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

By
Real Estate Agent with HomeSmart Realty West Cal BRE#01427412

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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