coping with divorce finances - Page 2

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Divorce is a complex and emotionally challenging experience, and it’s often accompanied by a range of financial implications. As you navigate the divorce process, understanding what will happen to your finances can make a significant difference in protecting your future. In this guide, we’ll cover the essential financial aspects of divorce, including financial settlements, consent orders, mediation, and how the divorce proceedings impact your financial outlook.

Understanding Financial Settlements

A financial consent settlement is an agreement between you and your former spouse on how to divide your financial assets after the marriage is dissolved. This settlement typically includes assets such as property, savings, investments, pensions, and sometimes, even personal belongings of substantial value.

It’s crucial to remember that a financial settlement can have long-lasting implications on your financial health. Therefore, ensuring a fair and thorough agreement is essential. Financial settlements are not automatic during divorce; you must actively pursue this part of the divorce proceedings. Without a formal agreement, financial ties may remain in place, leaving you vulnerable to potential future claims from your ex-spouse. You should seek professional independent legal and financial advice as you navigate the agreement on how to divide your assets, to avoid any pitfalls commonly made such as tax liabilities.

The Role of Consent Orders

A consent order is a legally binding document that finalises the division of assets and financial responsibilities between you and your ex-spouse. Once you and your ex have reached an agreement on the financial settlement, a consent order is submitted to the court for approval. This document is critical as it prevents either party from making future financial claims against each other, providing closure and security for both parties. Once the consent order is sealed by the court your future security is protected and it would be very difficult for an ex-spouse to challenge.

Without a consent order, you could potentially face financial claims from your ex-spouse in the future, even years after the divorce. For this reason, securing a consent order is a wise step to ensure that your financial settlement is legally recognised and protected.

Mediation: A Cost-Effective Solution

For many couples, mediation is a valuable tool in reaching a financial settlement. Mediation allows both parties to discuss and negotiate the terms of their divorce in a controlled environment, with the assistance of a neutral third party. It’s often more cost-effective than going through prolonged court battles and can help facilitate a less adversarial divorce process.

During mediation, you and your ex-spouse can discuss various financial aspects, including the division of assets, child support, child, and spousal maintenance, if applicable. Mediators are trained to guide conversations constructively, focusing on mutual understanding and compromise. Although mediation isn’t a substitute for legal advice, it can be a highly effective first step in reaching an amicable and fair agreement.

Feel free to get in touch with Fair Result if you are seeking a mediator or need help with drawing up your agreed financial consent order. You will need a specialist solicitor to draw up and submit your agreed consent order, even if you have used a mediator to assist with reaching the agreement. This is because mediators cannot complete the final act of having the order approved by the court.

Key Financial Aspects to Consider in Divorce

When going through the divorce proceedings, several financial considerations need your attention. Here’s a breakdown of some of the key areas:

• Property: One of the most significant assets for many couples is their home. Deciding who gets to keep the property or whether it should be sold, and the proceeds divided can be challenging. The financial settlement will outline how the property is handled and whether the home is split equally or otherwise, including whether one party should remain in the property until the children reach a certain age.
• Pensions and Retirement Funds: Pensions are often overlooked during the divorce process, but they can be one of the most valuable assets to consider. In the UK, pensions can be divided through pension sharing orders or earmarking orders or offsetting the value of one person’s share in the pension against their value in another asset – normally a house. Working with a financial advisor and solicitor can help you understand your options and make the best decision for your future.
• Savings and Investments: Savings accounts, investments, and other assets acquired during the marriage are typically considered matrimonial assets and are subject to division. It’s essential to disclose all assets honestly to ensure a fair settlement.
• Debts and Liabilities: Divorce doesn’t just mean dividing assets—it also includes dividing any joint debts. If you and your ex-spouse accumulated debt during your marriage, such as credit card debt, loans, or mortgages, these liabilities may be divided as part of the financial settlement. Make sure to discuss how these debts will be managed to prevent financial complications in the future. This is also especially important if there is a business owned by either or both parties to the divorce.
• Child Support and Maintenance: If you have children, child maintenance payments may be required to support their upbringing. The amount is typically determined based on the income of the non-residential parent. It’s vital to include child maintenance in your financial settlement to ensure that your children’s needs are adequately addressed. This can either be done using the child maintenance service calculator which simply divides income against the number of nights each parent has the child or alternatively you could agree voluntarily an agreed amount each week/month.
• Spousal Support: In some cases, one spouse may be entitled to receive spousal support, especially if they have lower earning potential or sacrificed career opportunities during the marriage. The financial settlement will outline the terms of spousal support, including the amount and duration. It is important to remember though now the aim of the court is not to give spousal maintenance for life – it is just for a period of time for a spouse to return to independent living.

