Housing Prices About to Get Crushed in Southern California?

Our Divorce Financial Planning business offers an interesting insight into the real estate markets of our communities. We see more homes bought and sold by our clients than all but the top 2% of realtors. In most cases we are also actively engaged in helping our clients make decisions about if or when to buy and sell. In doing so it is important to keep our finger on the pulse of prices and the factors that affect them.

In 2012 real estate prices in Southern California were stable seeing minimal growth in valuations. The market was slow and listing versus selling price spreads were negative meaning most property was selling at or below list prices. The higher the price the bigger the spread and the longer it took to sell. In early 2013 mortgage interest rates sank to such low levels that buyers began to realize they could be missing an opportunity to lock in low rates. At the same time the inventory of homes for sale was anemic thanks to the perception in the sellers market that prices were stagnant and it was not a good time to sell.

I believe the combination of low inventory of homes for sale and buyers starting to come into the market has created a bubble. I started to notice this in full swing during the Spring when homes first began universally selling above list prices and getting multiple bids. The low inventory of homes meant multiple buyers were competing and forced to offer continually higher purchase offers in order to risk getting out bid. The neighbors started to see homes selling at 10% premiums to their list price and realized they could now sell their own home and break even when two years ago they would have done a short sale. Here comes the bubble.

Buyers are worried the competitive offer environment will price them out of the homes they wish to purchase so they make progressively higher bids. Sellers start flooding the market with listings. The competitive purchase offer environment drys up thanks to increased inventory and rising interest rates. I expect prices may fall back to their 2012 levels while interest rates continue to rise over the next six months.

This bubble has made it difficult for many divorcing couples and individuals to make a decision about how to handle their family residence. As part of our Divorce Financial Planning conversation we are making sure clients understand that our current outlook on real estate prices may mean they need to consider alternative methods for valuing the home or mean they need to abandon the idea of keeping the residence thanks to the inflated price level. If you believe prices will fall you may not want to appraise a home today and buy it from your spouse. I am also advising clients that now may not be the best time to buy as I expect prices will be lower by next year.

Defense of Marriage Act Ruled Unconstitutional – Same-Sex Marriage Legal in California

June 26, 2013/in California Divorce Dictionary, Divorce Financial Planning /by Justin Reckers

The Supreme Court has found the Federal Defense of Marriage Act (DOMA) to be unconstitutional in all states where the state allows same-sex marriage. Same-sex couples now have equal rights to those of opposite-sex marriages including

File joint tax returns as their marriage is not recognized for this purpose. This may result in larger tax bills for same sex couples compared to a marriage of a man and woman which enjoys the right to file Married Jointly. Under DOMA same-sex couples did not have the option.
Take advantage of unlimited asset transfers between spouses. Section 1041 of the internal revenue code allows married couples to transfer an unlimited amount of assets back and forth during marriage and as part of a marital dissolution proceeding. A same sex couple did not have the same rights under DOMA and instead was often required to make other plans for tax efficiently passing assets via complicated and costly estate planning and trusts. Property settlements upon the dissolution of an opposite-sex marriage would not trigger income taxes. However, under DOMA a property settlement in the divorce of same-sex couples resulted in appreciated assets being deemed to have been sold for the value of the obligation being extinguished (the property settlement). This could trigger a gain or loss for tax purposes and have possible tax implications.
Collect Social Security benefits on their spouses record. Under DOMA Same sex couples did not have the right to spousal or survivor benefits under the Social Security system. This kept a same sex couple from adopting a family model with a stay at home parent and had major negative consequences if a major bread-winner passes away.
Have a spouse covered under an employer provided benefit program such as medical insurance. Under DOMA a same-sex couple was not afforded the same rights to cover their spouse on employer provided medical and other benefits. The resulting accommodation had become some corporations adopting eligibility requirements allowing a same sex couple to have coverage but DOMA made the benefit a taxable income to the employee when a man and woman couple would avoid such taxation.
Deduct alimony payments to their spouse on a tax return. Under DOMA alimony payable from a member of a same sex couple to their spouse is not tax deductible as it would be when payments are made between a man and woman couple. This arrangement generally had the effect of transferring income between ex-spouses tax efficiently by reducing income of the taxpayer in the higher marginal tax bracket and transferring it to the ex-spouse in the lower marginal tax bracket. Under DOMA alimony payments from same-sex divorces are not deductible for federal income tax purposes and may in fact be considered a gift, further reducing the lifetime limit or even triggering taxable gifts.

The Supreme Court has found the Proposition 8 supporters in California lack standing for appealing the voter decision making same-sex marriage legal in California and remanded the case to a lower court. Ultimately this means same-sex marriage in California will resume.

The combination of Defense of Marriage Act strike down and Proposition 8 decision means same-sex couples in California will have the same rights under the law as their opposite-sex counterparts.

Navigating Divorce Mediation – How to Manage the Process for Clients

April 21, 2013/in Divorce Financial Planning, Divorce Mediation /by Justin Reckers

Clarity about process in Divorce Mediation is absolutely mandatory for success.

The concept of Divorce Mediation has proliferated in America in the last thirty years as divorcing parties have realized that divorce court should be an option of last resort. Divorce Mediation supports the decision making of the people whose lives are actually affected by the decisions and allows divorcing individuals a sense of control of the outcome IF it is done right.

Divorce Mediation is a delicate process. Here are some things to keep in mind when considering Divorce Mediation.

Balance of Power:

Too much power on one side of the table creates an unsafe environment. The power could be due to the marital dynamic, control of financial resources of access to information. A skilled Divorce Mediator will recognize the power imbalance together with the dynamic creating it and set out to level the playing field.

