Divorce Financial Planners can Help with Financial Future of Former Partners
Divorcing clients need to make important economic decisions as they go through the process. If they make bad decisions, they will more than likely have to live with financially and emotionally devastating consequences. That’s why people going through divorce need expert financial advice. While they have traditionally relied on the attorney or the mediator to provide such advice, and while many mediators and attorneys have come to accept this role, the requisite financial knowledge and skills are often outside their areas of training and expertise.
Some divorce professionals realized they can better serve their clients by incorporating financial experts, particularly financial planners into the pre-divorce process. Because of that, a new trend is emerging: divorce financial planning.
Most financial planners have the relevant tax and financial knowledge to act as outside experts in a divorce. However, their best contributions come from a more intimate involvement in the process. Because planners have traditionally helped individuals achieve long-term financial goals, saving for college or retirement, for example, they have specialized training and skills that enable them to analyze financial issues in their long-term context. During the divorce process, this often sets a more productive tone for discussion, empowering individuals to make workable decisions and lifestyle adjustments.
The earlier the financial planner becomes involved in the process, the more likely the situation will not escalate out of control, and the more likely good financial decisions will be made. The financial planner can help stabilize the situation, including helping determine short-term support needs or paying abilities, closing or re-registering accounts, changing beneficiaries on insurance policies, notifying credit card companies or establishing credit.
One of the most important steps in the pre-divorce financial planning process is the collection of accurate, complete and reliable financial data. Collecting, inventorying, organizing and analyzing historical data is one of the cornerstones of the financial planning process and is probably best done by the divorce financial planner. The less reliable the information, the more likely bad decisions will be made.
In addition, a financial planner will examine the financial position and cash flow. These are important because clients need to understand their current and future assets and liabilities and their current and projected income and expenses. Historical information provides insight into pre-divorce lifestyle and standard of living.
This process includes a budgeting step. From a financial planning perspective, budgeting is important no matter how much money is earned or what the expenses are. Further, total expenses are likely to increase once the parties have separated. While some people view a budget as a financial diet, this could not be further from the truth. A budget is simply a basic financial plan, a plan for managing cash flow. It is important that it be understood by both parties, and it is also important that it be balanced.
In addition, the parties need to construct a historical budget. This means going through the checkbook, bank, brokerage and credit card statements, etc., and compiling and organizing actual expenses. This is a time-consuming task and may not always be completely achievable, but going through the process can, in addition to providing insight into pre-divorce lifestyle, teach individuals how to use and adopt financial management tools, such as Quicken® educate them about the value of budgeting; and help them become better able to manage their money as they move forward.
The strategy for handling these issues is to calculate the needs and paying abilities associated with particular settlement scenarios to determine how best to fund them. Tax planning is often an important component of this process. On the surface, it might seem that the best solution would be to allocate as much money as possible to spousal support and give the dependency exemptions to the husband. In many situations, however – especially under the new tax law – the calculation is much more complex.
For example, the husband’s income may make him ineligible for the child tax credit, which is currently $1,000 a child. Or if the husband is a high wage earner in a high-income state like New York, he might otherwise be affected by the alternative minimum tax, and this may severely restrict the tax benefits he receives from his spousal support payments.
The amount of spousal support, and how periodic payments should be allocated between spousal support, child support, and a distributive award, should be related to needs, paying abilities, tax consequences and potential financial risks. It will vary with different settlement scenarios and therefore needs to be calculated each time a specific scenario is being considered. The duration of spousal support should be determined by the time needed to rehabilitate the recipient as well as the agreed-upon parenting plan. It should not be calculated using a formula such as one based on length of the marriage or the respective gross incomes of the parties.
Once the financial parameters are completely understood “ and only then “ should the parties begin the negotiation process. The two most important factors in this process are the workability of the settlements and the short- and long-term goals of the parties. Assistance with these issues is probably the most important role of the financial planner in the pre-divorce process. The planner can:
- Help the parties translate their goals into workable solutions;
- Determine which proposals are workable or what actions might need to be taken to make them workable;
- Educate the parties about the long-term consequences of specific proposals. This helps the parties feel more secure about the process and more comfortable about reaching an agreement. For example, they should fully understand whether they will have sufficient assets or income to manage their finances, whether they will be able to afford support payments or whether they will be able financially to survive or prosper over time;
- Suggest alternative scenarios to the parties when necessary.
Although this may seem surprising, the divorce planning process is similar in both litigated and mediated cases. There are some differences, however. For instance, the discovery process in litigated cases is more formal and implies a lack of trust. The financial planner in litigated cases might be asked to provide expert testimony in court. Alternatively, the informality of the discovery process in mediation is potentially subject to abuse, especially if there is a power imbalance. Involving a financial planner in the process is a good compromise in both mediated and litigated cases.
About the author: Carl M.Palatnik is a Certified Financial Planner practitioner, a Certified Divorce Financial Analyst and an Accredited Asset Management Specialist. He can be reached at c.palatnik@divorce360.com.
