Breaking up is hard to do

1. Breaking up is hard to do Glenda Baker, Senior Financial Advisor Jane Shanks, Regional Vice-President

3. Agenda The facts Divorce models How to help your clients Knowing your boundaries Divorce professionals Case study

4. Divorce: the numbers 43% of marriages end in divorce before the 50th wedding anniversary 70% of men and 58% of women will re-marry 35 year itch: “grey divorce” is a growing trend Increasing number of clients in 2nd and 3rd marriages Divorce rates 2.5 times higher for people in remarriages

5. Fears among baby boomers Being alone Failing again Becoming financially destitute Never finding another to live with or marry Staying angry or bitter over time Depression Not seeing children

6. Attribution on property transfers between spouses and common-law partners

7. Property transfers after separation or divorce

8. Property Transfers - residential real estate

9. Property Transfers: Who gets the Principal Residence Exception A family is allowed to designate one property as a “principle residence” Vacation property may qualify as the principal residence: “ordinarily inhabited” Can only claim one property as the principal residence for the same years of ownership Separated couple is not automatically entitled to two principal residence exemptions Must be living separate and apart for a full calendar year

10. Property Transfers: RRSPs and RRIFs Transfers as a result of separation or divorce can be tax deferred if: Transfer is made pursuant to a court order or written separation agreement Transferred directly to another registered plan Form T2220

11. Property Transfers: RRSPs and RRIFs If there is a significant difference in marginal tax rates, this is an effective way to satisfy equalization obligations Planning Point

12. Property Transfers: TFSAs Direct transfers as a result of separation or divorce are classified as “Qualified Transfers” if: Transfer is made pursuant to a court order or written separation agreement Living separate and apart No impact on either person’s contribution room

13. Property Transfers: TFSAs If they withdraw and then pay dollar amount, the amount is added to the unused contribution room and can be re-contributed the following year Planning Point

14. Deductibility of support payments Lump sum support payments generally not tax deductible Periodic payments made pursuant to a separation agreement or court order are generally deductible

15. Deductibility of support payments James v. The Queen, 2013 TCC 164

16. Divorce models Which one is right for you?

17. Kitchen Table Do-it-yourself Couple mutually agree on settlement Once in writing must seek independent legal advice

18. Kitchen Table

19. Litigation Each party hires a lawyer to advocate their positions Lawyer’s duty to get best deal for client If agreement can’t be reached then court will decide

20. Litigation

21. Mediation Couple meet with mediator to discuss issues and negotiate settlement Mediator doesn’t take sides, make decisions or give advice Still need independent legal advice

22. Mediation

23. Collaborative Each party hires a lawyer specifically trained in collaborative process All formally agree to work together in a respectful and honest manner Encourages an understanding of each party’s interest and concerns

24. Collaborative

25. It is common for divorcing clients to ask for your help

26. Be very careful!

27. What can’t you do? …tell clients how much support they will receive/pay …tell clients what assets they should receive DO NOT …share information about one spouse to the other …provide legal, accounting or valuation advice – unless you have those credentials

28. What can you do? Identify conflicts of interest Separate clients’ file (his/hers) Provide statements for assets as of date of separation and ACB (to owner) DO Help them understand that their financial life will change (now 2 households) Underwrite any new insurance needs once determined Refer to Divorce Professionals

29. Divorce Professionals Mediators Business valuators Accountants Financial divorce professionals (FDS/CDFA) Family law lawyers Collaborative lawyers Family health professionals Child counsellors

30. Role of Financial Divorce Professionals Examines financial issues, does not provide legal advice Assists spouses in gathering documents Provides financial analysis taking into consideration inflation and tax consequences Helps each spouse establish needs and hopes for the future Counsels clients on developing realistic budgets

31. Role of Financial Divorce Professionals Provides insight into pension plans, investments and insurance Determines assets that may not be divided Educates clients about tax and other financial consequences of retaining or giving up certain assets Assists lawyer in designing a settlement proposal that will maximize both spouses’ satisfaction

32. Role of Financial Divorce Professionals Provides unbiased presentations that show short-term and long-term financial impact of a proposed settlement Offers insight into pros and cons of various settlement proposals Hands back clients to their financial advisor for implementation of settlement, future planning and asset management

33. Case Study Tom and Katie are splitting up!

34. Background Information • 11-year relationship • 2 children, ages 9 and 11 They have been separated over 2 years and have not yet completed a separation • Katie • Aged 44 • Stay at home Mom • Tom • Aged 42 • Engineer • Salary $150K

35. Background Information Katie realizes she will have to go back to work at some point Tom knows that he has not been paying the right amount of child or spousal support Both Tom and Katie realize that Katie will need to upgrade her skills before re-entering the workforce Katie has told us she has huge trust issues

36. See any red flags so far?

37. What do they want?Ask and listen! Tom wants to keep his pension Katie wants to keep the house Tom wants to shorten the number of years he pays child support They both want their kids to maintain their activities and four years of post-secondary education

38. Gather information Provide them with a checklist of documents needed Assist with the completion of legal reports • Form 13.1 Financial Statement • Net Family Property Statement • Future Budgets • Order Pension Valuation Statement

39. Case Study A financial divorce professional identifies beyond the division of assets today to see what effect it will have on each party in their new life

40. What did the process look like? Compiled and analyzed all the information Completed the draft Net Family Proper Statement • Detailed Calculations: • Back spousal support • Back child support • Tax consideration • Child tax credit consideration Ran scenarios based on their desired goals and division of assets

41. Our findings in Round 1 Yikes! We ran several scenarios around the back support issues, the equalization and their goals

42. Round 1 Mid-point spousal support for maximum time and back support at mid-point Katie returns to work after 1 year and education upgrade Equalization to Tom of $90K less back child support owing of $14K and spousal support of $22K

43. Round 1 Katie’s education expense from her RRSP under the Life Long Learning Plan Katie stays in house until youngest child finishes school Tom keeps pension and purchases a house using equalization payment for his down payment

44. Round 1Outcome Katie is OK until age 69 then she runs out of money Tom has some minor cash flow shortages in the first couple of years but is fine and does not ever run out of money

45. First Scenario

46. First Scenario

47. Their Reaction Katie was shocked that she would owe Tom money in equalization Tom was shocked at the back support numbers They both broke down…crying…

48. What next? Remind them of their priorities and goals, short term and long term Brain storm other options

49. Long and short of it In our 15th scenario we were able to reach an agreement and it became the financial settlement Here’s what it looked like…

50. Final Scenario – Net Worth