“As an example, an emotionally biased client with passive tendencies may have a status quo bias affecting their ability to make changes. The status quo bias is the tendency to prefer that things remain the same because the disadvantages of the change loom larger than the advantages. This is one of the most common biases encountered in divorce financial planning.”

The quote above has been excerpted from the most recent article in a series I am writing along with Robert A. Simon, Ph.D. discussing the application of Behavioral Finance to Financial Decision making processes, specifically in divorce. These articles are written specifically for the Financial Planning and Advisory community. Please click the picture below to be directed to MorningstarAdvisor.com and read the whole article.

Stay tuned for more information on upcoming articles planned for individuals, families and Family Law practitioners.   Feel free to comment on the MorningstarAdvisor.com website.

Justin A. Reckers can be reached at:

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Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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When an airline offers a frequent-flyer program it allows members to accumulate miles. The miles begin to obtain value to the program member despite being only a medium you can trade for free travel. The member doesn’t truly care about the miles. He cares about the benefit of accumulating those miles, free travel. The medium, in this case, frequent flyer miles, truly has no value yet still draws the concentration of the program member. “The money we earn from work is also a medium. Thus, the potential implication of research on medium is not medium; it is extra large.” Christopher Hsee, Journal of Consumer Research, June 2003 

The tenet of Medium Maximization says people often fail to fully skip over the medium (frequent flyer miles) in favor of the benefit (free travel). For example, consider the opening scene to the film Wedding Crashers. The scene concentrates on a divorcing couple in the midst of a Divorce Mediation session. They begin arguing over who should be awarded the frequent flyer miles. Frequent flyer miles and other frequent buyer or cash back rewards programs are considered by family law courts to be a community asset in California. The husband says “I earned those miles”, the wife seems to agree but believes he earned them on trips to see his -insert expletive- girlfriend. The miles are the medium to this couples’ financial decision-making process (dispute). By focusing on the medium (frequent flyer miles) rather than the benefit (free travel) of owning the medium, they have both failed to consider the decision at hand from a rational perspective. The real decision at hand is who will be awarded the right to free travel in the future not who gets the frequent flyer miles. The value of this free travel can be estimated fairly easily. Twenty-five thousand (25,000) miles might earn a one way ticket from Los Angeles to New York while the same ticket would actually cost $300. The wife lost sight of the benefit of the miles immediately when she associated the medium with the outcome in her mind, her cheating husband. She has missed the point by concentrating on the medium rather than the benefit.

The wife is very clearly upset by the situation and allows her emotions into the decision making process. I don’t blame her. The point of the illustration is to realize that economic theory tells us people will never concentrate on the medium because it has no value. The emotional turmoil of the dispute in the movie tells us humans often place a value on the medium and may ultimately make emotional decisions because of their tendency for medium maximization. Understanding Behavioral Finance can help mitigate emotion but we can never hope to completely remove it making Behavioral Economics vital to appreciating real life financial decision-making especially in Divorce Financial Planning.

Justin A. Reckers can be reached at:

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53% of Judges reported they had seen an increase in cases. The most common increase was foreclosures at 61% followed by domestic relations (read divorce) cases at 49%. The report states “There has long been an ackowledged link between the economy and divorce rates, as economic issues tend to put the greatest amount of pressure on a marriage.”   

Judges were asked if they had seen a change in representation in their court-rooms in 2009. 60% reported seeing a greater number of self represented parties. 62% of these judges believe not having an attorney negatively impacted the outcomes for self represented parties. The judges unanimously noted failure to present necessary evidence as the most common problem. Close to 90% noted the negative impact of procedural errors and more than 80% noted ineffective witness examination and failure to properly object to evidence. Several judges even noted that pro-se litigants were not able to offer an enforcable order even after winning at trial.

The survey offers incredible insight into the self represented litigant and their effect on the court system from using more resources of court staff to slowing procedures to compromising the integrity of the court. Read a story on the findings in the American Bar Association Journal and the full text of the survey here.

Justin A. Reckers can be reached at:

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Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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“Denial, anger, bargaining, depression and acceptance are the commonly accepted steps in the grief process, whether grieving the loss of a patriarch, mother, business, child or family structure. If a client is stuck somewhere on this cycle, financial advisors will have trouble shepherding them toward an unbiased and healthy decision-making process.”

