Divorce is often financially messy, even when it is relatively amicable.
That’s what a couple from Brooklyn, N.Y., found when they tried to work out the finances of their separation.
The wife turned to Sara Stanich, founder of Cultivating Wealth, a New York City-based financial planning firm that specializes in the finances of divorce and tries to develop solutions that might not otherwise be considered by the spouses who are breaking up. The firm’s goal is to help clients—especially women—achieve financial freedom. The firm stresses that it’s important for women to take power over their own wealth, Stanich said.
Stanich had spent time at both a traditional wirehouse and an independent broker-dealer when she founded Cultivating Wealth in 2016. She now has five female employees who specialize in clients in transition, mostly women. She is also a certified divorce financial analyst who has handled 100 or more divorce cases.
The Brooklyn couple she worked with faced a fairly typical situation. The wife wanted to stay in the home with their three kids (at the time, four years ago, the couple’s twins were 6 years old and they also had a 2-year-old). But even if the wife wanted the house, she needed to find a way to share its equity with her husband, since it was the couple’s largest marital asset.
The house had been purchased for $425,000 in 2009 with a $408,000 mortgage. At the time of the divorce, the home was assessed at $700,000, “but was probably worth more than that,” Stanich says.
The husband was eager to help provide for the kids, but he was in the arts, and his income fluctuated wildly (it could swing from $25,000 to $200,000 from year to year), so he was worried about contributing during those times when his earnings had fallen off. The wife had taken time off from work when the twins were young, but later returned to work as an administrator at a local university. Her salary was modest at first.
The husband rented an apartment nearby during the couple’s separation but ultimately wanted to buy a home of his own and would need a lump sum for the down payment.
They could have sold the house and split the equity, but they would have had a difficult time buying new homes in the expensive New York area with the cash flow they had.
The couple was trying to figure out how to make all this work financially when the wife was referred to Stanich by a divorce mediator.
The state of New York sets guidelines for the amount of child support a spouse should pay, and in this situation the husband’s contribution had been set at $1,500 a month. Stanich faced this dilemma: how to keep the wife and kids in the house and at the same time help the husband pay child support in his lean years.
“As in many other cases, a family member offered to help,” Stanich says. “The wife’s brother offered her money to buy the house in exchange for being half owner, but she wanted to have clear ownership of the home. There did not seem to be enough money available for everyone to come out whole and start over.”
Luckily, the wife’s salary as a university administrator was steadily increasing, and by the time the divorce was being worked out, she had gotten a raise to $100,000 a year. She could then qualify for a fixed rate mortgage of $575,000, or $2,100 a month, Stanich says.
The numbers suggested the couple should have split the $292,000 in equity they had built in the house. However, their incomes gave Stanich some room to come up with a plan that solved several problems at once. Instead of receiving $146,000 as his half of the equity, the husband agreed to take only $50,000, with the stipulation that his child support would be lowered to $1,000 a month for approximately the next 15 years, a substantial savings for him.
It would still not be easy to come up with the $1,000 a month if he had a lean income year, but he felt it was doable. The agreement also gave him the money he needed for a down payment on a house.
“A lot of couples do not realize that the amount of child support set by the state guidelines is just a suggestion. The couple can agree on whatever they want,” Stanich says. “With this agreement, the wife and children could stay in the house and the husband felt relief that he could live up to his financial obligation. Neither they, nor the mediator, had worked out these possibilities. Sometimes it takes another set of eyes to realize all of the options.
“Working out the details so that both sides feel comfortable is key to keeping a divorce amicable,” Stanich says. “Most couples have never been through a divorce before, and they are sad and a little overwhelmed. Working out a good plan helps them be better parents going forward, means there is less disruption for the children and doesn’t make the husband feel like the bad guy.”
Advisors should keep in mind that they probably know more than the clients, and they should not hesitate to propose what might seem like a simple solution to the financial problem, Stanich says.
“Advisors should never assume the client knows how mortgages or taxes work,” she cautions. “You need to be more creative than the client is. As the advisor, you have been through the experience many times. They haven’t. That is why the client hires you—to know the details and work out a plan based on those facts that makes them both able to start over.”