Marriage and Divorce
Divorce Decrees Often Left Lacking
by Amy Rose Herrick (Write for us!)
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Millions of divorcees every year are instructed by the courts and their attorneys to be unsecured creditors. They are also expected
to do so with a fixed interest rate of 0% every year. Why? A couple of little things called "Alimony" and "Child Support".
Alimony and Child Support are often the two most difficult items to come to terms with for either party in a breakup of a marriage or relationship. They are often the most valuable financial asset on the table, yet they are the least protected asset most divorcing adults possess.
By now, you are ready to jump out of your seat with a strong opinion about one of these two emotion packed phrases. Let's all sit back now and consider why I feel these are the least protected financial asset in the world today, and what you can do about this travesty of "justice" in future situations like the examples below.
First let's visit "Child Support". One parent is paying to help support a child or children born as a result of a relationship to the other parent. The child is entitled to financial support from both parents no matter how brief or long the relationship lasted. One factor that bears repeating that is often misunderstood is: both parties are responsible for the financial support of the child, not just the one remitting child support to the other. Unequal wages may make unequal financial support between the parents, but both must contribute money and resources proportionately towards the child's needs.
We have a child involved in the child support equation, let's call him Sam. He is two years old and his father Jimmy has been ordered to pay child support in the amount of $437 a month until Sam is age 18 and graduates from high school. To keep it simple, we are not going to include any cost of living increases. That $437 a month amounts to $83,904 total support due until Sam reaches age 18.
In addition, Jimmy his father contributes 50% towards his medical insurance, out of pocket costs, and a few other items that total another $143 a month. That is another $27,456 his father is financially responsible for during the next 16 years. In all likelihood, Sam is going to drive a car some day when he is a teenager. If we assume that Jimmy was planning to help with 1/2 the cost of the vehicle, maintenance and insurance, then let's give that a very modest future liability of $20,000. Will Sam be college material? If so, how much would his father plan to contribute? 50%? 25%? Maybe he thought about a fixed amount like his father did for him. We will settle on $50,000 for this example.
There most certainly will be expenses that come up we can't foresee, maybe braces or something else quite expensive over the years, so let's set aside another $10,000 for those surprise expenses, but
they could be more. Things boys like such as Boy Scout Camp, new bicycles, maybe even a trip to a big debate tournament in high school. You know what I am talking about, all the extras parents bless their children with regularly.
At this point Sam's father has a future total liability to Sam and his mother for around $191,360 plus extras and cost of living increases for the next 16 years. $191,360 is a lot of money to Sam, even if at only two he is not old enough to understand that the figure represents how his future will likely unfold as his needs are met, or how his needs are not met.
Sam's father loved him very much. He paid right on time for the first six months and never once was late or missed picking Sam up. Then he died before Sam turned three from pneumonia at age 26 quite unexpectedly. Sam doesn't understand where Daddy went and why he didn't come last week like he was supposed to. But he understands how his mom is reacting. She is scared and cries a lot talking on the phone. He sees her packing their stuff in boxes, but doesn't realize this means they are moving...again, to an even smaller place.
Why? Sam's future mostly died with his father. Yes, there will be some Social Security income, but it is not enough to replace the difference in child support, and all the other things Jimmy was planning to take care for Sam from his earnings. Sam's mother is struggling to make ends meet after she was downsized out of her last job and had to take a lower paying one a few weeks ago. Now that she has to do it all alone financially for the both of them, ends will not meet here in the only place Sam has called home he can remember since the divorce.
How did all the people involved in the divorce settlement, including the attorneys and the court officers play a part in jeopardizing Sam's future? No one bothered to mention or include, then enforce a provision that Jimmy and his ex wife Sarah had to each carry life insurance for these expected support obligations in the event either did not live long enough to see Sam become an adult. No one bothered. Now Sam will pay the lifetime price for their adult negligence.
Now let's visit "Alimony". One party is promising to pay another party a set figure of financial support. In many cases this is deducted from wages and forwarded to the courts for confirmation of payment, then forwarded to the recipient monthly over a period of years similar to child support handling.
Joe owes Mary $1,857 a month in court ordered alimony for the next 13 years and 6 months. That on paper is a $300,834 liability to Joe and a $300,834 asset to Mary.
But what happed if Joe the person paying alimony died before the judgment was satisfied? Well, the recipient Mary may try and file a claim against the estate to recover the missing $300,000 or so in payments, if there even is one to claim against. Most likely, Mary will receive little or nothing except the outrage and disdain of Joe's heirs for
trying to collect what she was awarded by the courts for her future. Mary will likely have to also come up with more attorney expenses to represent her interests in the estate settlement process.
But wait, Joe had life insurance, some investment accounts and IRA's didn't he? Can't she just take some of that money? Probably not. They all either had beneficiaries listed that were not Mary, or they were "TOD" or "POD" accounts. They were "Transferred on Death" or "Paid on Death" to someone else.
Alimony debt is not typically secured by any real property like a home, land, business or a car. Now Mary's previously promising future is in doubt, her car and existing home loan may also be in default if she can't come up with the payments which will ruin her credit for years to come.
Once again, to protect both parties had the decree included a provision for life insurance, and verified its existence, Mary would be protected in the event Joe does not live long enough to satisfy the debt to her. Plus as a benefit to Joe, his heirs would be protected from any potential estate shrinkage from this large cash claim if they had leveraged pennies on the dollar with life insurance.
Including provisions for securing and maintaining long term Disability income coverage would be another way to safeguard the financial futures of all parties involved when child support and alimony are ordered. Did you know many disability companies will allow assignment of a specific amount of the policy benefits by the simple filling out of a form or two? Most people don't.
I find it appalling that the courts allow without any proactive effort millions of divorcees of any sex, age or race and minor children to finance their futures with nothing more than words on a page called a "decree". Why is there no provision for "Plan B= life and/or disability insurance" should "Plan A= Earnings" fail to satisfy these large debts to individuals and society if death or disability occur before the debt is satisfied?
Compare the generous divorce "decree" terms against any other typical "loan" package consisting of hundreds of thousands of dollars of financial liabilities. A bank or investor would require substantial collateral to loan these levels of proceeds to any person. They charge interest according
to the risk, secure ample collateral and review the credit history of the person seeking the loan before advancing any proceeds. For a car or home lenders require insurance to replace them in the event of loss, protecting the lender and the borrowers from a catastrophic loss. Both parties to the lending transaction accept this as normal procedure.
The outrageous fact that a child support or alimony recipient is expected to hold out over a period of years for their financial award at 0% interest, often to be paid in monthly installments without any real assurance the debt will eventually be paid is simply irresponsible business practices. Why does this continue when an affordable, easily accessible, viable solution exists in almost every situation, in every state, known as "insurance"?
A licensed insurance professional should be added to every the divorce representation team to help determine the amounts of coverage needed on both parties, sort out the proper handling of ownership of existing coverage, assist in determining the most advantageous ownership arrangement, help to determine the best beneficiary designation on each policy, the selection of coverage and pricing.
I challenge all court officials who are suppose to be protecting client's interests, not jeopardizing them, to stand up and begin insisting on changes within the status quo. What is stopping you from beginning to include life insurance and disability coverage on both parties as a part of any "decree"?
The non-working status quo leaves too much to unfunded chance for little guys like Sam.
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