Last week, we mentioned two different people who want as part of Your Divorce Team – Your Divorce Attorney and The Mediator. This week, we will look into the importance of having a Financial Expert on Your Team but not just any Financial Expert but one specially trained for the work of divorce.
CERTIFIED DIVORCE FINANCIAL ANALYST®
Whether you are amicably divorcing or you are in the middle of a highly contentious divorce, a financial expert is a must. There are a few financial experts you may want to consult with, but one is a necessity on your team, the Certified Divorce Financial Analyst® or CDFA®. So what’s so special about a CDFA® and why are they needed on Your Divorce Team? Why can’t you just work with your CPA or Accountant or your investment advisor or broker?
Your CPA or Accountant or your Financial Advisor may be a good option for some financial information as you take steps toward your divorce but, they were not specifically trained to look at your finances in terms of what to consider in the situation between divorcing couples. Divorce Financial Planning and Financial Analysis is not just about splitting your finances down the middle and calling it good. A Divorce Financial Planner will work with you as a neutral or as an advocate, depending on whether your divorce is amicable or contentious. A CDFA® will take into consideration what may be considered martial asset versus separate property, what your cash flow will look like based on whether or not there is spousal maintenance and/or child support and how that affects your monthly budget. They will take into consideration any tax benefits or any tax pitfalls and help you put together scenarios for what the asset division looks like pre-tax and also post- tax. They will also look at ways to creatively split any retirement accounts and how to avoid extra expenses, if possible, such as having to hire an expert to draw up a Qualified Domestic Relations Order or QDRO. Each QDRO can cost up to $1000 a piece.
Although CDFA®’s does not practice law, they understand the parameters of the law and will work asset division scenarios based on these parameters. They can look at the State’s spousal or child support calculations and help the clients come up with scenarios to consider and how these scenarios will affect their ability to live their lives as they had been as a one household family to two separate households. A CDFA® will help you with your budget and post-divorce cash flow projections for as many years as you request. Some may request up to 5 years, others may ask for projections until retirement and how retirement living may look, especially if you are close to entering retirement and wondering if divorce will be a possibility for you.
Something else a CDFA® may be able to do for you is to help you with Restricted Stock Units and the calculations to consider in how to split these stocks. A CPA or a Financial Advisor who is not especially trained for divorce may not know that there is a calculation to consider and may not review with the divorcing client how the calculations work in order for both the spouses to know what is a fair or equitable split, especially if much of the spouse’s wages were gifted stock units.
HOW TO CHOOSE YOUR CDFA®
Things to look for as you start to meet with potential CDFA®s to be a part of your team. As mentioned earlier about attorneys, there are attorneys who are excellent attorneys and there are attorneys who do not have your best interest at heart. As you research different Divorce Financial Analysts and Planners, check to see if they are actively practicing in the divorce realm or if they merely have the initials behind their names. If they are Financial Advisors, check to see which firm they work for as many firms under the Broker/Dealer model will not allow a CDFA® to fully practice as a Divorce Financial Analyst nor utilize software specifically designed to do Divorce Financial Analysis and Planning. Many broker/dealer firms require their advisors to use their firm’s general financial planning software, which does not take into consideration their state’s family law parameters. Because of liability reasons, as well as liability insurance coverage, specifically to practice as a CDFA®, most larger firms will not allow their Financial Advisors to put together actual settlement scenarios. Although the firms will allow their advisors to have the CDFA® initials behind their names because they went through the testing and certification, these advisors are not able to fully assist in the Divorce Financial Analysis and Planning because they are not allowed to truly practice as a CDFA®.
Many independent firms also known as RIAs are more flexible with their advisors practicing Divorce Financial Analysis and Financial Planning and will allow an advisor to do the actual work of a CDFA® versus putting together a financial plan for clients who happen to be divorcing based on non-divorce financial planning software. Also, be sure to ask the CDFA® if they hold specific liability insurance to cover the CDFA® work. This insurance is not one that every advisor will carry as it is highly specific. Again, depending on the firm the CDFA® works for, they may not carry this insurance and if they do not carry this insurance, most likely the Financial Advisor is not actively practicing Divorce Financial Planning and Analysis
OTHER FINANCIAL EXPERTS
Your CDFA® may ask you to consult with your CPA and/or your Financial Advisor to help clarify your personal situations in order to provide the best asset division scenarios. Your CPA will be an excellent source of information at you consider what your taxable income will be post-divorce and to help you strategize how to maximize your effective tax rate. For business owners, your CPA can assist you on how to best manage any tax liabilities or maximize deductions post-divorce.
Post-Divorce and once all the assets have been split, it is a great idea to meet with your Financial Advisor and update them on the terms of the divorce so that they can update your Financial Plan with them and can plan and project accordingly. Your Financial Advisor is also a great resource to help you consolidate your accounts once the assets have been split. Your Advisor may also help with executing some of the cash flow planning which you and your CDFA® may have come up with as you put together your budget during your divorce.
CDFA® – MEDIATOR
One final consideration, if you and your spouse are amicably working towards a divorce, hire a CDFA® who is also a mediator. In this scenario, you will have two experts in one. As you go through mediation, all of the financial pitfalls and considerations are factored into the scenarios. Because you are in a mediation situation, you will be working within the parameters of Family Law but you and your spouse have the option to make specific decisions that work better for you and your family and your futures.
Speak to several experts as you want the right person to help guide you and your soon-to-be ex-spouse on the journey to a successful divorce. Sometimes one spouse may feel okay moving forward with someone while the other spouse does not feel the same way. In this situation, meet with another CDFA®-Mediator. You want the right person to help you come up with good and solid agreements which will affect your life immediately after the divorce is finalized as well as into your future.