Attorney Fees: Five Keys to Ethical Compliance

By David Cameron Carr

We all can agree that “money makes the world go round.” For attorneys in the private practice of law, we may say “attorney fees make the world go round.”

Attorneys are in the interesting position of being both officers of the court (that is, quasi-public officials) and entrepreneurs engaged in operating businesses that need to make a profit in order to survive. The tension between these two roles is a lot of what the ethics rules are all about.

Solos and small firm lawyers may be more keenly aware of this tension because they tend to wear all the hats when it comes to running a law practice.

In the essential area of attorney fees, there are five keys to complying with the ethics rules: (1) setting the fee, (2) documenting the fee agreement, (3) securing the fee, (4) communicating the fee, and (5) earning the fee.

Setting the Fee
Young lawyers who are starting out as solos or small firm lawyers often ask “how much can I charge?” The answer to the question turns on myriad business factors: the practice area, the characteristics of the target market, the amount of your overhead, and what your competitors are charging. But the ultimate determination of what you should charge for your services is also limited by ethics rules designed to keep clients from being gouged.

ABA Model Rule of Professional Conduct 1.5(a) states simply, “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” How do we know when a fee is unreasonable? ABA Model Rule 1.5 dictates we look at eight factors:

1.  the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
2.  the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
3.  the fee customarily charged in the locality for similar legal services;
4.  the amount involved and the results obtained;
5.  the time limitations imposed by the client or by the circumstances;
6.  the nature and length of the professional relationship with the client;
7.  the experience, reputation, and ability of the lawyer or lawyers performing the services; and
8.  whether the fee is fixed or contingent.

A new proposed version of Rule 1.5 in my home state, California, is consistent with peculiar California case law that holds that a lawyer may only be disciplinedfor charging a fee that is unconscionable, that is, one “that shocks the conscience.” California’s version of 1.5 reiterates all the factors in the ABA Model Rule—with the exception of the “customarily charged” local fee—and adds four more:

1.  the relative sophistication of the client and the attorney;
2.  the amount of the fee in proportion to the value of the services provided;
3.  the time and labor required; and
4.  the informed consent of the client.

Market considerations alone might tempt you to charge what the traffic will bear. The circumstances of individual clients might also present opportunities for over-reaching (e.g., the desperate client who has tangible assets). Conscientious lawyers, however, will remember the 12 factors outlined above before even considering taking advantage of their clients.

Documenting the Fee Agreement
Lawyers like written agreements. Thus the utility of a written attorney fee agreement seems obvious. A signed writing should remove all doubt about the exact terms of the engagement. A carefully written scope of representation section is in the lawyer’s interest because it will ensure that the lawyer is not on the hook for work that is beyond the scope of the agreement.

Yet lawyers continue to represent clients without well-written fee agreements or without any fee agreement at all, despite the rules and despite their best interests. It is not uncommon for lawyers to use boilerplate agreements borrowed from other lawyers practicing in the same areas of law—the assumption is that, if it worked once for somebody else, it must be good.

ABA Model Rule 1.5(b) requires that the fee agreement be communicated to the client “preferably in writing” but goes on to state in Rule 1.5(c) that a contingent fee agreement must be in writing. California goes further and requires by statute that both contingent fee agreements and most other fee agreements be in writing (Cal. Bus. & Prof. Code §§ 6147 and 6148, respectively). In California, the informed consent of the client is also a factor in determining whether a fee is unconscionable.

Two of the biggest risks inherent in the practice of law are legal malpractice and not getting paid. A well-thought-out and continually reexamined attorney fee agreement is an essential tool for the managing those risks. The fee agreement should be a living document, continually reexamined in light of changes in the law and lessons learned in the lawyer’s practice.

Securing the Fee
Setting the fee and documenting the fee agreement are of little use to the lawyer if the fee is not paid. A number of ethical rules address the common ways attorneys secure their fees.

The best security is taking an advanced fee. This is a sum of money paid at the beginning of the representation that will be paid to the lawyer as the work is done and the fee is earned. ABA Model Rule 1.15 (c) provides that “a lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.” When the representation terminates, unearned fees and costs must be refunded to the client (ABA Model Rule 1.16(d)).

Another possibility is securing the fee with the client’s property, or taking an interest in the client’s business. This may be done provided certain safeguards are put into place. ABA Model Rule 1.8(a) provides that a lawyer may not take an ownership, possessory, security, or other pecuniary interest adverse to a client unless the transaction is fair and disclosed in writing, the client is given written notice of the right to independent counsel, and the client thereafter agrees in writing.

Failure to scrupulously abide by the rules of professional conduct in this area is fertile ground for the discipline system. Violations often result in actual suspension from practice, sometimes even disbarment. Use of any security device or transaction with the client should only be done after a close examination of the rules and your state’s law.

Communicating the Fee
ABA Model Rule 1.4(a)(3) requires a lawyer to “keep the client reasonably informed,” and Model Rule 1.4(b) provides that the lawyer must explain to the extent reasonably necessary to permit the client to make informed decisions. Aside from the general duties to communicate (and the duty to avoid dishonest or fraudulent conduct (ABA Model Rule 8.4(c)), the ABA Model Rules are not specific about the lawyer’s duty to provide timely or accurate billing statements. California imposes a duty by statute, but Bus. & Prof. Code §6148(c) only requires the lawyer to provide a billing statement within ten days if requested by the client . California disciplinary case law also imposes a specific duty to account to their clients for advanced fees, whether or not those fees are to be deposited into trust.

One of the first cases that I handled when I left the State Bar of California and entered private practice was a lawyer-client dispute in which the lawyer had entered into an hourly fee agreement with a client in a civil litigation matter, had litigated the matter through a three-day trial (in which they lost), and then presented his very first billing statement to the client for an amount in excess of $80,000. Needless to say, the client was in shock. The lawyer’s defense was that he had told the client that his claim was weak to begin with and that he should settle the matter, but the client refused “on principal,” and the law did not require him to provide the client with a billing statement.

