Types of Divorce
Part 6 of The High Net Worth Guide To Divorce
This is part 6 of a 7-part guide for affluent and high net worth individuals considering divorce. In this section, we cover the types of divorce and
Jurnex is an independent registered investment advisor that specializes in supporting women going through divorce. If you’re ready to take the next step with your separation, contact us for a consultation today.
Separating from your spouse is one of the most difficult decisions you can ever make. We get it. Because we’ve been there too.
But even once you’ve decided to separate, you still need to consider HOW you will divorce. What type of divorce will you and your spouse take?
In this article, we cover the 4 primary methods of divorce.
- Lawyer-driven divorce
- Collaborative divorce
- Pro se divorce (do-it-yourself)
By going through this article, you will leave with a clear idea of which type of divorce you should follow.
Which Divorce Method?
Did you know you actually have several options in choosing your type of divorce? Each method has certain advantages and disadvantages. But choosing the right path is essential, especially for affluent and high net worth families. Here are some things you need to consider.
- Agreement: Do you and your spouse generally agree on how to divide assets? Or do you have significant disagreements that need a third-party to solve?
- Amicable: Are you and your spouse willing to work towards an amicable solution? Do you trust your spouse or do you want legal protection?
- Children: Do the two of you have your kid’s best interest in mind? Are both of you willing to make sacrifices for your children?
Make sure you review all four options before choosing how to divorce.
1. Lawyer-driven divorce
Lawyer-driven divorces are common among affluent and high net worth families who have significant disagreements about assets.
In these types of divorce, the two parties hire separate legal representation to negotiate an agreement. Couples resolve issues by sending settlement letters between the lawyers. This is an expensive method. Both parties must pay for their own legal team. So costs add up fast.
Lawyer-driven divorces are also SLOW. All communication must be channeled through lawyers. So even a simple request might take a week or more. On Monday, you might call your lawyer with a request… “Harry, can you ask my spouse how much is in our IRA account?” Your lawyer then sets up a call with your spouse’s lawyer… “Hey Jim, are you free to talk this Wednesday?” Then your spouse’s lawyer has to talk to your spouse… And then you might need another week to get a response! All the while, your lawyers are billing you for their time spent.
If the two parties cannot reach a settlement agreement, the case moves to arbitration by either a judge or a neutral arbiter. In this scenario, both parties submit their cases to a decision-making body. The judicial process then decides how assets are split and how much alimony or child support either party owes.
This process is binding. In other words, the couple will be forced to accept the ruling, regardless of whether either party agrees. So once you state your case, you have nothing more you can do!
What’s the benefit?
Lawyer-based divorces provide clear legal protection. For instance, it becomes easier to take your spouse to court if it later turns out he or she omitted financial data. Family finances are reported via “legal discovery”, a process where a couple submits and summarizes financial statements in a Financial Affidavit. And because the process is done under oath, the courts can pursue an individual for perjury (lying under sworn testimony).
Even though the arbitration process can feel intimidating, the divorce court system is designed to be fair. 41 of 50 states are “equitable distribution” states. This means judges will look to split assets equitably, even if not 50/50. So if you have a lower earning power, you may get a greater share of marital assets to compensate. The other 9 states are “community property” states where marital property is split 50/50.
Community property states include
- New Mexico
Alaska is an opt-in community property state. Yet these definitions are simply variations on a theme. Even though their interpretation of “equitable” differs, every US court system seeks to create a fair distribution of assets.
No direct spousal contact. Lawyer-based divorces allow individuals to immediately sever ties with their spouses. Individuals in abusive relationships often require such protection.
Binding settlement. Couples with irreconcilable disagreements may find binding arbitration the only way to reach a settlement. Judges and arbiters can help break a deadlock by issuing a final settlement.
Separate legal representation. If either spouse is unable to represent their own interests, lawyer-based divorces can make sure their needs are voiced. This is especially valuable for individuals in abusive relationships, have mental disabilities, or otherwise unable to make their own decisions.
Consideration for children. The courts consider children a top priority. If either party shows disinterest in their children, a lawyer-based divorce may be the only way to make sure children are properly cared for.
HIgh legal fees. Experienced lawyers typically charge between $250-650 per hour. Costs can add up quickly because you need two lawyers. One for each spouse. Each lawyer must also bill twice. Once for talking to you (the client) and once for talking to each other.
Potential for miscommunication. In a legal-driven divorce, all negotiation is channeled between lawyers. This creates a significant chance for miscommunication.
Time-consuming. Back-and-forth arguments take time because lawyers must perform all communications. The typical legal-driven divorce takes 8 to 12 months to complete.
Lack of privacy. A legal-based divorce requires families to submit full financial statements to the courts. Families who prefer privacy should consider other forms of divorce.
