Divorce: The Financial Plan No One Wants to Make

Divorce is one of the most stressful occurrences in a person’s life and the lives of their family members. In fact, on the Holmes and Rahe Stress Scale (a historic research study that measured the correlation between stressful life events and future illness), divorce is second only to the death of a spouse as a predictor of future health problems.

Now, with the addition of the COVID-19, many families have experienced lost jobs, illness, closed schools—and forced togetherness. The New York Post reported that all of this led to a 34 percent increase in divorce filings from March through June of 2020, as compared to 2019--with the Southern states being the hardest hit. Historically, couples often waited until the holidays were over, making January the month with the highest number of filings.

While we pray no one ever has to go through a divorce, there is a resource that will provide careful planning and mitigate some of this stress and take the uncertainty out of the financial aspects.

A Certified Divorce Financial Analyst (CDFA®) can provide the analysis necessary to ensure that a couple’s divorce is equitable for both parties. An “equitable” divorce doesn’t necessarily mean an “equal” one. To ensure that both parties have financially secure futures 10, 20, even 30 years down the road, a fair division of property must be calculated at the time of the divorce settlement.

Here are some of the things CDFAs are specifically trained to analyze:

• Whether it’s worth it to “get the house”
  It might sound like a great thing, but a home is often the most illiquid asset a couple owns, and it comes with its own set of tax and maintenance issues.
• Being awarded all of the retirement accounts (IRAs, 401(k)s, etc.)
  This isn’t always the best decision because of the tax consequences and withdrawal penalties if you are younger than 59½. Evaluating and valuing those various retirement and stock option plans is challenging, as is monitoring the progress and details of the Qualified Domestic Relations Order (“QDRO”), which is written to divide qualified retirement plans between spouses.
• Alimony
  Since Jan. 1, 2019, alimony no longer receives the special treatment of being tax deductible for the payer and taxable for the payee. While this may seem fine for the receiving party, who no longer has to list it as income on his/her tax return, it can create quite a dispute during settlement now that the payer no longer gets the deduction.
• Uncovering hidden or underreported assets
  While no one wants to imagine their spouse is hiding assets, it is a very common occurrence, especially once the divorce process begins. So, a CDFA has the expertise and time to really delve into all the statements, ATM withdrawals, Financial Affidavits, paychecks, etc. to find assets.
• Discover errors in income and expense affidavits
  Social Security withholding and pension projections are often miscalculated. Expense items are often double counted. For a very simple example, one spouse may list monthly bills as “Credit Card Bill - $500” and “Clothing - $100,” but forget to point out that the clothes were paid for with the credit card, thereby inflating expenses.
• A true analysis of cash flow
  Available cash is key during and after the divorce process. Many times, it’s the only way to pay for certain divorce expenses and everyday bills. Managing cash flow becomes an important element in the divorce process.
• CDFAs can help protect clients and their attorneys from making costly errors
  Clients often assume that their attorney and his/her staff or their CPA will be able to handle all the financial issues of their divorce. There are so many financial aspects to a divorce that aren’t even on the attorney’s or CPA’s radar.
• Helping clients sift through the emotional and financial difficulties during the divorce process
  Discussing finances, the possible sale of the family home, projecting future solvency, reviewing child custody issues and expenses—all of these are emotionally charged. Second only to a therapist or family counselor, a client’s attorney and CDFA are important confidants and support systems. While all these things affect both spouses, statistically more women go from a comfortable financial situation during marriage to being at risk for poverty years after the divorce is final.

With expenses already very high during a divorce, people don’t always think of hiring a CDFA. However, in many cases, clients already have a financial advisor who manages their investments. If that advisory firm has a CDFA on staff, like we do here in The Oakley Group at Pinnacle, the CDFA’s services are already included in the amount you pay to have your money managed.

Bottom line--a CDFA can become the best partner for spouses and their attorneys during a divorce and hopefully help turn a very difficult life event into a manageable one.

"Let your hopes, not your hurts, shape your future." – Robert H. Schuller

Bev Herbert, CDFA® is a senior vice president with The Oakley Group at Pinnacle Financial Partners and client services director with Raymond James Financial Services. She is based in Nashville, TN, and can be reached by phone at 615-743-8995 or by email at Bev.Herbert@pnfp.com.