FICTITIOUS CASE STUDY (READ PROPERTY & DEBT DIVISION FIRST)
Here are the assets and liabilities of 2 spouses we will call Bob and Cindy. They are both 32 years old and will retire at 65. They will receive a detailed yearly projection of their cash flow, working capital, and net worth. Here only modest projections over 5 and 10, years will be referenced. Edwin Knight, CDFA, will place inflation rates, growth rate assumptions of the business, RRSP growth rates, and mortgage payments (not shown) into a spreadsheet proprietary software resulting in a potential scenario for consideration.
We will consider three options.
OPTION # 1
1/ Cindy keeps the matrimonial home resulting in this division. (All numbers have been tax adjusted)
It is a 50/50 deal and looks fair right?Bob only keeps his business. The projections cash flow show Net Worth and Working Capital based on this split and create the following outcomes:
BOB at 5 yrs = 25000 cash flow,73000 working capital, 432,000 net worth
CINDY 5 yrs = minus -11000 cash flow, 11,000 working capital, 136,000 net worth
BOB at 10 yrs = 47,000 cash flow, 269,000 working capital, 782,000 net worth
CINDY 10 yrs = minus-13000 cash flow, minus-76000 working capital, 176,000
This means Cindy is using her assets to manage the home including the mortgage and the budget to maintain it. The mortgage was $290/mo. for 10 yrs. But she reaches zero WC in 3 yrs so likely has to sell the house and rent while having to pay Bob his part of the equity in the house. Or she keeps the house if she can handle the negative cash flow without making a loan, but how? While Bob through his business has a larger net worth on which to retire. Cindy needs to sell her house to gain some retirement relief.
OPTION # 2
So that didn't work, let's try another 50/50% split by transferring the credit card debt to Bob with the equalization payment at $20,125. With his business overhead, Bob could not obtain a loan so he is paying Cindy $2,561 for 10 yrs at 5% interest to pay the equalization payment.
Additionally, Bob will also pay spousal support at $2000 / mo = $24000/yr. for 3 yrs until Cindy graduates. Cindy has been a stay at home mom as agreed in the marriage and therefore has developed limited career skills. Bob also agrees to pay for tuition until Cindy has trained for her new career.
[[PASTING TABLES IS NOT SUPPORTED]]
BOB at 5 yrs = 24,000 cash flow,58000 working capital, 409000 net worth
CINDY 5 yrs = minus 6500 cash flow, 6500 working capital, 160000 net worth
BOB 10 yrs = 43,500 cash flow, 243,000 working capital, 745,000 net worth
CINDY 10 yrs = minus-9,000 cash flow, minus-61,500 working capital, 227,500
This means Cindy is still using her assets to manage the home including the mortgage and the budget to maintain it. She reaches zero working capital in 4 yrs so likely still has to sell the house and rent while having to pay Bob his part of the equity in the house. Bob's larger net worth has decreased minimally. Cindy is still looking at bankruptcy or liquidation of assets.
OPTION # 3
So that didn't work. Cindy now realizes she needs to sell the house and move into the rental house owned by them. The rental house has a value of $160,000 and a mortgage of $100,000 while the matrimonial home has a value of $220,000 and a mortgage of $130,000. In changing residences her budget to operate the house decreases as well. Now the equalization payment will be $10,125 at a loan amount to pay back of $1230/mo.
Bob will still pay spousal support at $2000 / mo = $24000/yr. for 3 yrs. Bob also pays for tuition until Cindy has trained for her new career.
[[PASTING TABLES IS NOT SUPPORTED]]
BOB at 5 yrs = 27,000 cash flow,91000 working capital, 470,000 net worth
CINDY 5 yrs = 726 cash flow, 82,600 working capital, 228,500 net worth
BOB 10 yrs = 43,500 cash flow, 256,500 working capital, 758,000 net worth
CINDY 10 yrs = 2000 cash flow, 113,500 working capital, 336,500 net worth
Now Cindy is better off and after 5 yrs, never has a negative cash flow or working capital with minimized impact on Bob's potential resulting in a stable relationship after separation beneficial to both and to the children if any.
WIN-WIN financial scenario by keeping options open and testing them.
Click here to edit text