The quote above has been excerpted from the most recent article in a series I am writing along with Robert A. Simon, Ph.D. discussing the application of Behavioral Finance to Financial Decision making processes. These articles are written specifically for the Financial Planning and Advisory community. Please click the picture below to be directed to MorningstarAdvisor.com and read the whole article.

Stay tuned for more information on upcoming articles planned for individuals, families and Family Law practitioners.   Feel free to comment on the MorningstarAdvisor.com website.

Justin A. Reckers can be reached at:

_________________________________________________________

Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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Colleagues of mine, Jim and Tony Dunne of Dunne and Dunne Family Law, recently won a reversal of an interesting property division issue on appeal to the Fourth Appellate District of California. The case was certified for publication and Filed December 1^st 2009. Following is my summary of the details and important points.

The couple, Tatia Buie (Wife) and Walter Neighbors (Husband), were married in 1999. During the marriage, Husband purchased a 2001 Porsche 996 using a check written from Wife’s bank account. Wife’s bank account held funds derived from the sale of her separate property residence. Husband argued the $60,000 expended for the Porsche was a gift since the purchase occurred in close proximity to his birthday. The family court agreed with Husband at trial and actually awarded the Porsche to him as his Separate Property.

Ms. Buie disagreed with the Family Court decision and appealed contending 1) the Porsche was community property and 2) that she was entitled to reimbursement under section 2640 for the use of her separate property funds to acquire the Porsche on behalf of the community.

The appeal court ruled there was no transmutation from community property to Husband’s separate property citing there had been no express declaration of intent to gift the property to Husband. Transmutation of real or personal property is not valid unless made in writing by the spouse whose interest is adversely affected. According to the appeal court, there are sections of California code that allow for gifts to be made from spouse to spouse without express written documentation but they must be a “tangible article of a personal nature” and not be “substantial in value”.

The appeal court found 1) that there was no evidence of a written document stating intent to gift the Porsche and 2) the automobile did not fall under the definition of “tangible article of a personal nature”. They did not discuss the issue of substantial value in their decision but I imagine it would be easy to convince the court a Porsche carries substantial value.

In short, the Court of Appeal concluded the Family Court had erred in awarding the Porsche to Husband as his separate property and therefore must be included as community property.

Ms. Buie went on to argue that she should be reimbursed as part of the division of the community estate for her separate property funds used to purchase the Porsche since it was confirmed as a community asset. Section 2640, subdivision (b) provides: “In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source.” I am often hired to provide the necessary tracing to prove or refute such a claim. Wife was able to prove that 100% of funds used to purchase the Porsche were her separate property and the Court of Appeal ruled she had a right to reimbursement of the separate property funds under section 2640. They did not render opinion as to how much the reimbursement should be. That is a question for another day.

Justin A. Reckers can be reached at:

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Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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69% of Certified Divorce Financial Analysts said they had seen clients who could not afford to get divorced because of recession-related financial problems.

When asked to assess the difference that current economic conditions have made to the number of new divorcing clients coming through their doors, 39% say that the recession has not affected the number of cases, and 25% say that the recession has increased the number of new cases they’re seeing (these numbers compare with 43% and 19% respectively the previous year.

The most common reason cited for an increase was the clients’ desire to reduce the cost of their divorce. Other common responses included:

• Economic climate is straining marriages
• People are exploring the financial feasibility of being able to divorce before they file or see an attorney
• An increase in mediated and Pro Se divorces using CDFAs as financial neutral.

The most common reason cited for the decrease was fear: fear of the economy, job loss, losing (or not being able to sell) their homes, and of not being able to make ends meet without their spouses. Other common responses included:

• People are afraid to divorce while they’re unemployed
• Clients can’t afford to divorce until the economy improves
• Not enough money to hire a financial expert
• People just can’t afford to live apart – especially if the matrimonial home is “underwater” (meaning that they owe more on the mortgage than the house is currently worth).

22% percent of respondents said that the number of clients whose matrimonial homes were “underwater” has increased dramatically over the last year. An additional 34% said that the number had increased slightly, and 24% said that the number had remained the same. Eighteen percent of respondents do not presently have clients with underwater houses, and only 2% report a decrease in the number from the same time last year.

Sixty-seven percent of respondents said that the current housing market has forced them to come up with creative solutions to property-division problems when the matrimonial home fails to sell – or would sell for less than what clients still owe on the mortgage. This number is down from 73% the year before. The most common solution is for ex-spouses to retain joint ownership and continue to live in the house (often, he moves into the basement and she lives upstairs) until the market improves, agreeing to postpone final division of assets until after the house is sold.