The lack of specificity regarding the duty to account for how a fee is earned misleads some lawyers about the importance of accounting. Frequent and accurate billing statements that account for what work has been done and what fees have been incurred are an essential part of a lawyer’s ethical duty to communicate with the client. And remember, clients complain to disciplinary agencies about lack of communication from their lawyers more than about anything else.

Earning the Fee
Model Rule 1.16(d) provides that “any advance payment of fee or expense that has not been earned or incurred” must be refunded upon termination of employment.

California’s proposed version, Rule 1.16(e), is almost identical but adds the concept of the “true retainer,” that is, “a fee paid solely for the purpose of ensuring the availability of the lawyer for the matter” that need not be refunded on termination of employment. Few concepts in the ethics of attorney fees have caused as much consternation as the “true retainer.” Many lawyers would love to avoid having to return unearned fees on termination of employment and not always out of bad motives.

Consider the marital dissolution lawyer who, having done the initial intake consultation, incurred the overhead expense of setting up the client’s file, and perhaps turned down other clients in order to be available to do the work for this client, is informed a few days later that the client has reconciled with her spouse and that the lawyer’s services are no longer required. Small firm and solo lawyers also need to have a constant and predictable cash flow in order to operate in an efficient manner. As a result, many lawyers, especially in the marital dissolution area, have attempted to structure their fees as nonrefundable despite the clear intent of Model Rule 1.16 that no fee that has not been earned may be kept after termination.

In California, many lawyers have attempted to clothe nonrefundable fees as true retainers in spite of the fact that their fee agreements clearly show that the advance fee was paid not for availability but for services. In the modern world of superabundant lawyers, the true retainer is largely an anachronism; it dates from a time, almost unimaginable now, when there were too few lawyers to serve the legal needs of the population and it was often necessary to pay a fee to make sure a lawyer was available when needed—and to make sure that the lawyer was not tied up representing an opposing party.

The current trend toward flat fees, “value billing,” and other unconventional fee agreements gives us reason to consider the requirement that fees be earned.

Flat fees provide certainty for clients who want to know what their legal problem will cost them. Flat fees also provide advantages for lawyers, but only if the lawyer can predict with confidence how much work will need to be done on a particular matter. If the work consists of “cookie-cutter” cases, such as unlawful detainer prosecution, or cases that can be done in volume with a high degree of automation and delegation of much of the work to relatively inexpensive non- attorney staff, flat fees can be extremely lucrative. If the cases are not “cookie cutter” in character, a flat fee can be a financial disaster if the amount of work necessary turns out to be much greater than anticipated when the amount of the flat fee was agreed to. In these cases, lawyers end up working for a small fraction of their usual hourly rate, sometimes far less than the amount of their overhead expense.

If a lawyer on a flat-fee case is terminated before completion of the work set forth in the scope of the engagement, what part of the fee has been earned and what part needs to be refunded? With hourly billing, the calculation is relatively easy; the number of hours reasonably spent multiplied by the agreed hourly rate equals the earned fee. But how do you calculate that with a flat fee? California’s proposed new rule 1.5(e)(2) attempts to address the problem with this language:

a lawyer may charge a flat fee for specified legal services, which constitutes complete payment for those services and may be paid in whole or in part in advance of the lawyer providing the services. If agreed to in advance in a writing signed by the client, a flat fee is the lawyer’s property on receipt. The written fee agreement shall, in a manner that can easily be understood by the client, include the following: (i) the scope of the services to be provided; (ii) the total amount of the fee and the terms of payment; (iii) that the fee is the lawyer’s property immediately on receipt; (iv) that the fee agreement does not alter the client’s right to terminate the lawyer-client relationship; and (v) that the client may be entitled to a refund of a portion of the fee if the agreed-upon legal services have not been completed.

The intent of this language seems to be to take the problem outside the realm of potential lawyer discipline and place the onus on the client to dispute the lawyer’s entitlement to the entire fee through some mechanism such as mandatory fee arbitration. Beyond this well-intentioned goal, it is not particularly helpful in determining how much of the flat fee should be refunded.

One of the reasons many lawyers like flat-fee arrangements is that they believe these arrangements will relieve them from the onerous chore of timekeeping (contingent-fee lawyers often do not keep time records for the same reasons). Because of the unearned fee problem, however, this belief is illusory. The best practice for lawyers is to keep timekeeping records, even if the fee arrangement is a contingent or flat fee.

Conclusion

Ethical compliance and sound risk management do not end with our relatively brief examination of these five key areas. There is no substitute for a working knowledge of the rules in your jurisdiction. This can be daunting; California’s proposed version of the Model Rules with comments runs to 100 pages. Lack of familiarity, however, can result in a career-ending injury, one that is often self-inflicted.

 

https://www.americanbar.org/newsletter/publications/gp_solo_magazine_home/gp_solo_magazine_index/solo_lawyer_ethics_fee_client_relationship.html

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Will My Spouse Pay My Attorney’s Fees?

 

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Understanding How Assets Get Divided In Divorce

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Dividing the family’s property during divorce can be quite difficult, especially if there are significant assets such as houses, rental property, retirement and pension plans, stock options, restricted stock, deferred compensation, brokerage accounts, closely-held businesses, professional practices and licenses, etc. Deciding who should get what can be quite a challenge, even under the most amenable of situations. But, if your divorce is contentious, then this can be especially complicated.

Assets should not necessarily be divided simply based on their current dollar value. You need to understand which assets will be best for your short- and long-term financial security. This is not always easy to discern without a thorough understanding of the asset itself – its liquidity, cost basis and any tax implications associated with its sale.

However, before we go any further, we need to discuss the differences between Separate and Marital Property and why that’s critically important to you. In my experience, this is an area that is not well understood by most people.

States differ in some of the details, but generally speaking, Separate Property includes:

•Any property that was owned by either spouse prior to the marriage;

• An inheritance received by the husband or wife (either before or after the marriage);

• A gift received by the husband or wife from a third party (your mother gave you her diamond ring);

• Payment received for pain and suffering portion in a personal injury judgment

Warning: Separate property can lose its separate property status if you commingle it with marital property or vice versa. For example, if you re-title your separately owned condo by adding your husband as a co-owner or if you deposit the inheritance from your parents into a joint bank account with him, then that property will most likely now be considered marital property.

