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Breaking up is hard to do

Glenda Baker, Senior Financial Advisor

Jane Shanks, Regional Vice-President

Agenda

The facts

Divorce models

Knowing your boundaries

Divorce professionals

Case study

How to help your clients

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

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

Attribution on property transfers between spouses and common-law partners

Property transfers after separation or divorce

No tax on transfers of a capital property to a spouse/former spouse if the transfer is in settlement of marital property rights

Automatic rollover at ACB, unless elect out of rollover to transfer at FMC

IT – 325R2 – Property Transfers after Separation, Divorce or Annulment

Property Transfers - residential real estate

Family Circumstances

& Goals

Tax Implications

Ownership & Use

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

Property Transfers: RRSPs and RRIFs

Transfers as a result of separation or divorce can be tax deferred if:

Transferred directly to another

registered plan

Transfer is made pursuant to a court order or

written separation agreement

Form T2220

Property Transfers: RRSPs and RRIFs

Planning

Point

If there is a significant difference in marginal

tax rates, this is an effective way to satisfy

equalization obligations

Property Transfers: TFSAs

Direct transfers as a result of separation or divorce are classified as “Qualified Transfers” if:

Living separate and apart

Transfer is made pursuant to a court order or

written separation agreement

No impact on either person’s contribution room

Planning

Point

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

Property Transfers: TFSAs

Deductibility of support payments

Periodic payments made

pursuant to a separation

agreement or court order are

generally deductible

Lump sum support

payments generally not tax

deductible

Deductibility of support payments

James v. The Queen, 2013 TCC 164

Divorce modelsWhich one is right for you?

Kitchen Table

Do-it-yourself

Couple mutually agree on settlement

Once in writing must seek independent legal advice

May be giving up valuable

rights

Quick, inexpensive

and less outside

influences

Kitchen Table

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

Court proceedings

are public and can be very expensive

Resolution for people who can’t settle

Litigation

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

No advice from mediator

Both parties have

opportunity to be heard and assisted by a neutral party

Mediation

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

Collaborative

Team must withdraw if

unable to settle

Couple focuses on ways to

restructure so everyone’s

needs are met

It is common for divorcing clients to ask for your help

Be very careful!

…tell clients how much support they will receive/pay

…tell clients what assets they should receive

…share information about one spouse to the other

…provide legal, accounting or valuation advice – unless you have those credentials

What can’t you do?

DO NOT

Identify conflicts of interest

Provide statements for assets as of date of separation and ACB (to owner)

Help them understand that their financial life will change (now 2 households)

Underwrite any new insurance needs once determined

Separate clients’ file (his/hers)

Refer to Divorce Professionals

DO

What can you do?

Divorce Professionals

Family law lawyers

Collaborative lawyers

Family health professionals

Child counsellors

Mediators

Business valuators

Accountants

Financial divorce professionals (FDS/CDFA)

Role of Financial Divorce Professionals

Helps each spouse establish needs and hopes for the future

Examines financial issues, does not provide legal advice

Assists spouses in gathering documents

Provides financial analysis taking into consideration inflation and tax consequences

Counsels clients on developing realistic budgets

Role of Financial Divorce Professionals

Assists lawyer in designing a settlement proposal that will maximize both spouses’ satisfaction

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

Role of Financial Divorce Professionals

Hands back clients to their financial advisor for implementation of settlement, future planning and asset management

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

Case Study

Tom and Katie are splitting up!

Background Information

Tom• Aged 42• Engineer• Salary $150K

Katie• Aged 44• Stay at home Mom

• 11-year relationship

• 2 children, ages 9 and 11

They have been separated over 2

years and have not yet completed a

separation

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

See any red flags so far?

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

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

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

What did the process look like?

Detailed Calculations:• Back spousal support• Back child support• Tax consideration• Child tax credit

consideration

Compiled and analyzed all the information

Completed the draft Net Family Proper

Statement

Ran scenarios based on their desired goals and division of assets

Our findings in Round 1Yikes!

We ran several scenarios around the back support

issues, the equalization and their goals

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

Round 1

Katie stays in house until youngest child finishes school

Tom keeps pension and purchases a house using equalization payment for his down payment

Katie’s education expense from her RRSP under the Life Long Learning Plan

Round 1Outcome

Tom has some minor cash flow shortages in the first couple of years but is fine and does not ever run out of money

Katie is OK until age 69 then she runs out of money

First Scenario

First Scenario

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…

What next?

Remind them of their priorities and goals, short term and long term

Brain storm other options

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…

Final Scenario – Net Worth

Final Scenario – Working Capital

What did this look like for each of them?

Pays spousal support for four more years at the mid-range for his salary

Child support as per guidelines

Forgoes equalization payment

Tom

No back support paid

Keeps his pension

Shares day care expenses proportionately to his income when Katie returns to work

Postpones buying a house until support payments are finished

Tom

RESP contributions set up proportionately to income

Tom

He never runs out of money

Katie

Child support and spousal support increases as per guidelines

She does not have to pay Tom an equalization payment

Keeps the house with the intention to sell when youngest leaves home

Takes money from her RRSP to pay for education

Katie

She never runs out of money

Conclusion

Tom and Katie reached an agreement on a settlement that they helped

orchestrate. It was based on their interests and needs.

They commented that our neutral voice helped them to reach a settlement that they both felt

comfortable with now and 25 years from now.

Conclusion

Thank you

For advisor use only

All charts and illustrations in this presentation are for illustrative purposes only. They are not intended to predict or project investment results. Assante Wealth Management’s advisory services are offered through Assante Financial Management Ltd., Assante Capital Management Ltd. and Assante Estate and Insurance Services Inc. Assante Estate and Insurance Services Inc. is owned by Assante Financial Management Ltd. and Assante Wealth Management (Canada) Ltd. ®The Assante symbol and Assante Wealth Management are registered trademarks of CI Investments Inc., used under licence.