50/50 Is Not Always An Equal Split

Author:  Paul Beck, FMA, CFP, FCSI, CFDS

When couples decide to finally spit up and go their separate ways it is an emotional and uncertain time for everyone involved.  One of the biggest questions asked is, “How am I going to survive financially?” Part of that question causes us to help them look at how to divide up our family property. In other words: who gets what. If the couple has been together a long time and both entered their relationship basically broke, the process can appear quite simple. You may help them establish a value of all the property accumulated during the relationship and then start dividing up who gets what until they arrive at a 50/50 split and both have the property that is most important to them.

If your client’s total family property is made up of similar assets, then it is likely no further analysis is required, and the couple can move forward with having the division documented by their lawyer in their legal agreement. However, if your case has different types of property to share then one of the parties may have an advantage over the other beyond the separation date  if each partner received 50% of the fair market value.

To keep it simple here I am going to use two different assets to illustrate my point: a family home and a defined benefit pension plan. I am not going to get into providing financial illustrations here or suggesting one asset is better than the other but raise some points to consider when helping your clients work through who gets what.

As you both partners consider their options here, it would be in both parties’ best interest to use professionals to prepare accurate valuations on their  family property. No one likes to spend money on fees, but money spent now could save either party tens, if not hundreds of thousands, of dollars over the course of their lifetime. Separating partners may also give some consideration to hiring a Chartered Financial Divorce Specialist (CFDS, see www.afds.ca for a listing). These professionals are trained in all aspects of family and divorce matters and have a greater level of training beyond your typical financial advisor.

Let’s start with the family home. With escalating house prices over the past few years this may be the largest asset the partners own. There are likely no tax implications when dividing up the property but there are ongoing costs. The party thinking of taking over the family home will need to ask themself if they will have sufficient income to maintain the home including property taxes, insurance, utilities, and a slush fund to cover repairs over the years. they may even have to make mortgage payments if there is still a mortgage on the home.

If your clients are  beyond age 40 it is important to look at how they will fund their retirement. If all eggs are in the  house basket, how are they  going to pay those ongoing never-ending expenses when they retire? If your client has  no income, they can’t eat drywall. Some people think the equity in their home is their retirement plan. If this is the case, then they will need to sell their home to generate the cash and then need to use some of that cash monthly to pay rent. I am not sure this is what people have in mind when they are thinking about this strategy.

The second primary asset that is of significant consideration is the division of family property are pensions. If a pension is a defined contribution or group registered savings plan (RSP), then the calculations are straightforward.  If a pension is a defined benefit plan, both partners need to understand both the current and future value of the pension.

Many people make the mistake of believing the current commuted amount on their last pension statement represents today’s accurate valuation number. Again, it is important to encourage your clients to seek a pension properly evaluated by a pension valuator. Considerations must be given to your age, tax implications and future years of service.  Some pensions automatically name a former spouse as beneficiary if the party is already receiving a pension at the time of the family property division.

The family home looks at realizing the value and enjoyment of the asset now but doesn’t really address the financial impact to a client later on in life. The pension plan may support retirement needs later on in life but doesn’t address a client’s  immediate need for housing and if that is affordable given other financial obligations both parties may have as a result of the split up.

Couples need to look at both the long- and short-term implications of dividing their property before just splitting up their property 50/50. It makes sense to have an uneven split depending on your unique circumstances. 

A financial professional with education and experience specific to separation and divorce can be engaged by the parties directly, or by their Family Dispute Resolution Professional.  As a lawyer or mediator, if the financial situation of the parties is a bit of a challenge, consider contacting a CFDS.  The earlier all parties know their financial options, the quicker they are able to make decisions and move on.