All other property that is acquired during the marriage is usually considered marital property regardless of which spouse owns the property or how the property is titled. Most people don’t understand this. I’ve had many clients tell me that they were not entitled to a specific asset, because it was titled in their husband’s name – such as his 401K. This is not true! This point is worth repeating because it is that important. All property that is acquired during the marriage is usually considered marital property regardless of which spouse owns the property or how that property is titled.

(State laws vary greatly, especially between Community Property & Equitable Distribution States, so please consult with your divorce attorney).

 

Read more at: https://www.forbes.com/sites/jefflanders/2011/04/12/understanding-how-assets-get-divided-in-divorce/#5e238aec2b66

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What Can I Expect from My Divorce?

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A Time to Divorce and a Time Not To

By Sharon Zarozny

It’s been said, timing is everything. And with divorce season upon us, it’s a good time to consider how kids, at different stages including adulthood, experience their parents breaking up. You might be surprised by what the experts report.

Young Children
My family fell apart when our daughters were only 3 and 6 years old. The timing wasn’t up to me and I remember tearfully struggling — taking one step forward, and 20 backwards— to put my divorce-ducks-in-a-row.

It was a difficult time for all of us, but my girls were so young and innocent that putting them first, and protecting them from the situation, happened naturally despite how distraught I was. When a new challenge arose, we had our comforting rituals to fall back on. We’d grab blankets and cuddle around a “fire-in-our-place” as my little one called it, or we’d pile into “my big-bed” for a group cry, eventually dissolving into giggles (yes, with a bit of tickling) and tiredly drifting off to sleep.

Their school embraced us, once I made the leap and shared the news. Teachers watched out for my daughters, letting me know how they were doing. The guidance counselor was wonderful, getting each child into an age-appropriate “lunch bunch” and meeting with my girls and me together — and individually.

When I finally got myself to an attorney, I told him I was just gathering information and not ready to divorce. After describing my situation, he looked me in the eye and firmly said, “Get this done before your oldest turns 13. If you wait, from what I’ve seen, it will be too hard on her — and that will make it even harder on you.”

I was stunned. My plan was to do whatever I could to keep the marriage going until our daughters were launched — which, to me, meant off to college.

Now I know I was wrong on two accounts.

  • First, staying in a turbulent marriage is one of the worst things you can do for a child. Despite our culture’s emphasis on “happily-ever-after” and keeping a marriage going for “the kids’ sake,” studies (and now even the Pope) report a chaotic, highly volatile home life takes a huge toll on a child. Simply put, experts say it’s parental conflict and being caught in the middle— not divorce — that hurts kids the most. Having two separate homes, with at least one being peaceful, is much better for kids and it gives them a better chance of a healthy romantic relationship down the road.
  • Second — and this may surprise you — one of the worst times to spring divorce on a child is shortly after he/she leaves for college. The first Monday after Labor Day (on September 14 this year), family law attorneys expect to be deluged with calls from potential clients ready to learn about, or start, the divorce process. It’s speculated the phenomenon, called D-Day, is partially fueled by parents dropping their last (or only) child off at college.

Teens and Beyond

Thinking (as I initially did) their child is now launched, parents who’ve selflessly stayed married “for the kids’ sake” finally feel free to start the divorce process. The rationale? With the last child away, creating his/her own world, their job is practically done and a divorce won’t be as difficult for their child. Turns out, that’s not necessarily the case.

Several years ago, spurred by Tipper and Al Gore’s divorce, there was such an increase in what’s been coined “grey divorce” that college counselors were slammed with students grappling with the news their parents were divorcing. It created so much havoc, colleges started sending freshman parents letters asking them to hold off any divorce plans, at least until their child was well-settled at college. One overworked, exasperated college counselor was known to admonish parents, “You’ve managed it for 18 years. Would another couple of months kill you?”

Why is waiting so important? Although your college student may look like an adult, s/he is actually more like a toddler needing Mom and Dad’s reassurance and the security of home as an anchor while testing his/her newly found independence. News of a divorce throws the student totally off-balance. Rather than focusing on school and new relationships, s/he worries about Mom and Dad and how badly the divorce could turn the entire family’s life upside down.

In her book, Calling It Quits, Deirdre Bair (a NY Times bestselling author and winner of the National Book Award) interviewed children of all ages whose parents had divorced. She was surprised to find 8 year-olds had an easier time than 30 year-olds whose parents were divorcing. Young kids have grown up with divorce around them and they are more accepting of it. Plus, when they tell another kid on the playground their parents are divorcing, they are likely to hear, “You so are lucky! Now you’ll have two birthdays, twoChristmases, and your parents will buy you lots of new things!”

It’s a very different story for older children. Instead of extra presents, older children get extra worries — especially if they didn’t see the divorce coming. Older kids worry about why they are having such a hard time coping, how their parents are doing, if they’ll be able to finish college, and if they, too, are doomed to divorce. It creates huge trust issues. Then there’s the fact we don’t coddle them as we would a little child. Instead, we are inclined to see them as “friends,” turning to them for comfort and even sharing details we shouldn’t.

To help you understand the enormity of divorce’s impact on an adult child, I leave you with this. A mom I was coaching told me, for her, the most difficult part of separating was how devastated her 25-year-old (successfully living independently miles away) was by the news. I asked her why her daughter was having such a hard time. The answer, in her daughter’s words:

“I feel like my whole life was a lie. I thought we were a family and we all loved each other. Now, everything I believed the past 25 years probably wasn’t true.”

I was stunned. It never would have occurred to me that’s how an adult child might experience her parents’ divorce.

Later that day Pete Seeger’s song Turn, Turn, Turn (To Everything There is a Season)became stuck in my head. I plan to call the mom and suggest she listen to it with her daughter and then talk about how even parents have seasons and families change. Yes, the love and memories are real, the breaking apart is hard, but happy times will come again. It’s how life works.

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How Much Does a Divorce Cost?

