From spousal support payments to asset equalization, advisor highlights often-overlooked danger zones in negotiations
Like any good financial advisor, Melissa Prusky, Senior Investment Advisor with Mandeville Private Client Inc. makes client education a cornerstone of her practice. And as someone who survived a divorce, she’s able to forewarn and forearm clients who are going through the ugly but necessary work of financial decoupling that comes with it.
“The best advice I can probably give to any couple who are separating is to try to use a mediator, not the courts,” says Prusky.
“Using a mediator can save huge court costs. As we know, only the lawyers win in going to court; engaging them just leaves less money for the two spouses in the end,” she says. “For many of my clients, whose net worth is in and around the $5-million range in assets including their home and things like that, there's only so much money, and why give it to the lawyers?”
Going through the legal system can be a lengthy and costly affair, Prusky says, with fees and other costs going as high as $70,000 to $100,000 between the two parties; in the world of the ultra-wealthy, she says those costs can even exceed $250,000. By having a mediator, couples can eliminate a major source of financial friction by stripping emotion from the process.
At her practice, Prusky has effectively played that role numerous times for couple clients, acting as an unbiased and informed third party to help them navigate the sometimes-treacherous terrain of divorce negotiations, and try to work together as amicably as possible.
One often-overlooked aspect, she says, involves different tax treatments of spousal support and child support. As of 2019, Prusky says, child support payments from one spouse to another does not have a tax impact on either party. In contrast, spousal support payments are tax-deductible to the person paying, and taxable in the hands of the spouse receiving it.
“In these negotiations, there’s what we call ‘add-ons’ for the children, which include such things as private school, day care, and even birthday gifts for their friends,” she says. “If you do those through spousal support, those get counted toward the tax deduction of the person paying and are added to the tax of the recipient. So that can be a negotiating tool for settlement.”
That differential tax treatment can provide the person paying spousal support an edge, as they receive the tax deduction for these expenses. Child support is tax-neutral, and the add-ons are often split 50-50, depending on where the children reside in the agreement. To ensure no one gets an unfair advantage, Prusky says it pays to be mindful of who’ll get a tax credit and who’ll be hit with a tax penalty.
“I know many couples where the higher-earning spouse pays all the add-ons,” Prusky says, adding: “Divorce is not at all the fault of the children, and the parents always have to consider what’s best for them in these decisions.”
Asset equalization is another area worth watching. According to Prusky, many lawyers will agree to give up their client’s registered accounts to the other spouse, knowing that the money can’t be accessed right away. While the spouse receiving the funds as part of equalization does get the money, it just can’t be used until the future, so in effect it’s not adding to their current liquid assets.
“If the lawyer representing a husband agrees to give up his RSP, they know he has no access to that money now, and he’ll have to wait until he’s 72 years old at most,” she says. “He’ll be giving up some of his wealth without hindering his day-to-day, month-to-month, or year-to-year spending.”
Whenever possible, Prusky tells clients on the receiving end of that offer to insist on having their spouse’s non-registered assets, or a combination of the asset class so that it is an equalization “now.” Regardless of the fact that it will change hands from one person to another, she says that money is accessible right away with no tax consequences.
Because she dispenses completely unbiased and factual advice, she says both spouses usually stay on as clients at her practice. The same can’t be said for lawyers, who can’t go down that road, and accountants, who often won’t do it.
“I actually recommend that clients have separate accountants after they get divorced,” Prusky says. “I know if they keep sharing the same accountant, they're supposed to have that Chinese wall so one doesn’t know where the other’s at financially – but I'm not so sure they really do.”