Navigating the Divorce Process: Seeking Expert Help

Understanding the intricacies of financial settlements and consent orders can be overwhelming. This is where professional guidance comes into play. A skilled divorce solicitor can help you navigate the legal landscape, ensuring that your rights are protected and that you achieve a fair outcome.

Working with experts not only provides peace of mind but also helps you avoid costly mistakes that could impact your financial future. Divorce is more than just a legal process—it’s a time of transformation and taking proactive steps to protect your financial wellbeing is essential.

The Importance of Taking Early Action

The earlier you begin preparing for your financial settlement, the better positioned you will be to protect your assets and secure your financial future. It’s easy to become overwhelmed by the emotional aspects of divorce but ignoring the financial side can lead to lasting repercussions. Start gathering financial documents, organising assets, and assessing your individual financial needs as soon as possible.

With a solid plan in place, you can approach the divorce process from a position of confidence. Whether you pursue mediation, seek a consent order, or simply work through the financial aspects with a solicitor, taking these steps early on can make a world of difference.

Final Thoughts: Protect Your Financial Future

Divorce is one of life’s most challenging transitions, but with the right preparation and support, you can secure a stable financial future. Remember, reaching a fair financial settlement and obtaining a consent order can provide the legal protection you need to move forward without the fear of future financial claims.

If you’re considering divorce or are already going through divorce proceedings, don’t wait to get expert guidance. Fair Result offers a unique, fixed-fee divorce service, covering all aspects of divorce, including court time, barrister fees, valuations, and everything required to achieve a fair and equitable outcome. Let us help you navigate this journey with confidence.

Ready to take control of your financial future during divorce?

Get in touch with Fair Result today to discuss your options and learn how we can support you:

Call: 07500933818 or 0333 577 7009

Email: peter@fair-result.co.uk or chris@fair-result.co.uk

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The financial consequences and processes of divorce can be baffling even when the parties’ assets are reasonably straightforward. Lawyers are prone to using jargon and acronyms that are entirely unfamiliar to the lay client. Where the financial assets include private equity or hedge fund investments, the degree of complexity and jargon increases exponentially.

For those who do not work in the world of private equity, the investment structures and how they work are often entirely alien concepts. Those who do work in that world are so familiar with it that they struggle to explain those concepts to the uninitiated. This can leave a divorcing spouse feeling completely lost; the gradient on their learning curve becomes significantly steeper.

Matrimonial and Non-Matrimonial: To Share or Not To Share

For long marriages, courts will look to equally share the value of wealth accumulated by a couple during the marriage. However, where possible, a non-sharing approach will be taken to wealth brought into the marriage, wealth created after the marriage and inherited wealth.

Broadly, it is considered fair that a party should be able to keep the benefit of the wealth they create after separation because it’s attributable to effort made after the marriage has ended.

Therefore, whilst the capital and pension assets accumulated during a marriage are likely to be shared, future income will not. Income (or maintenance) orders are assessed against ongoing income needs.

Things are seldom clear cut; bonuses are often paid in the financial year after they were earned. A bonus received in the first year of separation is quite likely to have been referable to work undertaken in the final year of the marriage. Marriages don’t break down on schedule, so there is scope for argument where a marriage breaks down partway through the financial year against which a bonus is judged.

With private equity investments, the lines can blur where matrimonial wealth is invested in long running funds which may not pay off for many years after a marriage is over.  An additional complication arises as the structure of these funds means that future payments cannot be clearly said to be either capital or income – so what approach is the court to take?

Private Equity Fund Structure

Managers establish a fund and over time raise funds for investment. A management fee is charged for the funds under investment. As many of these funds are worth hundreds of millions of dollars, the management fees themselves can be significant.