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5 Inconvenient Truths About Divorcing With Children

Gwyneth Paltrow annoyed millions when she referred to her impending divorce from Chris Martin as “conscious uncoupling.” I find it noble that they’re attempting to split amicably; however, framing this as some kind of enticing spiritual experience belies the reality of how difficult divorce is when children are involved. I see no point in sugar-coating. I’m in the midst of separation with two kids and I can attest, it’s best to face the truth, have strategies for coping and support lined up.

Here are 5 Inconvenient Truths about Divorcing with Children:

1. Kids are not THAT resilient. 
When I told a friend I was getting divorced, he asked, “Why don’t you just run over your kids with a truck?” Immediately, I knew he “got it.” Most divorcing parents hear repeatedly that “kids are resilient.” This platitude sets up very unrealistic expectations. In the same vein, the notion that “if you are okay, your kids will be okay” is also an exaggeration. While you must take care of yourself and stabilize as quickly as possible, your children are not extensions of you; they have their own interpretations, their own desires and their own processes. In fact, if children are experiencing grief or struggling to comprehend, it can be disturbing and offensive when parents are glib or celebratory. Even if divorce makes perfect sense to you, it most likely does not make sense to your children. They should be allowed to see it from their own perspectives and not talked out of that. Rather, help them work toward acceptance while understanding how their new lives will operate. Allow them to heal in their own time (which could take many years). Don’t be defensive or shut down their experiences of what is happening.

2. Most likely one, if not both spouses, will flip out (at least temporarily).
Divorce can propel one or both spouses into destitution, depression, and even physical jeopardy. Likely, the “left spouse” will feel screwed over, betrayed, distraught, desperate, terrified, abandoned, vengeful or some combination of negative emotions. These feelings may not be comprehensible to the other spouse who feels some equally potent mix of heightened emotions (perhaps even relief and elation). So, a cycle of misunderstanding and defensiveness is set in motion. In the middle of all of this upheaval are children who need present, stable parents. Both spouses must remember that the well-being of your ex directly impacts that of your children. That doesn’t mean you should accept manipulation or unreasonable settlements; it means temper your behavior with the awareness that, because you created children with this person, you may not be able to cut ties as swiftly and easily as you’d like. It is essential to employ a great deal of empathy, as well as patience, when managing communication with an ex.

3. Many problems don’t go away (and the ones that do, get replaced by new ones).
Ah, the biggest bitch about divorcing someone with whom you’ve had children is that you still have to deal with them on a regular basis. The things that pissed you off about your ex will still piss you off. In fact, I’ve observed that, at least temporarily, most spouses become the worst versions of themselves during divorce. There are huge paradigm shifts when a family breaks up and new problems emerge in the process. Do the spouses keep agreements? Is there enough money for two households? Are new partners or lovers being introduced to the children? Are the parents abiding by common child-rearing methods or contradicting each other? Is one parent absent? Is one parent bad-mouthing the other? Are the kids falling apart, acting out or struggling to adapt? The list of issues that may arise is endless. Obviously, there were problems in the marriage that precipitated the divorce but just know that there is no panacea. Relative freedom comes at a price and it can take time to feel that it’s worth that cost.

4. Divorce is a failure.
Two people make a legal commitment to stay together for a lifetime. By definition, divorce is reneging on that agreement. Yes, you failed to keep that commitment — I’m not judging — I did too; I’m just calling a spade a spade. People like to reframe experiences in a way that feels more comfortable and less damning (e.g., “conscious uncoupling”). I get that, but we all fail sometimes. Can’t we admit that we’ve failed? Healing from divorce requires a great deal of forgiveness on the part of all parties involved. If you can’t even admit that you failed, how do you even know what to apologize for? This is not to say there aren’t valid reasons to divorce. We humans make mistakes and fail a lot; hopefully we glean something in the process.

5. This ain’t no Eat, Pray, Love. 
Certainly, being wealthy can make divorce significantly less stressful. But if you’re a parent, there’s no amount of money that will afford you the ability to set off on a personal pilgrimage AND be a half-decent parent in the process. Even if I had the means, I wouldn’t trade my time with my kids for hot romances, meditating on a mountain or decadent meals in exotic locales (although that does sound enticing). And while, in my worst moments, I’ve contemplated driving north and never turning back, the reality is, I’d happily settle for a night out, a yoga class, or even just a decent stretch of sleep. Living is stressful, parenting is stressful, living and parenting while going through divorce is a whole other level. You have to process your own pain and upheaval while managing that of your children. The presentation of divorce as some sort of personal renaissance is rather distasteful to me. There are certainly opportunities borne out of all struggles. If I were clubbed in the knees tomorrow, I would gain strength and self-love in the process of recovering; that does not mean I want to get clubbed in the knees, nor do I recommend it!

As for “conscious uncoupling,” that strikes me as a fancy way of labeling something that many of us parents are already in the trenches doing — attempting to soften the blow of divorce by getting along with our exes. But let’s be real here. There is no pleasant way to skin a cat and there is no pain-free way to divorce, especially with children.

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Can I Get Full Custody of my Children in a Divorce?

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40 Secrets Only Divorce Attorneys Know

By Lia Sestric, Contributor

The divorce process is a stressful one that can easily bring out the worse in people. Some people even see divorce as a way to seek revenge on a spouse by seizing money and assets.

Although divorce can bail you out of an unhappy marriage, it can also milk you for all you are worth if you don’t know your rights. Check out these 40 secrets from top divorce attorneys to help you protect your assets and stay on the winning side.

Related10 Most Expensive Divorces of 2015

1. Don’t Let Emotions Lead Your Financial Decisions

Divorcing people often want to take out their hurt feelings on exes, however it’s important not to let emotions interfere with the business at hand. In the long run, being spiteful could harm your own pocketbook.

“Asking your lawyer to write a letter to your ex over who gets the $50 coffee table book is kind of nonsensical,” said Brendan Lyle, a former divorce attorney and CEO at BBL Churchill, a divorce finance firm. He went on to reveal that a short letter could cost you $500 in attorney fees.

Understanding that divorce can be costly, savvy petitioners opt to pick their battles.

