetheless, it can avoid lots of headaches, frustrations, and expenses should the marriage not last forever.

The reason I know this is that I am currently providing financial analysis for a second marriage that only lasted six years. By the way, the occurrence of divorce is much higher for those who re-marry than for first time couples. [1]Also, second marriages often last less than ten years[2]. In this divorce case, the husband has a business, retirement and non-retirement accounts, and they have lived in the home that he owned prior to the marriage.

Although both parties agree that the pre-marital value of these assets are non-marital, the wife will want to lay claim to half of the appreciation of each of these assets over the six years of the marriage. Now we have to re-construct the values for each of these assets not only today, but also as of the date of marriage, including the business, which can be very expensive and contentious to value.

We all have insurance policies which itemize the fair market value of valuables. If there is a loss, there already exists a valuation to which the parties agreed. In a similar fashion, it shouldn’t be too uncomfortable simply to itemize the value of assets each party is bringing to the marriage, and this serves as insurance to establish those values up-front rather than arguing and paying a fortune down the road.

Seeing so many things that go wrong after the marriage ends enables us to provide financial analysis and planning before the couple takes their vows. This aims to facilitate couples living happily ever after regardless whether they remain together or apart.   

 

* Divorce financial planning is a fee-only process that does not involve investment advice or securities transactions. All information provided herein is financial and educational in nature and should not be relied upon as legal or tax advice. You should consult with your tax advisor or attorney regarding specific tax issues.

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[1] Second (And Third) Marriages: Destined for Divorce? Huffington Post 02/08/2013,

[2] (1)National Center for Health Statistics, B. F. Wilson. 19B9. Remarriages and Subsequent Divorces: United States. Vita/ and Hea/th Statistics. Series 21, No. 45. DHHS Pub. No. (PHS) 89-1923. Public Health Service. Washington: U.S. Government Printing Office

Stock Options and Divorce

 A)           Overview:

Many executives of both public and private companies are granted stock options and restricted stock units either as an inducement to join a company, reward for past contributions, or as an incentive to remain tied to the company. These can represent an extremely lucrative portion of a marital estate; yet their valuations are often miscalculated.

 B)            Issues to Address:

The primary issues to address with respect to stock options in divorce is whether they are marital, vested, how will they be valued, how will they be divided, and what are the tax considerations. Whether they are treated as an asset or income or both will impact property division and spousal and child support. Options which are awarded and vested during the marriage are 100% marital. For options which are awarded but not vested, a determination must be made as to whether the options were granted as a result of past service or future performance.

 C)            Types of Stock Options and Tax Consequences:

Stock Options come in two varieties- incentive stock options and non- qualified stock options. Incentive stock options are not taxed upon exercise, but rather upon the sale of the underlying stock. Shares held for one year from the date of exercise and two years from the date of the grant receive long-term capital gain tax treatment. Incentive Stock Options must be exercised within 10 years of the grant and they can only be transferred as a result of the employee’s death. Non-qualified stock options are far more common. They are taxed at the date of exercise at ordinary income tax rates that reflect the difference in price between the lesser exercise (strike) price and the fair market value.

 D)           Division and Valuation:

The employee’s benefits have to be reviewed to determine whether the plan permits the employee spouse to transfer the options in kind to the non-employee spouse. It is much more likely that an in kind transfer is not feasible, and therefore a constructive trust might need to be executed whereby the employee spouse will in fact effectuate the transfer to the trust for the benefit of the non-employee spouse. In this case, the employee spouse needs to act as a fiduciary for the ex-spouse well after the divorce is finalized.

There are fundamentally two ways to value the options. One is known as the intrinsic value that simply measures the difference in price between the strike price and the value as of the date of divorce. This is very simple and may significantly undercut the other valuation method known as the Black Sholes pricing model. Black Scholes factors in various features of the option such as strike price, time to maturity, current price and historical price volatility, all of which are adjusted by a risk free rate of return, namely the rate on a 30 year Treasury. Google provides the daily volatility for any publicly traded stock and this number can be inserted into a Black-Scholes calculator. An option on a stock with nice historical appreciation would generate a significantly higher Black-Scholes value than an intrinsic value, and particularly for large awards this differential can be very significant. In other words, it is important to appreciate the impacts and distinctions between the two valuation methodologies. A spouse who seeks to minimize the valuation of options for a stock with good appreciation potential would argue for the intrinsic value method. However, the other spouse would want to negotiate a valuation based on Black Sholes. In valuing stock options, particularly if the value will be used to offset other aspects of the property settlement, it is important to calculate using both methods as this can represent a big bargaining chip for negotiations.

E)           Marital versus Non-Marital Calculations:

Stock options that were granted and vested during the marriage are clearly marital property. The challenge is valuing options that were granted during the marriage, but vest after the date of divorce. A time formula or coverture fraction is usually applied to determine the marital share. Other than options which are provided to a new employee as incentive to join the corporation, the formula used to establish the marital portion is known as the Nelson formula to reference the case from which it derived. The formula is as follows: the number of months between the date of the grant and the date of the divorce is divided by the number of months between the date of the grant and the date of exercisability. Then this fraction is multiplied by the number of shares which can be exercised, and that ratio represents the number of options which are marital property, which can either be exercised or used for purposes of offsetting the value of other marital property.

 F)            Mechanics:

If the non-employee spouse wishes to exercise the stock purchase when the option vests and hold onto the shares, and the plan does not allow for direct transfers of the options, then (s)he would have to have adequate cash to provide to the employee spouse to effectuate the purchase. The shares could then be transferred to the non-employee spouse. Alternatively, the employee spouse could exercise and sell the options simultaneously on behalf of the non-employee spouse. However, under both scenarios, there will have to be some remuneration to the employee spouse to account for the tax consequence resulting from the exercise. Therefore, the employee spouse may need to exercise more shares than (s)he will transfer to the non-employee spouse in order to gross up the associated tax liability. If a settlement agreement makes reference to the number of shares that the non-employee spouse may exercise based on the non-employee’s shares of the marital portion of the stock options, but does not make reference to how the tax ramifications of that exercise should be treated, then such ambiguity will result in problems, potential post-divorce litigation, and a tax nightmare. In addition to the settlement agreement providing clarification regarding the tax consequences of exercising the stock options on behalf of  the non-employee spouse, it should also specify that the employee spouse must provide the non-employee spouse with all vesting schedules, statements, and exercise options. The agreement should also put the burden on the non-employee spouse upon vesting to send written request to the employee spouse to request action. Stock options can represent a significant portion of a marital estate. It is essential to understand how such options can be valued as well as to document the rights and responsibilities associated with maintaining this asset.

G)           Disclaimer:

Divorce financial planning is a fee-only process that does not involve investment advice or securities transactions. All information provided herein is financial and educational in nature and should not be relied upon as legal or tax advice.  You should consult with your tax advisor or attorney regarding specific tax issues.