When is a dollar not worth a dollar? When it’s paid out over time. No that wasn’t supposed to be a funny joke, just a statement of basic financial principles. Divorce attorneys need to have a clear understanding of present value of assets to be able enter correct values in the settlement statement software and negotiate fair agreements for their clients.
Let’s say you have an annuity that pays you $1000 per month for 60 months. How much is that worth? The obvious answer is $60,000 and that answer is wrong for two reasons: inflation and investment. The first month’s $1000 will buy more than the 60th month’s $1000 so you can’t count every payment in today’s dollars. On the other hand if you get $60,000 today you could invest it and have much more than $60,000 after five years.
To determine the real value of that annuity you have to adjust each payment by increased value due to investment and the decreased value due to inflation. Overall that $60,000 in payments will net you a much lower amount if you accepted a buyout today.
One of the main reasons present value is important in divorce settlement is alimony buyout. Let’s say that $1000 per month is an alimony payment and the recipient has immediate bills so would like to negotiate a buyout. That total alimony agreement would have a present value of about $40,000, though the exact value would depend on other factors. Divorce software for attorneys includes present value calculators to give an objective value of how much an alimony agreement is worth for cases of buyout.
Another common use for present value is pension valuation. When a couple gets divorced, if either spouse has a pension then the other spouse is entitled to a portion of it. This gets more complicated because the full value of the pension depends on retirement age and life expectancy as well as years married compared to years worked. Again attorneys use divorce planning software that can perform these complex calculations in a fraction of a second.
The same calculations apply to other periodic payouts such an annuity or a lawsuit settlement. Without the fair and unbiased calculations from divorce software, trying to determine values that are agreeable to both parties could be nearly impossible.
The financial complexities of modern divorce settlements mean computer tools are essential even in the simplest no-fault divorces. Contact us to find out more about how Easy Soft law firm management software speeds up and simplifies your family law practice.