Visit GOBankingRates for more on divorce >>>

2. Everything Is Divisible and Fair Game

Individuals often make the mistake of assuming that assets that are in their names can’t be claimed by spouses in a divorce. However, divorce experts caution that the opposite is true.

“Practically everything is divisible, including frequent flyer air miles or royalties from a book you wrote,” said Ann Narris, a Massachusetts attorney with the Narris Law Office & Family Mediation Partners.

Because the same holds true for liabilities like debt and credit cards, couples should be sure to consider all factors when doing their financial planning.

3. Make Big Purchase Before Filing for Divorce

Have a big purchase in mind, such as a new car?

“Most states issue automatic financial restraining orders prohibiting people from making big purchases or liquidating assets after the divorce is filed, absent a court order or an agreement,” said Narris.

In her practice, she advises those considering divorce to buy big items before filing.

4. Keep Track of Your Spouse’s Money

If you’re thinking of filing for divorce or even marriage separation, it’s a good idea to take a look at your spouse’s financial situation. According to Narris, spouses should start by tracking partners’ new credit card and loan applications.

“People are more generous in their income reporting on credit or loan applications than they are in, say, their 1040,” said Narris, who went on to stress that loan applications could be crucial parts of a divorce discovery.

5. Gather Key Evidence Before Filing for a Divorce

If you’re thinking of filing for divorce, it can be tough not to walk out the door when your spouse pushes your buttons. However, Narris recommends that individuals take time to collect evidence before a split. Along with taking pictures of assets, individuals should make copies of account statements and jot down any important numbers. Preparation is key if you hope to come out ahead in court.

6. Get Property Valued Before You Part Ways

When it comes to divorce, almost all property is fair game. However, spouses can’t hope to get their fair shares if they don’t know the value of assets.

“No sense in guessing on the worth of his baseball cards or your engagement ring — never mind a house or a business,” said Narris, who reminds couples that there are experts available who can appraise just about anything.

Doing your homework now is the best way to come out ahead down the line.

Related:How to Deal With an Underwater Mortgage During Divorce

7. Don’t Hide Assets

You can try to deceive your spouse by hiding or concealing assets, but don’t forget that you’re also messing with the law. According to Narris, if what you’re hiding is discovered, you’ll lose your credibility in court. There could also be stiff penalties, including monetary sanctions. To protect yourself and your property during a divorce, it’s best to declare all assets upfront.

8. A Former Spouse Can Be a Great Tax Shield

People who pay alimony are rarely grateful for the opportunity. However, ex-spouses can actually help you out come tax time. According to Narris, people who pay alimony to their exes can write it off as a tax deduction. On the other hand, those who receive alimony must report it as taxable income.

It’s important to note that alimony is different from child support, which is neither taxable nor deductible.

9. If Not Considered Alimony, the Income Is Not Taxable

On the contrary, if the transfer of money in a divorce is not considered alimony, the receiving spouse is in luck: these funds aren’t regarded as taxable income, according to Christian Denmon, founding partner of Denmon & Denmon, a personal injury, divorce and criminal defense law firm in Tampa.

Not so lucky is the payer, as there is no tax break for money transferred during the divorce process.

10. There Are Hidden Tax Implications to Watch Out For

During a divorce, it’s important to stay alert to hidden tax obligations.

“A husband might have purchased stock for $50 during the marriage,” said Denmon. “The stock has gone up in value so that at the time of the divorce, the husband ends up transferring $75 to the wife. If not otherwise addressed in the divorce settlement, the husband will be on the hook to pay taxes on the $25 gain on the stock.”

According to Denmon, spouses who are receiving real estate, stocks or bonds need to understand that taxable gains can leave them vulnerable.

11. Get Job Training or Update Your Education Before Filing

If you are currently being supported by your spouse, you might want to consider taking the time to dust off your resume and freshen up your skill set before seeking a divorce.

“Even if you receive support, the courts can impute income and expect you to be working if your kids are school aged and you are not of retirement age or disabled,” said Narris, who cautioned against “depend[ing] too much on a hopeful spousal support award.”

Updating your education now can help protect you later if things don’t go your way in court.

12. Familiarize Yourself With Finances Before You Split

Normally, one person in a household manages the finances. However, this arrangement can create a “power imbalance when it comes time to negotiate settlements,” according to Narris. So what can you do to protect yourself?

Seek professional help to guide you in making more informed decisions about finances being filing for divorce. Doing this will help you come out swinging when you get your day in court.

13. Consider Mediating Your Divorce

It’s no secret that divorce can be expensive. In fact, according to Narris, the average cost of legal fees in a divorce is an astounding $15,000! One way to cut down on these expenses is to use a mediator.

A mediator doesn’t work on behalf of any one party, just facilitates agreements. If you want to keep your divorce details behind closed doors while cutting costs, a mediator might be the best bet for both you and your bank account.

14. Know What is Your Biggest Asset

According to Narris, many people mistakenly believe that their house is their biggest asset when it is actually a retirement or pension account. Even if your retirement account is less than robust now, the court will likely consider its future value when dividing assets.

“There are many ways to divide your portion of your spouse’s retirement asset (called a qualified domestic relations order) so give that due consideration,” said Narris.

15. If Your Lawyer Recommends a PI or Forensic Accountant – Hire One

Many individuals are hesitant to shell out for a PI or forensic attorney when going through a divorce.

However, according to Eva Cockerham, an attorney with Burke Jaskot law firm in Baltimore, “Private investigators are useful for investigating people who own small businesses, as independent data about numbers of customers, employees and resources can give a much fuller picture of a person’s true finances.”

Likewise, Cockerham noted that forensic accountants can give “insight as to whether a person going through a divorce is getting accurate information from their soon to be ex-spouse.” By spending a little now, you might be able to save yourself a bundle in the future.

16. The Most Expensive Lawyer Isn’t Always the Best

Pick your divorce lawyer wisely, as it could save your bottom line.

“Find one that is experienced and knowledgeable, but is also a good fit for you,” said Narris. “You have the power to set the tone for your divorce. The attorney should advise you, but also respect your position on how to approach the negotiations.”

