A couple’s finances constitute a large component of their divorce and can bring significant anxiety and stress. Most wonder how support will be determined, how marital property should be divided, whether they’ll have to divide their pensions or retirement accounts, and more. Unlike any other divorce professional, a Certified Divorce Financial Analyst (CDFA®) is uniquely equipped to address these issues.
What does a Certified Divorce Financial Analyst (CDFA) do?
A Certified Divorce Financial Analyst is a professional equipped with specialized knowledge in financial matters related to divorce. These experts undergo rigorous training and examination to earn their certification, making them well-versed in the intricacies of divorce finances.
CDFA’s help individuals and couples determine an optimal financial settlement agreement that helps answer the questions “will I have enough to pay my bills after the divorce” and “in the future, will I have sufficient net worth to meet my longer term objectives?” Assets are not all alike and shouldn’t necessarily be split 50/50 down the middle. Assets may be a mix of marital (subject to division) and separate, they have varying tax consequences, impact on cash flow, and rates of return. Thus, optimal settlements take into account taxes (income and capital gains), accurate valuations, and determination of what is marital vs. separate, and the short-term impact on cash flow, as well as the longer-term impact on future wealth.
A CDFA can also help determine the right level of child support and alimony needed for the lesser-earning spouse to meet their post-divorce budgets. In most states, child support is based on state legislature guidelines based on the parents’ incomes, but they are just guidelines and only provide minimums. Alimony is a subjective determination based on a variety of factors including age, earning potential, and likelihood of future inheritances.
Benefits of Working with a Certified Divorce Financial Analyst
A CDFA empowers individuals to make informed financial decisions, avoid common pitfalls, and ultimately secure a more stable and equitable post-divorce future post-divorce. Let’s look more closely at some of the benefits of working with a CDFA.
1. Inform Financial Settlement Decisions
In essence, the CDFA acts as a financial compass during the divorce process, steering individuals and couples towards informed choices that guide them toward their future true north. This clarity goes beyond a mere snapshot; it extends to a detailed examination of their short and long-term priorities and goals along with an exploration of assets, debts, income streams, and potential future financial scenarios.
A CDFA’s focus on long-term financial planning is a forward-looking approach that transcends the turbulence of divorce proceedings. It ensures that clients not only secure a fair divorce settlement but also position themselves for a stable and prosperous financial future, laying the groundwork for a new chapter with confidence and foresight.
Cash flow is typically an immediate concern and a significant source of anxiety. So, the first step is to get a snapshot of the current financial situation, including current spending. From there, the CDFA helps clients build a post-divorce budget based on their specific objectives and priorities. Next comes identifying future financial goals, e.g., buying a house, funding children’s or grandchildren’s educations, and retirement. We are then able to look at how various support and marital property division scenarios will affect their ability to meet these goals. The outcome of these exercises allows divorcing individuals and couples to make informed settlement decisions. Lawyers, judges, and courts don’t provide that kind of information and blind settlement decisions lead to lost opportunities and highly consequential financial mistakes.
2. Safeguard Financial Assets and Income
The Certified Divorce Financial Analyst’s role in asset protection becomes a linchpin in fostering financial resilience and ensuring that clients can embark on the next chapter of their lives with a robust and safeguarded financial foundation. Most divorcing couples avoid the possibility that alimony and child support could terminate upon the provider’s incapacitation or death. CDFA’s will work with you to determine if an alimony buyout will be in your best interests and examine such safeguards as purchasing life and disability insurance or establishing a trust for the children to reduce the risk of a financially catastrophic event.
Example
Here’s a detailed example to illustrate the potential mistake of opting for periodic alimony payments over a one-time alimony buyout.
- Spouse A earns significantly more than Spouse B.
- The settlement options include alimony payments or a one-time alimony buyout.
Option 1: Periodic Alimony Payments
- Alimony Agreement: Spouse A pays Spouse B $3,000 per month for 10 years.
- Total Alimony Paid Over 10 Years: $3,000 x 12 months x 10 years = $360,000.
Financial Implications for Spouse A
- Income Stream: Regular monthly payments provide a steady income.
- Inflation: The value of the $3,000 monthly payment will decrease over time due to inflation.
- Dependency: Financial dependency on Spouse B for the duration of the alimony payments.
- Risk: If Spouse B’s financial situation changes (e.g., loss of job, disability), the payments might be reduced or terminated.
Option 2: Alimony Buyout
- Buyout Amount: A lump sum, let’s say $250,000, paid to Spouse A instead of periodic payments.
Financial Implications for Spouse A
- Lump Sum: Immediate access to a significant amount of money.
- Investment Opportunity: Potential to invest the lump sum in a diversified portfolio or other investment vehicles.
- Example: Investing $250,000 with an average annual return of 5% for 10 years.
- Tax Implications: Depending on jurisdiction and laws, the lump sum might have different tax implications than periodic payments.
- Financial Independence: No dependency on Spouse A for future payments.
- Inflation: The lump sum can be invested to potentially outpace inflation.
Potential Mistake in Choosing Periodic Payments
- Opportunity Cost: Spouse B misses out on the potential growth of the lump sum investment.
- Financial Risk: Relying on Spouse B’s ability to make future payments.
- Inflation: Decreasing value of the $3,000 monthly payment.