2. Mediation-based divorce
In recent years, lawyer-driven divorces have become less popular. Even for families who can afford it, lawyer fees add unnecessary cost to an already stressful process. Is there a better way?
Enter mediation. Mediation has grown quickly among affluent and high-net-worth families in recent years. It’s a less costly, faster process. And unlike arbitration, you are never forced to accept an agreement you dislike.
In these types of divorce, a couple uses an independent third-party to create a separation agreement. Each party can still retain his or her own legal counsel. (It’s up to you if you want legal representation). But both parties must agree to work together. If either side decides to break off mediation, the process reverts to a lawyer-based divorce with court-ordered arbitration.
Mediators follow four simple steps.
- First, identify issues between the spouses.
- Second, create an environment for the two parties to negotiate.
- Next, help the two sides come to an agreement about the separation.
- Finally, if either party rejects the agreement, create a new agreement that both sides accept.
Mediation is a flexible process because is non-binding. Either side can accept or reject any agreement at any time. A mediator’s goal is simply to guide both sides towards a mutually agreeable outcome.
What about follow-through? Mediation covers that too. At the end of mediation, both sides must accept and sign a final agreement. The final agreement then gets submitted to the state court for legal approval. If either spouse rejects mediation, the process simply gets kicked back to the courts for legal-based arbitration.
Mutually agreeable outcome. Unlike arbitration, mediation allows either party to accept or reject an offer. This means both parties are incentivized to create a mutually acceptable settlement.
Privacy. Mediation allows for privacy. Affluent and high net worth families often prefer not to have their financial statements published by the courts.
Low-cost. Mediation typically costs 30% or less than lawyer-driven divorces. Conclusions tend to be reached much faster since couples lead the negotiation process. You also only need to hire one mediator instead of two lawyers.
Highly effective. When two parties come to a resolution on their own, they have a greater likelihood of honoring the agreement.
The mediator cannot make decisions for you. In mediation, you as an individual must express your own opinions and make your own choices.
Couples must work together. If your spouse is unwilling to work with a mediator, a court-based approach could be the only option to legally compel him or her to action.
3. Collaborative divorce
But what if you like the idea of mediation but have specialized concerns? A collaborative divorce could be right for you. In this process, each party retains its own team of experts. The team generally consists of the spouse, their lawyer, a financial expert and perhaps a mental health counselor. Some teams may also retain child experts or healthcare specialists.
Once the teams are set up, the two parties meet together. In this meeting, both sides attempt to come to a mutually acceptable agreement. The process is similar to mediation:
- Firstly, one party (party A) will propose a settlement.
- Next, the other side (party B) is free to accept or reject the offer.
- If rejected, the other side (party B) then creates a counter-offer.
- Finally, this process continues until an agreement is reached.
Like mediation, the final outcome is non-binding until both spouses agree to the final outcome. This means no side can force the other to accept or reject a proposal. Thus, both sides are incentivized to come to a mutually acceptable conclusion. Once both sides agree to the outcome, the agreement next gets submitted to the courts. Then, the courts review the documents for fairness. (This prevents spouses from submitting an unconsciounable agreement). Finally, once approved, the agreement then becomes legally enforceable.
What if my spouse breaks off negotiations?
Like meditation, if neither side can come to an agreement or one side threatens legal action, the whole collaborative divorce process ends. The case then reverts to the court system of trial or legal arbitration. Typically, both legal teams are also disbanded and replaced by trial lawyers.
In the vast majority of cases, however, both sides follow through with a collaborative divorce. Why you might ask? That’s because this process is ideal for affluent and high net worth couples. It combines the privacy and flexibility of mediation with the professionalism and support of legal-based divorces. Consequently, Both you and your spouse are legally and financially protected by experts. So in general, neither spouse benefits from reverting to binding arbitration.
Collaborative process. Like mediation, collaborative divorce has a higher rate of success because both parties are incentivized to find a mutually agreeable outcome.
Lower-cost. While more expensive than mediation, collaborative divorce is still less expensive than a lawyer-driven divorce. Negotiation happens face to face with everyone present, reducing legal fees and delays.
Quality legal and financial advice. Collaborative divorce involves both legal and financial professionals, so couples know they are getting a fair and well-advised outcome.
Couples must collaborate. Even though lawyers are involved in a collaborative divorce, a couple must still sit down together to work out their differences. This might be impossible for spouses in harmful or abusive relationships.
Possibility for deadlock. Both parties must agree to the final outcome for collaborative divorce to work. In a deadlock, the collaborative process may need to revert to the courts.
Complex setup. Because more parties are involved, collaborative divorce has a greater need for good logistical planning. You will also need to find lawyers and financial experts who are familiar with collaborative law.
4. Pro se divorce
When couples decide not to use an attorney, the courts call this a pro se divorce. (In other words, a “do-it-yourself” divorce). Approximately 50% of divorces are pro se divorces. But for affluent and high net worth families, there are significant problems with taking this route. Why? Here are three reasons.