Just because an attorney has a high hourly rate doesn’t necessarily mean he or she will honor your wishes. For best results, go with your gut feeling.

17. Understand Debt Obligations

According to Heather Sunderman, a divorce attorney with Mirsky Policastri in the Washington, D.C. area, too many clients assume partners’ debts are joint when they’re not.

“Some states do not divide marital debt if it’s just in one person’s name, so if possible, during separation you may want to pay down that debt preferentially,” said Sunderman.

The last thing you want is to be on the hook for debts you didn’t accumulate.

18. Don’t Forget About Beneficiary Designations

Divorce attorneys note that many clients fail to remove former spouses from their beneficiary designations.

Cautioned Sunderman, if you fail to remove these designations, “those amounts may end up being paid out to a former spouse. Usually that’s not the result you want!”

For best results, handle beneficiary designations and other tedious paperwork as soon as possible.

19. Pay Court-Ordered Attorney Fees

Court-ordered attorney fees are no joke.

“The court can order one spouse to contribute to the other spouse’s attorney fees,” said Denmon, who went on to explain that this type of debt was treated in a special manner. When it comes to court-ordered attorney fees, the judge can throw the offending spouse in jail for failing to pay.

In light of these regulations, Denmon advises that spouses who are receiving financial help should have language drafted into agreements clarifying how much money must be paid and by what date.
Doing this gives spouses the ability “to enforce the agreement should the paying spouse fail to follow through with his agreement,” said Denmon.

20. Being the Higher Income Earner, You Might Not Necessarily Want to Ask for All of the Deductible Items

Clients typically strive to get as much as possible in a divorce. However, according Russell Luna, a certified divorce financial analyst in Colorado, higher incomes can disqualify individuals from important tax deductions.

“If you file single and make more than $380,750, your personal exemption of $4,000 is not available,” said Luna.

In light of this fact, individuals might not want all the items they originally requested in a divorce. For best results, speak to a financial professional about your specific fiscal situation and options.

21. Take Advantage of Free Legal Advice

Most attorneys will offer free consultations, said Narris, who advises clients to “take advantage of that and get some basic information, see if the lawyer is the right fit.”

To ensure you make the right choice, be sure to consult with a few attorneys before coming to a hiring decision. After all, the outcome of your divorce depends in large part on the quality of your legal advice.

22. Be Mindful of the Date When Initiating Divorce

While you might be tempted to file as soon as possible, it’s important to note that property division is based on the date of marriage separation in some states. Typically, the court uses a formal date of separation (DOS) to determine property division and the value of certain assets.

“If you are expecting a large increase in the value of a major asset upon a certain occasion, be mindful of that when you decide to initiate the divorce,” said Narris.

23. Consider Wisely When Designing a Joint Parenting Arrangement

Unlike claiming a child as a tax dependent, claiming head of household is not assignable, said Narris, who went on to explain that individuals either met the criteria or did not.

If you’re negotiating who will claim a child as a dependent, Narris said, “You can include a provision that the right to claim the child is dependent on the parent being up to date on their support obligation.”

24. Plan Finances for After Divorce

Clients often neglect to consider how their financial planning can change after a divorce.

“Your risk aversion may be very different than your former spouse[‘s] and you do not need to keep the same investment trajectory you had before the divorce,” said Narris.

If you don’t know where to begin, you might want to hire a financial adviser. Remember to think long-term when planning finances after divorce.

25. Have a Paper Trail

While most assets are divisible in divorce, there are some exceptions to the rule. Documents can help preserve what you believe to be separate property when it comes to divorce proceedings and should be collected beforehand.

“Too many times the necessary documents seem to disappear after a divorce starts, so to the highest degree possible, gather those documents before you start the divorce,” said Jeff Anderson, a Dallas family law attorney.

26. The Division of Property Can be Complex

Dividing assets and properties isn’t always a simple numerical transaction.

“Negotiating the division of property is an art form all its own,” said Keith Nelson, a family law attorney in Dallas. “It’s a three-step process: characterize the asset, value it, divide it.”

After the asset is identified as community property, separate property or both, figuring out the value can be tricky. “For instance, a bank account with cash in it is pretty easy to value — look at the balance,” said Nelson. “But a retirement account, a house or securities can have more complex issues.”

27. Retirement Accounts Are Not Worth the Statement Balance

Just as it can be difficult to value assets, couples often struggle to determine the true value of their retirement accounts. One reason that retirement accounts pose problems is that deferred tax will have to be paid at some point. In light of this fact, Nelson cautions clients that retirement accounts might be worth even less than the balance minus tax.

“If one of the parties will be liquidating a retirement account early, then the highest marginal tax rate and the early withdrawal penalty might need to be subtracted from the value of the account,” said Nelson, who went on to explain that the value of these assets is often drastically reduced as a result.

According to Nelson, “Even if the account is not going to be liquidated, the taxes which will be paid on the money at the time of retirement can be considered and a reduction of the overall value of the asset might [be], and very often is, appropriate.”

28. “Division of Property” Depends on Where You Live

When a divorcing couple heads to court for a property dispute, state law is used to divide the property using one of two classifications: community property or equitable distribution. With community property, both spouses own income and assets equally, and items can be divided evenly. Additionally, individuals can keep separate property.

According to NOLO, a legal advice website, community property applies to the states of Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin as well as Puerto Rico. On the contrary, every other state uses equitable distribution, which involves “fairly” divvying up assets and money accrued during marriage. Knowing the law of the land can help you avoid surprises during your divorce proceedings.

29. Some States Are Better for Getting a Divorce

According to the government research site InsideGov, the five states with the easiest and most lenient divorce laws are Alaska, South Dakota, Wyoming, Iowa and Washington. The ease of filing, fees and processing times are all considered as part of the rankings. If time and cost are of the essence, you might want to consider where you live before filing divorce papers.

30. Be Mindful of the Worst States for Divorce

Based off InsideGov’s data, the most difficult states to get a divorce include Arkansas, New Jersey, Rhode Island, South Carolina and Vermont. Arkansas takes the longest amount of time at 540 days. If you live in one of these states, you and your spouse might want to consider relocating to expedite the divorce process.

