Understanding the intersection of human emotion and economic theory will help you serve your clients better as they navigate disagreements during marriage and during divorce.
Psychological, financial, and legal professionals who work with clients going through the divorce process recognize the importance of assisting them to think strategically about financial decisions and how to avoid allowing emotions to unduly and inappropriately cloud their vision. Emotions readily and often inappropriately influence rational decision-making, and divorce evokes profound emotions that often de-rail economically rational decision-making in the midst of the upheaval.
Experience in practice as well as attention to the divorce literature results in more insight into the kinds of disagreements that lead couples to divorce in the first place. We now have research-derived empirical evidence that disagreements over financial matters are the leading cause of divorce across all socioeconomic levels in the United States. It turns out disparate values around money and the meaning attributed to money are more difficult to navigate than arguments about sex, household chores, child rearing, or offensive in-laws. More often than not, the disagreements had during marriage will spill over into divorce negotiations and possibly persist long after the judgment of dissolution is entered and spouses are officially divorced.
Understanding the intersection of human emotion and economic theory will help you, the advisor, to serve your clients better as they navigate disagreements during marriage and during divorce.
Couples often make an economic decision to have one party postpone the development of their career in the interest of rearing the children at home. It saves day-care costs and hopefully allows hands-on parenting. The decision of who will be the stay-at-home parent is also an economic one based simply on comparative advantage. Whoever has a more stable job, a more promising career path, and/or and the ability to make more money is probably going to be the one working. The individual staying at home is likely to be the person whose income prospects are not as bright as the working spouse.
When the marriage ends this joint arrangement, interesting and complex things can happen. The non-working or stay-at-home party will probably find that he or she can no longer afford to remain out of the work force. Thus, this parent must return to the labor market after being a stay-at-home parent.
For many, this is a recipe for disaster. They may need to go back to college to retrain in order to find work or take a position working for minimum wage. On the other hand, for the spouse who has been working, there is often a feeling of being exploited. They have worked and earned an income. Because of this, they now are in the position of having to pay a portion of that income to their soon-to-be former spouse. If the working parent happens to be someone who owns their own business, they may also end up having to buy out their spouse’s portion of the value of the business and support the spouse as well. No wonder many couples choose not to get divorced due to the negative financial consequences.
Alimony is a simple economic concept. It acts as an extension of the lifestyle that was enjoyed during marriage in order to protect individuals and families with disparate incomes. Alimony is not just for full-time homemakers. Working individuals are often awarded alimony in circumstances where their former spouse earns considerably more.
When making an alimony award, courts are asked to look at statutory factors (aka the law)–including, but not limited to, the “battlegrounds” detailed below–then develop, as the State of New York puts it, “nuanced treatment of the parties’ individualized circumstances.”
1. Income available for support payments. The more money a person makes, the more difficult it becomes to determine what they really have available. Are stock options available for support? How about an automobile allowance from an employer?
2. Ability of supported party to earn an income of their own. Should a party who spent 18 years as a full-time parent and homemaker be expected to re-enter the workforce? If so, when, and how much can they earn?
3. Needs of the supported party. Just how much does a middle-class Midwestern homemaker need? How about a Los Angeles socialite? Does the standard of living enjoyed during the marriage play a role?
4. Duration of the payments. How long will the payments last? This is usually the most contentious conflict. In many states it could be “permanent” in the case of a long-term marriage.
As you may have guessed, the payer wants to pay as little as possible for as short a time period as possible. The payee wants as much as possible for as long as possible. Every dollar moved to one party is a dollar the other party loses. Interestingly, there is research that suggests that women who are in a position to be the alimony payer (i.e., who are the higher earner) fight far harder to keep their obligation in check than their male counterparts.
The Ambiguity Problem
The entire process of determining the amount and duration of an alimony order is rife with ambiguity and a lack of precision. What does “nuanced treatment of the parties’ individualized circumstances” mean?
It basically means that a judge is required to look at all the factors presented by the lawyers on each side of the case and make a judgment call. Leaving this judgment call in the hands of the judge scares most people and leaves them hoping the judge will get it right (that is, see things their way). We should all educate our clients from operating on this assumption, because what they think is right may not resonate with their spouse or the judge. This ambiguity and the long-term nature of alimony payments can make it the most difficult piece of a divorce to settle.
Following are some strategies you may consider employing as you help clients through this difficult process:
1. The Installment Sale: We find it helpful when working with clients to think of alimony as payment for the non-working spouse’s interest in a “partnership” that was developed during marriage. They are being bought out of the “business” they helped create via an earn-out style installment sale. Note that this concept is not meant to imply a real business partnership or going concern. Instead, we suggest that you help your client conceptualize the marriage as if it were a business partnership or going concern.
2. Considering Options: We find it helpful when working with clients to remind them that, if they both choose, their settlement can be different than what a judge would order. We then help to develop creative options for their consideration. The strategic thinking required in the creation of these options helps to draw a client out of the minutiae of the statutory guidelines and remove the ambiguity. In fact, there is abundant empirical evidence showing that when people create their own outcomes and are the authors of their own decisions, conflict decreases and feelings of efficacy, empowerment, and well-being increase.
Remember, clients can choose to settle their case however they wish. The dictates of the law only come into play when matters are put directly before the court. When negotiating divorce settlements, including alimony, consider the law as a potential guide but not a book of “musts” or “rules.”
3. Taking Control: Many clients have feelings of helplessness when leaving their future in the hands of a judge. Engaging clients in settlement discussions and helping them conceptualize long-term outcomes remove feelings of helplessness. We often couch it as taking control of your financial future. Part of taking control is taking the decision-making power out of judges’ hands. Alternative dispute resolution models such as collaborative divorce and mediation are great options for divorce proceedings. These processes have self-determination at their core. Clients can also take control of a litigated process by engaging in settlement conferences.
Over the coming months, we will take a more detailed look at some real life decision-making processes that unravel during a divorce, including cash-flow management, small business management, financial infidelity, retirement planning, and legacy planning through the eyes of clients navigating the most chaotic time in their lives.