Firstly, many financial professionals will not work cases without attorneys involved. That’s because of the potential legal liability. For instance, if one spouse finds out after the divorce that the other spouse was hiding $2 million in a separate account, they may blame the financial professional. Had the case gone through the legal system, there would have been formal discovery. Consequently, the cheated party has legal recourse against the ex-spouse who failed to report assets.
Secondly, couples can miss major tax issues. Divorcing couples often transfer assets without realizing the tax bill they can accrue. As a result, even well-intentioned couples often generate large tax bills by mistake.
Finally, there is the issue of fairness. Firstly, one or both individuals might not understand the full value of marital assets. Secondly, they may not know what they’re entitled to. Company retirement benefits, for instance, are often a major source of a family’s wealth. But the non-working spouse might accidentally decline the cash value of their working spouse’s company benefits because they didn’t realize how much belongs to them.
Low-cost. Pro se divorces are cheap. No state requires you to hire a lawyer for your divorce.
Flexibility. If you and your spouse need flexibility, a pro se divorce allows you to draw out a separation on your own terms
Income taxes. Many individuals do not understand the tax consequences of transferring properties. So if assets are transferred incorrectly, the mistake could burden one spouse with a massive tax bill.
Mixed assets. If the parties do not completely understand the legal differences between marital and separate property in their state, they may transfer too much property to one spouse.
No legal recourse. Without proper legal representation or formal discovery, individuals have little recourse if they later find that one spouse had hidden assets.
Fairness. Many individuals do not realize that the court system is built to protect both spouses. They may fail to ask for enough alimony or child support. But had they gone through the legal system, the courts may have awarded them far greater monetary benefits.
What types of divorce are right for me?
For the majority of affluent and high-net-worth couples, the ideal type of divorce depends on the level of cooperation. In other words, will you and your spouse work together?
Willing to co-operate
Spouses who are willing to co-operate generally end up with the best outcomes.
That’s because when families fight, lawyer fees pile up. So both sides tend to lose. The CDFA once recorded a case where a husband and wife spent over $75,000 in lawyer fees to fight over some personal collectible items. Neither side would budge. But the collectibles were only worth $84,000! It turns out that either spouse could have used the money to almost cover a new set.
Signs your spouse is willing to cooperate
- Clear communication. You and your spouse just have to communicate well. In other words, you don’t have to be on friendly terms. Just willing to talk.
- No personal threats. Emotions can run high in a divorce. You and your spouse might feel sad, angry… even despair. But as long as neither side shows vindictiveness to the other, cooperative divorce can be a good option.
- Care for children. If you have kids, make sure your spouse has their best interest in mind. Look for their willingness to make sacrifices for the good of the children.
If you and your spouse are willing to cooperate, the two best types of divorce are:
Mediation. This tends to work better for couples with simpler requirements and a higher level of trust. The spouses are the primary negotiators in mediation; you have to know what you want. Mediation seldom involves lawyers.
Collaborative divorce. This method works better for people who still want legal representation or have more complex cases. If either spouse has a special medical condition, for instance, they can add a medical consultant to their negotiation team to make sure there is enough alimony to cover future healthcare costs.
Unwilling to co-operate
Unfortunately, not all spouses are willing to cooperate. In some cases, one spouse simply vanishes, leaving no possibility for negotiation. In other cases, the spouses come to a deadlock. Unwilling to budge or get past a particular issue. It could be as simple as deciding who gets a shared item, or as complex as valuing a multi-million dollar estate.
Signs your spouse is not willing to cooperate
- Avoidance of communication. If your spouse is unwilling to communicate, you may have to rely on the legal system to move things forward.
- Vindictive feelings. If you feel threatened by your spouse, you should consider
If you and your spouse are unwilling to cooperate, the best options are:
Lawyer-driven. Although expensive, trial by the state courts can bring legal transparency and enforceability to a divorce.
Arbitration. For couples unable to reach an agreement, binding third-party arbitration can help break the deadlock.
In conclusion, affluent and high-net-worth families should only use lawyer-driven divorces and arbitration as a last resort. Couples will find these types of divorce both inflexible and quite arbitrary. In addition, neither side may end up with what they actually want! So if possible, you and your spouse should try to cooperate. That’s because even if the two of you aren’t on friendly terms, working together can yield enormous dividends down the road for both sides.
How can a financial advisor help?
If you’re looking for advice about your own separation, a divorce financial advisor can help. At Jurnex, we are financial advisors who specialize in helping individuals and families considering divorce. We operate under a Certified Divorce Financial Advisor (CDFA) designation, which is a gold standard for financial advisors acting neutral third-party mediator in divorce cases.
Continue to Part 7: How to Divorce