31. When in Doubt, Seek a Professional — Or it May Cost You

Todd Huettner, president of the residential and commercial real estate mortgage bank Huettner Capital and a financial analyst who has helped many individuals dealing with divorce, advises clients to seek professional help at all costs.

“A simple mistake that drops your credit score 40 points can cost you thousands on your next mortgage,” said Huettner. “Making a mistake separating accounts, renaming beneficiaries or not setting up life insurance properly can cost you hundreds of thousands and impact you for years.”

32. Make Sure You Actually Implement the Divorce

Despite their eagerness to be divorced, many people actually fail to complete all the steps needed to make their divorces legal, according to Huettner. For best results, clients should make sure all their bases are covered and check up on spouses to ensure they have completed the necessary steps.

“You don’t want to find out that your ex-spouse never refinanced the house five years ago like he was supposed to and [it’s] now in foreclosure,” said Huettner. “By the time you find out about it, your credit will be destroyed for years.”

33. Compromise Could Help You

You win some, you lose some, right? Unfortunately, divorcing spouses often refrain from compromising out of spite.

While you might be tempted to fight every battle that comes your way, agreeing to compromises could save you a lot of headaches and money on legal fees when going through a divorce. As an added bonus, your decision to compromise could encourage your spouse to do the same.

34. Don’t Forget About Health Insurance

Although federal law might dictate that you have health insurance access under your former spouse, Narris cautions clients against relying on COBRA coverage long-term due to the high cost.

Her advice: “Start doing legwork for available options that may be less expensive. Better yet, find a job for yourself that has benefits!”

35. Belts Are Always Tightened During a Divorce

While individuals tend to factor the price of getting divorced into their budgets, they don’t always consider other everyday expenses incurred during the process.

Narris recommends that clients carve out a little extra money to care for their personal needs during this difficult time. “Factor in a gym membership, therapy co-payments, massages,” said Narris. “You will want to be as healthy as you can to help your kids through the process, and you never know when you may have a bad day.”

36. Act Proactively But Be Wary

Savvy divorce attorneys advise their clients to be cautious when filing for divorce.

According to Luna, it’s important to make sure you have the current statement for your spouse’s brokerage account before announcing and filing for the divorce. After all, a deceitful spouse could very easily liquidate the account with no paper trail by neglecting to cash checks until later. The last thing you want is to find out your spouse set up a new account after the divorce settlement while leaving the current brokerage statement with a zero balance.

37. Avoid Underestimating Living Expenses

It should go without saying that divorcing individuals need to know what their spouses earn monthly, as well as where the money goes. According to a Divorcenet.com article, when considering the cost of future living expenses, it’s important to take into account the effect of inflation.

Narris recommends keeping receipts so you have a good idea of what everything actually costs. Doing this will help you maintain quality of life after a divorce.

38. Don’t Let Emotions Get in the Way of Selling or Handing Over Family Home

Whether you have an emotional attachment to your family home, or are just seeking vengeance against your former spouse, be sure you’re thinking wisely about your decisions with regard to shared property. You don’t want to discover later that you gave up other assets just to keep a home in which you can’t afford to live.

39. Know What You Value

When contemplating divorce, it’s important to consider what assets you value most and be prepared to let some things go.

“A major mistake in divorce, that everyone can get trapped into, is spending hundreds or thousands of dollars fighting for something that you don’t even want,” said Narris.

Take your time so you can make the most rational and intelligent decisions.

40. Dress Appropriately for Court

It might seem like a small matter, but buying nice clothes for court can boost one’s confidence.

“You will feel better and likely fair better with the judge,” said Narris.

Of course, clients should remember to keep it professional and avoid dressing in a manner that’s flashy or overly pompous. Play it safe by keeping clothing neutral and accessories to a minimum.

It’s important to remember that divorce law varies by state, and some of these tips might not be applicable in your region. Be sure to find a divorce attorney in your area to advise you on how to get a divorce. Doing this will help protect your assets and property while ensuring the process goes as smoothly as it possibly can.

 

https://www.huffingtonpost.com/gobankingrates/40-secrets-only-divorce-a_b_8602766.html

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Top 15 Financial Mistakes to Avoid in Your Divorce Settlement

Updated By Attorney

Becoming a Financial Victim

The biggest mistake divorcing spouses can make is being in the dark about finances. If your spouse has always handled all of the financial decisions in your household and you don’t have any information about you and your spouse’s income and assets, your spouse will have an unfair advantage over you when it comes time to settle the financial issues in your divorce.

If you suspect your spouse is planning a divorce, get as much information as you can now. Make copies of important financial records such as account statements (eg., savings, brokerage, and retirement) and all other data that relates to your marital lifestyle (eg., checking accounts, charge card statements, tax returns).

If you believe your spouse may liquidate (sell or transfer to cash) assets or retitle marital assets without your consent, notify the holder of the asset or property in writing and get a restraining order from the court. Watch out for any cash held in joint checking and brokerage accounts, and the cash value of life insurance policies. If your spouse uses or moves assets without your knowledge, you may have to hire legal and forensic accounting experts to help you locate and value the assets.

Not Considering Mediation

If you and your spouse can work together to reach a fair settlement on most or all of the issues in your divorce (eg., child custody, child support, alimony, and property division), choosing mediation to resolve your divorce case may save thousands of dollars in legal fees and emotional aggravation. The mediation process involves a neutral third-party mediator (an experienced family law attorney trained in mediation) that meets with the divorcing couple and helps them reach an agreement on the issues in their divorce. Mediation is completely voluntary; the mediator will not act as a judge, or insist on any particular outcome or agreement.

Mediation also provides divorcing couples a lot of flexibility, in terms of making their own decisions about what works best for their family, compared with the traditional adversarial legal process, which involves a court trial where a judge makes all the decisions.

Mediation, however, is not appropriate for all couples. For example, if one spouse is hiding assets or income, and refuses to come clean, you may have to head to court where a judge can order your spouse to comply. Or, if one spouse is unwilling to compromise, mediation probably won’t work.