If Spouse B opts for the alimony buyout and invests the $250,000 lump sum with an average annual return of 5%, after 10 years, this investment could grow to approximately $407,224. This amount significantly exceeds the total of $360,000 that would be received from periodic payments.
- Lump Sum = $250,000
- Rate = 5% (or 0.05)
- Years = 10
Investment Growth: The lump sum investment option potentially offers Spouse B a higher total return, assuming an average annual return of 5%.
- Financial Independence: Choosing the lump sum also grants Spouse B immediate financial independence and flexibility, without relying on Spouse A’s future payments.
- Risk Mitigation: It eliminates the risk associated with Spouse A’s ability to make future payments.
- Inflation Protection: The investment can potentially outpace inflation, preserving or even increasing the purchasing power of the initial amount.
3. Avoid Financial Settlement Mistakes
There are many costly mistakes that can be avoided by working with a CDFA.
Example 1: Keeping the Marital Home
One of the most common financial mistakes that divorcing individuals make is keeping the marital home because of emotional attachment and/or desire to keep the children in the same neighborhood or school district. Keeping the house, though, can have serious financial consequences. Many do not anticipate the real cost of maintaining a house, e.g., unexpected repairs, taxes, or homeowners’ association assessments, the increased cost of a mortgage after refinancing, or they don’t fully appreciate the impact of foregoing the proceeds of the sale of the house.
- Marital Home Value: $500,000
- Remaining Mortgage: $300,000
- Other Assets: $200,000 in savings, $300,000 in a retirement account
Spouse A decides to keep the marital home, while Spouse B takes the retirement account and half of the savings ($100,000).
Spouse A assumes the mortgage, taking full responsibility for the remaining $300,000 debt.
Financial Implications for Spouse A
- Equity in Home: $200,000 (the home value of $500,000 minus the mortgage of $300,000).
- Cash Assets: $100,000 (half of the savings).
- Debt: Assumes the full mortgage of $300,000.
- Liquidity: Low, as most of Spouse A’s assets are tied up in the home.
- Maintenance and Upkeep Costs: Ongoing expenses for maintaining the home, can be substantial and often underestimated.
- Property Taxes and Insurance: Continuing obligations that can be a significant annual financial burden
Challenges for Spouse A
- Affordability: If Spouse A’s income is not sufficient to cover the mortgage payments, property taxes, maintenance, and other living expenses, they might face financial strain
- Refinancing the Mortgage: Spouse A may need to refinance the mortgage to assume it solely, which could come with a higher interest rate or unfavorable terms
- Lack of Diversification: Spouse A’s financial situation is heavily invested in a single asset (the home), which can be risky, especially if the real estate market fluctuates
- Selling the Home in the Future: If Spouse A needs to sell the home, they might incur real estate fees, and if the market is down, they could sell at a loss. Also, the home’s equity might not have increased as expected
Financial Implications for Spouse B
- Spouse B walks away with liquid assets ($100,000 in savings) and a retirement account worth $300,000, which likely will grow over time and is diversified
- Spouse B has more financial flexibility and potentially less financial stress
With a CDFA ‘s guidance, individuals will be guided to accurately estimate future expenses and assess the impact on longer-term financial health.
Example 2: Treating All Marital Assets Equally
Another example of a mistake that can be avoided is treating all assets as essentially the same. Many couples strive for a 50/50 division of their assets but are they really dividing things equally? Not all assets (and debts) are created equally. Assets are taxed differently, have varying growth returns, and impact on liquidity. Consider this situation where the property division doesn’t consider taxes:
Total Assets: Let’s assume the couple has a total asset pool of $1 million, which includes a house valued at $500,000, a stock portfolio worth $300,000, and savings of $200,000.
- House: Spouse A keeps the house (valued at $500,000). Usually, there might be capital gains tax considerations if the house is sold, but in this scenario, we’re not accounting for that.
- Stock Portfolio: Spouse B receives the stock portfolio ($300,000). Normally, selling stocks might incur capital gains tax, but it’s not considered here.
- Savings: The savings ($200,000) are split equally, giving each spouse $100,000.
Implications
- Spouse with House: Spouse A has an asset worth $500,000, but if they decide to sell the house later, they might face a substantial tax bill, which hasn’t been accounted for in this division
- Spouse with Stocks: Similarly, Spouse B has stocks worth $300,000. If they sell these stocks, they might incur capital gains tax, which can significantly reduce the actual value they receive from this asset
- Savings: Both have liquid assets of $100,000 each, which are not typically subject to immediate taxes
- Liquidity: Spouse A who kept the house and stocks might face liquidity issues as their assets are not readily convertible to cash without potential tax implications
Fairness: The division might seem equal in terms of gross value, but after considering taxes on the sale of assets, one of these spouses will likely end up with significantly less net value
Take Control of Your Future
When you consider divorce, or if you know someone who is contemplating divorce, one of the biggest realities for those in the divorce process is the financial settlement and financial analysis post-divorce. Get the assistance of Berni Stevens, a Mediator, Certified Divorce Financial Analyst® (CDFA®), and divorce coach.
Berni provides step-by-step guidance on matters related to divorce. With a wide range of experience and expertise related to divorce issues, Berni will simplify the process and provide much-needed clarity in areas such as long-term tax consequences, asset, and debt analysis, dividing pension plans, continued health care coverage, stock option elections, protecting support with life insurance, and much more. She can also guide you through building an effective parenting plan, and getting your divorce processed through the court.