The fund managers are usually required to co-invest in it, demonstrating that they have ‘skin in the game’, albeit usually at much lower levels than the institutional investors they attract.

Investments are then made in carefully chosen businesses, with the aim that these will be built up and sold at a profit over the lifetime of the fund, on average a period of 8-10 years.

A hurdle rate is set for the fund; this is the minimum return that must be achieved for the investors before the fund managers can share in any additional profit created. The entitlement to share in that surplus profit is known as ‘carry’. Not every fund’s return will exceed the hurdle rate so the amount of carry is inherently uncertain.

Co-Invest and Carry Upon Divorce

Co-invest

Usually, but not always, co-invested fund managers will share in the carry. However, in some funds managers can be entitled to share in the carry without having invested. Establishing the detail is key; if the co-invested funds emanate from matrimonial sources they would be shareable, albeit the sharing of that value may be deferred until the fund makes distributions. These often occur when an underlying business is sold.

Carry

The entitlement to share in the carry is far more complicated. To understand how the court approaches this, you must ascertain:

• the degree of involvement a fund manager has had after the fund has been invested;
• the dates the fund was established and the date on which the ‘close’ occurred – namely the point when all funds had been raised.

Continuing involvement with the fund

Not all private equity funds are invested in the same way. Whilst some funds invest directly into underlying companies, others invest in larger private equity funds which make those direct investments.

For the former, fund managers will be actively involved with the underlying companies invested in.

For the latter, often known as ‘funds of funds’, managers will decide upon the best fund(s) to invest in but will not be involved in the ongoing management of the underlying investments.  Whilst it requires skill to select the right fund, once the choice is made, the ‘fund of funds’ manager’s involvement is minimal compared to the manager who remains directly involved with the development of the underlying companies.

Using the principles above to reflect post-marital effort, the court could consider that once the ‘fund of funds’ investment is made, the investment return is attributable to the efforts of others and that any returns of co-invest or carry entitlement flowing from the performance of the ‘fund of funds’ should be shared.

Where the divorcing spouse is the actively involved fund manager, the development of the underlying companies can be argued to be a direct result of their ongoing efforts during the lifetime of the fund. In that case, the court will calculate and share the element of carry that is matrimonial.

That is assessed by reference to the period from establishment of the fund to the date of trial, taken as a proportion of the expected term of the fund from the date of close. For example, in the case of A v M [2021], the period between establishing the fund and the trial was 60 months. The period from close to the expected end of term for the fund was 113 months. The judge decided therefore that 53% (60/113) of the carry should be shared equally between the parties, with the fund manager retaining for themselves the remaining 47% to reflect the work they would do over the remaining term of the fund.

Specialist Advice and Drafting

For the large funds, the divorce of an individual whose investment is minimal compared to the overall fund size means that the parties have very limited power to call for the return of funds.  Unless one party is prepared to offset other assets to pay off their spouse sooner, they must usually wait for the fund to run its course before funds are received. As investments do not always pay off, most prefer to share the risk, meaning payments from distributions of co-invest or carry will be deferred, potentially for years.

An order reflecting the division of monies emanating from such a fund requires detailed drafting. Inevitably they are lengthy and complex because they must contain the safeguards to protect the receiving party from any attempts to thwart payments being made. They must also include requirements to provide documentary evidence of the performance of the fund, the timescales for the payments, the actual amounts paid and the tax consequences of those payments.

Some funds may permit the co-invest to be shared so that future distributions can be made direct to each spouse. Where this is possible, the order must make specific provision for the assignment, and further advice from corporate lawyers to implement the assignment will be needed.

If there are private equity or hedge funds involved in your divorce, it’s essential for experienced, specialist family lawyers to be involved to help you navigate and understand these complex investments, and to ensure that you actually receive the sums that you are entitled to.

About Nicola Harries

Nicola is the head of the family team at Stevens & Bolton, looking after clients coping with all aspects of family breakdown. Nicola has extensive experience dealing with mid to very high value divorce, including complex financial proceedings. She has drafted numerous pre and post nuptial agreements and advises unmarried families on the breakdown of their relationships, as well as dealing with disputes in relation to children. Nicola is ranked in the Legal 500 and Chambers UK Legal Directories and is a trained collaborative lawyer as well as a member of Resolution.

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Nicola Harries