Impact of low interest rates and Investment Rates of Return on Divorce Settlements

Interest and investment rates of return impact numerous facets of divorce
settlements
. Like many other areas of divorce settlements, whether the impact is
positive or negative can depend on which side you are on. 

Low Interest Rates

Real Estate Financing – Positive for the ability to purchase property or refinance the
marital residence; the lower the interest rate, the larger the mortgage that can be
afforded and for which to qualify.

Notes Between Spouses – Positive for the payer, negative for the payee.

Alimony

Buyouts – The lower the interest (discount) rate, the higher the buyout
value. A low rate benefits the recipient is a detriment to the payer. Discount rates
will be a greater factor for buyouts based on longer alimony.

Pension Plan Valuations – Again, the lower the discount rate, the higher the present
value, which would be to the detriment of the pension plan participant if trading off
the pension for another asset. A long term (20 year) discount rate is usually used,
which is not as volatile as are shorter term rates.

Low Investment Rates of Return

Income Available For Support – Low investment rates of return, whether capital
gains, dividends or interest produce less investment income. Rather than the
traditional 5% imputed investment income, I am seeing rates no higher than 3%
being used in the current environment. Clients whose support payment obligations
were based on their investment income have good reason to have them
reevaluated.

Settlement Structure – For clients whose cash flow needs depend heavily on
investment income, I would use extremely conservative returns for the next several
years for projecting the viability of that income meeting their lifestyle needs.
Potential increase in the taxations of capital gains is another reason to use
conservative assumed returns in any projections. 

Information provided courtesy of Thea Glaza.

Military Families  and Divorce – Contact us for a free consultation on real estate matters. 619-248-5484

 

 

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