Collaborative Law in Divorce and the Role of the Financial Neutral

The financial neutral plays an important role in the collaborative law process

One of the team members in the collaborative law process of divorce is the financial neutral. This article explains the role of the financial neutral as an impartial expert.

The financial neutral plays a crucial role in the collaborative law process.   That much is certain.  Since it is estimated that 90 percent of collaborative cases arise out of family law disputes, our attention will be isolated to this area.   Before we dive into the role of the financial neutral, it is important to at least have a basic understanding of collaborative law. 

Collaborative law is a form of alternative dispute resolution (ADR). This approach initially started in Minnesota over 20 years ago.  Since then, the process has spread to all 50 states, as well as at least 15 countries, including Canada, England, Ireland and Australia.  In 2009, the Uniform Law Commission (ULC) approved the use of the Uniform Collaborative Law Act (UCLA).  In early 2011, the ULC submitted the UCLA to the American Bar Association (ABA) House of Delegates for endorsement, which did not pass.  However, the ABA Standing Committee on Ethics and Professional Responsibility and at least eight state bar ethics committees (Kentucky, Maryland, Minnesota, Missouri, New Jersey, North Carolina, Pennsylvania and Washington) have expressly approved the use of collaborative law.  Four states have already enacted collaborative law statutes—California, North Carolina, Utah and Texas.

As a brief overview, collaborative law in family law disputes is an alternative to the traditional litigious method of divorce.  While the process is voluntary, it involves a team of specially trained professionals who assist the divorcing couple in solving problems without a court battle and, when children are involved, making them a priority.  Ideal candidates for collaborative law are divorcing couples who are interested in goal-oriented negotiation, a team approach, de-escalating conflict, open communication, collaborative decision-making and gearing up for a life post-divorce.  This is a practice area that continues to grow and should be on the radar of most financial experts.

Collaborative divorce has many benefits to a divorcing couple.  For instance, spouses dictate the process and make final decisions.  Lines of communication are open, as spouses communicate directly with each other through the assistance of their team.  The method is also effective in identifying and addressing the interests and concerns of both parties and emphasizes the needs of children.  Moreover, costs are manageable, typically less than in a litigation setting, and experts are used in a financially efficient manner.  The UCLA also provides for broad prohibition on later disclosure of communications made within the collaborative law process.

Collaborative divorce begins with a contract between spouses, their respective attorneys and other professionals, which acts as an enforceable agreement.  No one is required to participate, and parties are free to terminate the process at any time.   Collaborative lawyers do not represent the party in court, but only for the purpose of negotiating agreements.  In addition, the parties agree in advance that the professionals will be disqualified from representing them in the event that the collaborative process ends without an agreement and the matter proceeds to litigation.  This important provision is known as the “disqualification requirement” and discourages the couple from terminating this process as they would essentially have to start over and incur additional time and costs in obtaining a new team.

The collaborative divorce process involves face-to-face meetings between spouses and their respective lawyers and, as needed, team members such as divorce coaches and child and financial specialists.  In a collaborative environment, lawyers are responsible for educating and counseling their client while managing conflict.  They guide their clients through the negotiation process and may assist him or her in implementing any agreed-upon arrangements.  Divorce coaches or mental health professionals assist with managing the stress levels and emotions that arise during the course of a divorce.  They also help facilitate teamwork and add perspective surrounding divorce-related issues, emphasizing a positive vision for the future.  Child specialists are present to provide a safe place for children to ask questions and discuss their concerns.  Additionally, they provide parents with education on child development, separation and divorce issues. 

One of the most important team members in the collaborative divorce process is the financial neutral.  As can be gleaned from the title, the financial neutral is an impartial expert.   This person offers a safe, unbiased environment for spouses to speak openly about their financial fears, concerns and ultimate goals.  The financial neutral is usually a financial professional with at least a CPA designation.  When a primary asset of the marital property is a business, a valuation designation such as a CVA or ABV becomes increasingly desirable.    In many divorce settings, negotiations break down over financial issues or concerns, oftentimes leading to litigation.  The financial neutral offers both parties a balanced, thorough financial evaluation of the marriage and offers realistic solutions to obstacles in negotiations. 

Depending on each individual situation, the financial neutral can perform a variety of functions in a collaborative divorce, such as:

• Identifying and gathering necessary financial documentation
• Assisting in the determination of separate vs. marital property
• Providing long-term projections of future cash flow and net worth
• Offering an analysis of the ability of the higher earning spouse to make maintenance payments
• Analyzing tax implications of various scenarios for child support and marital property division;
• budget analysis
• Analyzing property and business interests
• Analyzing debt pay-off situations
• Assessing the economic consequences of keeping one asset over another
• Assisting with collaborative modification of support agreements post-judgment

In all scenarios, the financial neutral is focused on assisting clients and lawyers in generating feasible financial options and understanding the future financial impact of those options.  Financial neutrals should not only be savvy when it comes to various financial and valuation issues, but he or she should also be keen problem solvers and be able to offer realistic solutions to guide decision-making. 

Every divorce is unique, requiring the critical perspective of a range of professionals.    The foundation of any financial settlement in a divorce hinges on the role of the financial neutral, which makes this role especially important.  Collaborative law, in conjunction with the role of the financial neutral, is an emerging specialty in the divorce arena and should not be overlooked by financial experts.  The opportunity is there and worth pursuing.

Lawrence A. Horwich, CPA, CVA, ABV, is the Managing Partner of Horwich Coleman Levin, LLC, a Chicago-based firm (www.horwich.com).  He has over 30 years of experience in public accounting, as well as business consulting, auditing, taxation and estate planning. He performs valuations of private, closely held businesses and emerging companies for sale, mergers and acquisitions, financing, (debt and/or equity) for estate and gift tax purposes, shareholder disputes, buy-sell agreements, insurance claims, marital situations and other business matters.  Larry can be reached at lah@horwich.com.

David Elyashar, CVA, CPA, has expertise dealing with income tax matters in the financial services industry, specifically with private equity firms and hedge funds.  He is also specializes in tax and estate planning, audit and accounting and financial/investment services. Mr. Elyashar is a Certified Valuation Analyst (CVA) and is well-versed in business valuation and litigation support.  He performs valuations of private, closely held businesses and emerging companies for sale, mergers and acquisitions, financing (debt and /or equity), estate and gift tax purposes, shareholder disputes, buy-sell agreements, insurance claims, marital situations and other business matters.  David can be reached at dje@horwich.com.