By Frank Fantozzi, CDFA

After his divorce, David went to a financial advisor to determine how to best position his assets. Together, David and his planner decided to do a total financial plan for him. During the planning session, it became apparent that during his marriage his wife had done all of the investing. She chose all the investments, made all the decisions, and invested all the money. At the time of their divorce she said, “Let’s just split everything 50/50. You take this half of the assets and I will take that half. Is that OK?” David answered, “Well, I guess that sounds pretty fair. That’s OK with me.”
 
Unfortunately, there was something he neither knew nor understood; neither did
his attorney, and neither did the judge. They didn’t realize that David would have to pay taxes on his half of the assets when he tried to access them. His ex-wife, on the other hand, could access her half of the assets tax-free. His 50/50 split cost him an additional $18,000 in taxes. Had David met with a financial advisor specializing in divorce before the divorce was finalized, he would have been in a better position to ask for a more equitable settlement.

This parable has an unfortunate ending, but pre-divorce financial counseling can help people going through a divorce arrive at a settlement that is fully understood by all involved. Who do people turn to for such assistance? When people think about getting a divorce, the first professional that comes to mind is an attorney. Typically, a financial advisor (a CPA, CFP™, or a CDFA™) is not considered until later in the divorce process – or even until after the divorce is final. Financial problems can tear a marriage apart and they are often the primary cause that eventually leads to divorce. If a couple cannot solve their financial problems during the marriage, why do they think they will be able to agree on financial issues during a divorce?
 
They have questions such as:

• How do we value our property?

• Who gets what property?

• What are the tax issues?

• How do we divide retirement funds and future pensions?

• How will the lower earning spouse survive financially?

• What kind of additional financial support does the lower earning spouse need?

• Who gets the house?

• Will that person have to pay capital gains tax?

• Who gets custody of the children?

• Who will pay for day care, medical expenses, college, summer camp, or orthodontia for the children?

• How much child support should be paid?

• How much spousal support should be paid (if any)?

• What happens if a paying ex-spouse dies?

Because of the financial complexity of many divorces, more and more financial professionals (financial planners and accountants) are being asked to play an active role helping individuals and attorneys sort through the financial issues related to divorce. Attorneys are also looking for new ways to help their clients obtain an equitable financial settlement. Attorneys, mediators, arbitrators, and judges are looking for experts that are knowledgeable about the financial issues of divorce. Most financial planners and accountants excel in their chosen field, but they have little or no training specifically related to the financial issues of divorce.
 
When a client or prospective client asks them for assistance, many financial planners and accountants are unable to provide the information the client needs – or even worse, they are unaware that they do not have the required knowledge and end up finding out what they should have known after the divorce has been finalized. Not only does the client potentially suffer, but also the financial expert’s career has been put in jeopardy. Common mistakes include, but unfortunately are not limited to:

• Negotiating to retain the marital home when the client cannot afford it

• Not obtaining complete information on all retirement plans, employee benefits, and stock options

• Not evaluating the defined benefit pension plan correctly

• Thinking that retirement assets have the same value as an equal dollar amount of non-retirement assets

• Not understanding the different division methods of a retirement asset and knowing which one is in your client’s best interest

• Not understanding the purpose of a QDRO and the need to get it completed and filed at the time of the divorce or immediately after the divorce is final

• Not looking at the long-term impact of a financial settlement

• Failure to factor in inflation and investment returns when looking at the long-term impact of a settlement, or using unrealistic numbers in the evaluation

• Not being aware that it is possible to take a distribution from a retirement plan prior to age 59 1/2 and avoid the 10% penalty

• Lack of information on the need to protect the survivor benefits of the non-employee spouse

• Lack of information on the need to protect spousal and child support payments through life insurance
  

• Not understanding the importance of making the spouse, who receives the spousal and child support payments the owner of a life insurance contract

• Improperly structuring spousal or child support payments

• Using a QDRO to divide an IRA

• Making isolated financial decisions versus looking at the big picture and analyzing how each financial decision impacts other decisions
  

• Not taking into account transaction costs when evaluating a settlement offer

• Failing to understand the tax implications of alimony payments versus child support payments

• Believing that a 50/50 division of property is an equitable division of property

• Not understanding methods of dividing stock options or the tax implications

• Failing to consider the cost basis of property

• Not understanding the capital gain taxes upon the sale of the marital home, or how the sale can impact each party

• Not understanding how to divide debt

• Not taking into account the effect of deferred taxes when dividing the assets

On the flip side, for the financial professional who has obtained the proper training and has the knowledge and expertise to address each of the issues noted above and help those involved in handling the divorce:

• The client that has to make financial decisions

• The attorney arguing their case

• The mediator working through the financial issues with a divorcing couple

• The judge who could use the information to assist in making a fair decision

These are some of the questions the divorce attorney faces in each divorce case. What many attorneys struggle with; however, are the intricate financial details, such as: tax issues, capital gains, and dividing assets including pensions. Attorneys attend law school to become experts in the law, not to become financial experts. Additionally, even if an attorney has significant financial expertise, he/she is not allowed to testify on behalf of his/her clients. Due to these financial complexities and the role they can play in getting the most equitable settlement for their clients, more and more attorneys are bringing a financial expert into the divorce process right from the start.

For specific questions on this article or Divorce Planning, Investment Management, Life & Disability Insurance, Tax/Estate Planning, Philanthropy, and/or other financial topics, contact:

Frank ntozzi at (440)740-0130.
You may also e-mail him at Frank@PlannedFinancial.com.
Frank is a requested lecturer and is the President of Planned Financial Services and
401(K) Plus. 
www.PlannedFinancial.com