Safe Container:

Lack of a safe container leaves couples feeling lost in the ambiguity of a complicated decision making process set a midst a legal dispute. A skilled Divorce Mediator will insure the couple is constantly apprised of where they are in the process, next steps in the process, homework assignments to be completed and time-lines for their completion and maintain an awareness for the parties of the legal process they are engaging in.

The Mediator:

“Mediators” are unregulated. There is no credential that guarantees a Divorce Mediator has the requisite knowledge and experience to assist a couple in navigating the largest financial transaction of their lives. Together with the proliferation of the Divorce Mediation process has come the proliferation of Divorce Mediators. Individuals with backgrounds varying from business owners to lawyers to accountants and financial advisors to Marriage and Family Therapists and Psychologists to law school graduates who never passed the bar exam and para-legals have hung up shingles as Divorce Mediators. Divorce Mediation is a process that can be taught. What can not be taught is the human dynamic that occurs during the process. For this reason it is important to engage a Divorce Mediator with experience and training specific to Divorce. This probably means a Lawyer and/or Certified Divorce Financial Analyst.

Costs:

Beware the flat fee Divorce Mediation. I have never seen a couple successfully navigate and complete a divorce for a flat fee. It is an unfair expectation to set a client up for. Often the professional will reach the extent of the time they have allocated for the flat fee and ask for more money or begin to dis-engage and abandon the parties before the Divorce Mediation process has been completed. Divorce mediation is not always cheap. Failed mediation proceedings may be a complete waste of money and time. I see Divorce Mediation proceedings fail all of the time.

Divorce Mediation Defined:

Just because you resolve your differences outside of court does not mean you are engaging in Divorce Mediation. Mediation is a process where a Neutral facilitator guides a couple through decision making around legal, emotional and financial issues that must be resolved in a divorce. Most Divorce cases resolve outside of a court room in settlement conferences, Collaborative Divorce of formal settlement proposals via letters between legal counsel. Couples need to understand that Divorce Mediation is not the only way to resolve their differences outside of court. Many will be better served by a process where they have legal counsel actively engaged which usually does not occur in Mediation.

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

Negotiating Against Yourself in Divorce

February 26, 2013/in Divorce Financial Planning, High Net Worth Divorce /by Justin Reckers

We are starting to notice a few Divorce Financial Planning trends in 2013 and will write about a couple over the next few weeks.

The first trend is what we call Negotiating Against Yourself. Negotiating Against Yourself in a divorce financial settlement happens when one party makes all the offers for settlement.

Assume a Husband makes an offer for a financial settlement in a divorce. Wife has four options. 1) Respond yes and accept the offer 2) Respond no and decline the offer 3) Respond with a counter offer 4) Don’t respond at all.

Each of the options can be a negotiation tactic. Negotiating Against Yourself is a common result and often the desired result for the negotiator who chooses option 4. The recipient of a settlement offer, the Wife in this case, may choose not to respond hoping the other party will grow tired of waiting and make another offer.

Most people in the Husband’s shoes in this example will grow restless, assume their original offer was simply not good enough and make another.

Making two offers before the opposing party in your negotiation makes their first is Negotiating Against Yourself. The Husband in this case must make progressively better offers in order to garner his wife’s response. As offers get better for her they get worse for him.

Divorce Financial Planning: Concentrated Stock Holdings During Divorce

January 2, 2013/in Divorce Financial Planning, High Net Worth Divorce /by Justin Reckers

Your Investments

We have many clients with significant wealth tied up in the stock of their employers. During Divorce Financial Planning it may become necessary to create liquidity to pay fees, facilitate an equalization payment or create diversification where there previously was none.

These stock holdings are through vehicles such as Employee Stock Purchase Plans, Stock Options and Restricted Stock. They may be vested, unvested or co-mingled, meaning they have different liquidity constraints. Each vehicle also has a different tax consequence at sale. Here is a quick review of some Divorce Financial Planning considerations to consider when seeking liquidity and diversification during during divorce proceedings.

Stock Holdings

For stock held outright we look at tax basis for guidance in our divorce financial planning. Shares with a low tax basis can be sold today to lock in tax rates and later repurchased if the client wishes to continue to hold the stock.

Restricted Stock

Restricted stock generally releases or distributes into a common brokerage account at vesting so it would be treated as normal stock holdings with divorce financial planning decisions based upon review of tax basis. The tax basis is based upon the stock price on the day of vesting and distribution.

Employee Stock Purchase Plans

Stock held in an Employee Stock Purchase plan has a complicated tax picture. The discount, typically 15%, given to the employee on the initial purchase price is taxed at ordinary income tax rates. The difference between the fair market value at purchase and the fair market value at sale is taxable at capital gains rates. ESPP assets often have low tax basis because employees buy and hold the stock so this may be the first place to look for harvesting gains and resetting basis during your divorce financial planning.

Stock Options

Non-Qualified stock options carry a more complicated set of tax implications and divorce financial planning considerations. Options are taxed as ordinary income for the difference between the strike price and the price at exercise. Options can be exercised today in a same day exercise and sale transaction to lock in tax rates. If you wished to hold the stock you could still exercise the options and lock in the ordinary income tax rates for 2012 but you would have to come up with cash from another source to fund the option exercise. Stock options also become a complicated logistics issue post divorce as the non-employee spouse may not be able to hold the options. For this reason alone it is worth considering liquidation during your divorce financial planning.

Wellspring Divorce Advisors builds long term distribution schedules and detailed analysis of current versus future values including opportunity cost and present value of money to help clients decide how to manage concentrated stock positions during and immediately after divorce proceedings.