The attorneys at our West Palm Beach divorce and family law firm make it a priority to review with their divorce clients several different long term financial outcomes. One of the most crucial mistakes an individual can make during a divorce in West Palm Beach, Florida is not thinking of the long term financial implications. It can be very tempting to call it “quits” in the middle of a contentious divorce and simply settle for whatever the other party throws at you. Be very careful of this mindset because it may have a substantial negative impact on your financial future. Therefore, all the financial consequences, which include asset distribution, net income and tax implications, of several different settlement scenarios should be weighed before making a decision.
While examining the different settlement scenarios during your South Florida divorce, it is equally important to consider a core principle of Finance called the “Time Value of Money.” In other words, you are essentially comparing dollars today with dollars down the road. Below is a basic example of this theory.
What if you were offered the choice of receiving $1,000 today versus waiting five years to collect the same $1,000? Logically, the better option would be to receive the $1,000 today.
It is better to accept the $1,000 today than waiting five years because money today is worth more than the same quantity of money in the future.
Compare with the following:
What if you were offered the choice of receiving $2,000 today versus waiting five years from now to receive $3,000? The reasonable response would be that it depends on the risk of waiting five years and opportunity cost. In other words, you need to consider the risk you are taking that the individual may not have the $3,000 to pay you at the end of five years. You should also determine whether you could invest the $2,000 today in something with less risk that will yield more than $3,000 in less than five years. Therefore, in order to determine the present value of waiting five years to receive $3,000, you need to determine a rate at which dollars in the future are brought back to the present. In Finance, this rate is often referred to as the “discount rate.”
Different investors may have different methods of calculating the discount rate. For example, Mr. Cunha knows of several well-known investors who use the yield on the 10-year US Treasury Note plus 4 to 7 points as a “risk premium” while many companies use their weighted average of the cost of debt and cost of equity (WACC).
In a divorce, however, the “discount rate” would be significantly higher because you are relying on an individual to pay you the amount promised. Accordingly, a discount rate between 12% and 25% each period would make more sense to account for the increased risk.
Compare the scenarios in the chart below:
(Net Present Value) NPV
(Net Present Value) NPV
|Discount Rate per period (year)|
|2.||$3,000 received 5 years from today|
When assessing the two simple scenarios in the above chart, the better option would be to accept the $2,000 today. Again, the above chart is meant to be a very simple illustration of how an individual would use the concept of the Time Value of Money in assessing different settlement scenarios during a divorce. Our experienced West Palm Beach divorce lawyers utilize the same financial principles while taking into consideration case law in assisting our clients in more complex settlement scenarios involving alimony and different types of marital assets. For example, it may be more beneficial for a client to agree to accept an offer of non-modifiable, non-taxable lump sum alimony as opposed to periodic permanent alimony payments or whether to release the client’s interest in a company jointly owned by the client and his/her spouse in exchange for either a cash payout or in exchange for a combination of financial securities and investment real property.
Please contact our main office in West Palm Beach, Florida at 561-429-3924 or via email at [email protected] to schedule a confidential consultation with our experienced family law and divorce attorney.