Fifty-eight percent of respondents said that the current economic climate has affected the type of assets their clients wish to receive as part of their divorce settlement (compared with 63% the year before). The most common request was for liquid assets only: their clients want cash rather than stocks, investments, real estate, or retirement plans. In other words, “Cash is King.”

According to the survey, Mediation and Collaborative Divorce proved to be the most cost-effective ways for clients to process the financial aspects of their divorce in 2009-2010. Many CDFAs work in two or more models, and they were able to paint a pretty clear picture of expenses incurred by their clients in each.

“These survey results are copyrighted and are used with permission from the Institute for Divorce Financial Analysts.  www.InstituteDFA.com”

Justin A. Reckers can be reached at:

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Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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“Research shows that there are conditions under which an individual is willing and quite happy to pay $28 for a $20 bill at auction. Some have written about how we can apply Einstein’s theory of relativity to human decision-making processes. The technology now exists to help us analyze the neurocognitive effect of receiving expert financial advice.”

The quote above has been excerpted from the most recent article in a series I am writing along with Robert A. Simon, Ph.D. discussing the application of Behavioral Finance to Financial Decision making processes. These articles are written specifically for the Financial Planning and Advisory community. Please click the picture below to be directed to MorningstarAdvisor.com and read the whole article.

Stay tuned for more information on upcoming articles planned for individuals, families and Family Law practitioners.   Feel free to comment on the MorningstarAdvisor.com website.

Justin A. Reckers can be reached at:

_________________________________________________________

Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

CONTACT US

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The quote above has been excerpted from most recent article in a series I am writing along with Robert A. Simon, Ph.D. discussing the application of Behavioral Finance to Financial Decision making processes. These articles are written specifically for the Financial Planning and Advisory community. Please click the picture below to be directed to MorningstarAdvisor.com and read the whole article.

Stay tuned for more information on upcoming articles planned for individuals, families and Family Law practitioners.   Feel free to comment on the MorningstarAdvisor.com website.

Justin A. Reckers can be reached at:

_________________________________________________________

Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

CONTACT US

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2)       The Government Pension Offset and Windfall Elimination Provision are federal Social Security rules that often unexpectedly reduce Social Security retirement benefits in divorce situations and may cause inequity;

3)       An apples to apples comparison may not be possible for before tax and after tax dollars from an individual brokerage account versus an IRA. Agreeing to an equal offset of accounts with different tax ramifications may result in inequity;

4)       Comparing the present value of a currently available liquid asset such as a savings account versus the future value of a non liquid asset such as a pension may result in inequity;

5)       Child contingency and Alimony recapture laws are hard to analyze and often missed in setting support awards but can cause unexpected tax ramifications of great magnitude if left without review;

6)       Unrealized capital gains that may cause future taxes should be included in estimates of value when considering asset division. Agreeing to a division where each party receives an asset of equal value but one has a large capital gain built in will result in inequity;

7)       Dependency exemptions and tax filing status may have real cash value now and in the future and can be used as bargaining chips for financial settlements;

8)       Life insurance placed as security for support payments should be positioned before a final settlement is reached to ensure a policy will be available with an efficient cost structure;

9)       Qualified Domestic Relations Orders necessary to divide retirement plans should be drafted and approved by the plan administrator prior to the divorce being final to avoid delays common post divorce;

10)   Always consider alternative dispute resolution models if available. Alternative models such as Mediation and Collaborative Divorce can save the family thousands of dollars and months or years of emotional turmoil.

11)   Consider the advantages of deferring capital gains taxes on real estate assets by using a 1031 exchange or converting a rental property to a primary residence for tax purposes.

Justin A. Reckers can be reached at:

_________________________________________________________

Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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Mark and Justin,

Thank you for the professional, practical, compassionate advice you provided Mark and I during our collaborative divorce process. Your knowledgeable and impartial stance and recommendations allowed us to approach a volatile situation in a mutually respectful manner and develop a foundation that has allowed us to continue to approach financial issues with the same respect and trust. We are fortunate that each of us and our girls have some financial security and I appreciate the efforts you made to see that happen.

Warmly,

Laurie

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Justin,

I want to thank you for being such a great help during our collaborative divorce. I really think you kept things going and I appreciate very much your level head.

Take care and best wishes,

Leslie

Justin A. Reckers can be reached at:

Our firm does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences. The information provided herein is obtained from sources believed to be reliable; but no representation or warranty is made as to its accuracy or completeness.

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