For more detailed information about the divorce mediation process, see Divorce Mediation Basicsby Emily Doskow.

Hiring a Combative Lawyer to Punish Your Spouse

This is a very bad idea for two reasons. First, except in extremely egregious cases, most courts won’t punish your spouse financially for being a bad person.

Second, hiring an attorney to punish your spouse will cost you because your attorney will need to increase the number of hours spent on your case. Increased attorney hours means higher divorce costs, and higher divorce costs means there will be fewer assets and cash left for you and your family. Try to take the emotion out of your divorce, and treat your case as a business arrangement. The best revenge is to live well after the divorce is over.

Failing to Recognize Your Common Enemy – the I.R.S.

Work together with a divorce financial planner or tax accountant to minimize the total taxes you and your spouse will pay during separation and after divorce; you can share the money you save. Don’t forget that both spouses are liable for taxes due as a result of audits on joint returns, so it’s usually in your best interest to work together and minimize possible liabilities. If you’re facing complicated tax issues in your divorce, it’s best to consult with an experienced family law attorney and an accountant.

Not Producing an Accurate Budget

Divorcing spouses usually underestimate living expenses when they produce their initial budget for temporary alimony (also referred to as “maintenance”), and later find that they aren’t able to cover all of their bills. Use a financial professional to help you produce an accurate and complete budget.

Disregarding the Impact of Taxes in a Divorce Settlement

It’s important to remember that after the divorce is final, you may get taxed on the marital assets you received through your settlement. Say your spouse handles all the investments and offers to split them 50/50. Sounds good, right? The only way to know if you’re getting a fair deal is to determine the value of the investments on an after-tax basis, then decide if you like the deal. Again, you should speak with a tax professional about the impact of any proposed property division before you agree to it.

Failure to Evaluate Settlement Proposals

If you’re trying to decide whether your spouse’s proposed divorce settlement is fair and workable, you should try to figure out how the settlement will impact your finances in the years ahead. There are many factors to consider, including assets, incomes, living expenses, inflation, alimony, child support, taxes, retirement plans, investments, medical expenses and health insurance costs, and child-related expenses such as education.

There are specialized divorce computer models that produce comprehensive and realistic analyses of your post-divorce lifestyle. You should speak with a local divorce attorney or financial planner that specializes in divorce for help analyzing any proposed financial settlement.

Being Emotionally Attached to Assets in Divorce Negotiations

The marital residence, the pension you earned, a painting purchased during your marriage – these assets often bring an emotionally charged debate to divorce negotiations, which can impair good decision-making. Often, divorcing spouses that are attached to the family home don’t realize that they can’t really afford. Yet, they fight tooth and nail to keep it, sometimes at the expense of retirement planning.

However, the real estate market crash has made it abundantly clear that homes have a very low return on investment and, in some cases, have a negative return; many houses today are still underwater, and couples have had to walk away from their homes and the hard-earned money they invested.

In addition, a home is a major cash expense (eg., mortgage payments, property taxes, repairs, and utilities). Let go of any emotional attachments you may have. During your divorce and settlement negotiations, your main focus should always be on how to maximize your finances by making sure you’ll have enough cash for living expenses after your divorce and in retirement.

Over-using Your Divorce Lawyer

Divorce attorneys generally charge $200- $300 per hour, and partners in well-known New York City, Los Angeles, and San Francisco family law firms typically charge $450 per hour. These attorneys can provide advice on divorce-related issues, but they are not therapists or certified financial planners. If you need to talk through the emotional aspects of your divorce, or need career counseling or financial analysis, save money on additional attorney’s fees and be sure to talk to the right professionals, such as a licensed therapist, vocational expert, or a financial planner.

Beware of Settlement Offers That Look Too Good

Both spouses and children must make compromises in their life styles post-divorce. A settlement that does not give one spouse enough money to live on is likely to go into default in the future. Be fair, but verify the numbers. Get payments up front whenever possible, even if you get less in total. Try to secure all payments with assets and insurance. It may be worth speaking to a family law attorney who can review a settlement offer and make sure your rights are fully protected.

Disregarding the Long Term Impact of Inflation

The effects of inflation on the cost of a child’s college education, or on retirement, 15 years in the future can be dramatic. The “Rule of 72” is a simple way to judge the impact of inflation. For example, if the inflation rate is 3%, the “Rule of 72” means that prices will double in 24 years (72/3=24). College costs at 5% inflation will double in 14.4 years (72/5=14.4). Be sure to work inflation into your settlement negotiations so you can cover the true costs of future financial expenses.

Failing to Consider Your Spouse’s Eligibility for Social Security Benefits

If a couple is married for 10 years or longer, a non-working or lower-earning spouse is entitled to derivative social security benefits on the higher earning spouse’s (“worker spouse”) record. These derivative benefits do not impact or lower the worker spouse’s social security payments, which is why it’s so ironic that the average length of marriage for people who get divorced is about nine and a half years. Waiting just another six months may guarantee increased retirement options with no reduction in payments.

For more information on this topic, see Social Security Benefits After Divorce by Lina Guillen.

Forgetting to Update Estate Documents

After divorce, many people forget to change the beneficiaries on their life insurance policies, IRAs, and will(s), so the estates they wanted to leave to their children, new partner, or favorite charity may go instead to their ex-spouse. If you’re going through a divorce, talk to a family law attorney to find out what changes you can make to your estate plan during and/or post-divorce.

Failure to Adequately Insure the Divorce Settlement

Your ex-spouse’s premature death or disability can be devastating and may result in a loss of alimony, child support, college tuition, or property settlement payments. Life and disability insurance policies can guarantee that these payments will continue despite an unexpected loss or injury.

Failure to Develop a Post-Divorce Financial Plan

One indisputable fact of divorce is that two households cost more to operate than one. Many divorcing spouses fail to realize that their divorce settlement must last a significant amount of time: perhaps even the rest of their lives. Financial planning can help people transition from a married to single lifestyle by prioritizing financial goals, developing realistic expectations, and producing sound plans for the assignment and division of financial resources.

https://www.divorcenet.com/states/new_york/15_critical_mistakes_in_divorce

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