Under normal circumstances, financial planning is a key component in securing the long-term well-being of you and your family.
But when you are faced with the prospect of a divorce, the need for financial planning can become even more critical.
Your short- and long-term goals will change dramatically, and you will be forced to reexamine your financial future with a new set of facts that will be a significant departure from your status as a married person.
Accepting your new reality having good and accurate information are important keys to making smart decisions about your financial future. You must also be aware that part of what drives your financial decisions will be influenced by the legal and emotional components of your divorce as well.
A family law attorney will guide you through the important legal issues you will be facing, and friends, family, support groups or even therapists will help support you emotionally. It’s just as important to get the professional help you need to make critical decisions that will align with your new set of financial goals and objectives.
What is divorce financial planning?
Divorce financial planning specifically focuses on developing personal and business financial strategies that can help an individual achieve the best possible divorce settlement for their personal situation.
Just as a family law attorney will focus on legal issues, and other resources will help you with emotional support issues, you can only make the best possible financial decisions when you tap into the extensive knowledge and experience provided by a professional trained to deal with critical financial decisions as they relate to divorce.
The goal of divorce financial planning is to make you fully aware of your options, the true value of your assets and how your decisions in a divorce will impact your finances.
Because divorce is an emotional experience, without guidance your judgment can be compromised at times, causing you to make mistakes that could take years to recover from, or cost you thousands of dollars.
When you get assistance from a divorce financial planning professional, you can work together to develop a strategic plan that will remove the right amount of emotional decisions, protect you and your future, and minimize mistakes and emotional stress that you will encounter along the way.
Who should I hire to assist me with divorce financial planning?
Because divorce can be a complicated process, chances are that you will need to not only retain a seasoned family law attorney, you will also need the services of other professionals who can fully understand and interpret your divorce-related financial, tax and long-term wealth issues.
Depending on the level of complexity of your finances, at the very least you will benefit from working with a divorce financial advisor.
Not only will a divorce financial advisor help you to better understand your current situations and how you will be impacted post-divorce, they will be able to bring added perspective in helping you evaluate various possible settlement proposals. This will be critical in helping you assess the long-term impacts of your decisions.
If you decide to retain this type of advisor, at a minimum, look for a Certified Divorce Financial Analyst (CDFA), and preferably someone who is also a Certified Financial Planner (CFP). A CDFA has specialized training in the financial and tax aspects of divorce, while a CFP has broad expertise across all facets of financial planning.
There are other highly specialized divorce financial analyst specialists who may be able to assist you as well depending on your circumstances. These may include a Chartered Business Valuator (CBV), a Certified Fraud Examiner (CFE), a Certified Valuation Analyst (CVA) and other professionals who can provide you with pinpoint analysis and services.
You may also want to work with a divorce mortgage advisor who will have specialized knowledge of divorce-specific underwriting guidelines, and a forensic accountant to help you determine a spouse’s true income and assets.
Last but not least, because divorce can be highly stressful, and you must continue to move forward in other parts of your life, consider working with a therapist who can give you the emotional support you will need, including financial matters, to get you through this difficult period.
What information will I need to start the divorce financial planning process?
The more thorough you are in gathering your information, the better the financial plan that can be created and implemented for you and your situation.
If possible, it’s best to pull together all of your information before you formally ask your spouse for a divorce. In some instances, if a spouse is aware of an impending divorce, they will attempt to hide assets and information, making your task that much more difficult.
At a minimum, you should try to gather the following materials and information, going back three to five years. If you have been in a long marriage, then going back longer may be even more preferable.
- Stock, bond and mutual fund assets
- Real estate holdings and mortgage info
- Income tax returns
- Auto loans
- Personal loans
- Checking and savings account statements
- Credit cards statements
- Retirement accounts
- Personal and business tax returns
- Lists of marital and non-marital personal property
- Supporting documentation to prove separate ownership of personal property
- List of assets and debts that were brought into the marriage
- Business holdings
- Details on pending lawsuits
- Other related asset information that can be used to help divide assets at a later date
- Monthly estimated expenses that will be used for possible alimony or child support amounts
- Any child or spousal support that you are either paying or have received
- Pre- or post-nuptial agreements
- Copies of prior divorce judgments
- Life and health insurance policy information
- Birth certificates and social security information for you and your children
- Immigration and naturalization information if it applies
- Any other documents that have an impact on your current financial situation
Steps in the divorce financial planning process
Step 1: Gather and assess financial information
So that a divorce financial planning professional can work with you to help you reach the best possible settlement, the first step you take will be the most critical.
You must gather as much accurate and comprehensive information as possible. If you have doubts about whether a certain document or information is important or not, include it and let your financial planning professional make the call.
To protect your financial position to the highest degree possible, you must be forthcoming and provide full disclosure regarding all your marital assets and liabilities.
Once your divorce financial planner has the information in hand, a complete assessment and in-depth analysis of your finances will take place and begin the initial building blocks of your divorce financial planning strategy.
Step 2: Budgeting and cash flow analysis
After your financial information has been reviewed, a budgeting and cash flow analysis will provide you with a solid foundation for your future financial stability.
By incorporating your cash flow and net worth projections, you will be able to have a better understanding of what your post-divorce lifestyle will be like.
Step 3: Analyzing possible settlement options
Depending on the laws of your state, not all assets are divided on a 50-50 basis. As part of the settlement process, it is not uncommon for one spouse to give up a greater share in one asset so that they can get a larger share in another. This is especially true when it comes to homes, business ownership interests, or retirement accounts. It’s important to understand the financial issues and tax consequences of taking ownership of these various assets and how they will impact the bottom line of your settlement agreement.
Step 4: Risk management and asset protection
An important part of divorce financial planning is making sure you and your loved ones are protected even when unforeseen events take place. This could include the loss of child support or alimony in the event an ex-spouse passes away or becomes disabled. A divorce financial planner will also make sure that existing life insurance coverage is appropriate and cost-effective, and restructured in such a way that it meets with your new financial goals and objectives.
Step 5: Estate planning
You must make sure that wills, trusts and other financial instruments are updated to reflect your post-divorce desires. This will include making sure that you change the beneficiaries of your estate to transfer your wealth to the heirs and the charities you want to support. Your financial planner will also work with you to ensure advance directives, power of attorney, guardianship of minor children and other related legal documents now reflect your post-divorce directions.
Step 6: Analyzing executive equity compensation
Equity-based compensation can represent a significant portion of a family’s wealth, especially when a spouse is a highly compensated executive.
These compensation arrangements can be extremely complicated, and it is essential to understand the implications of valuation, transfer and liquidation of stocks and stock options.
Without thorough analysis, it is easy to make mistakes when negotiating a settlement that includes executive equity compensation.
There are a number of factors to consider, including the types of stock options involved, grant strike price, transaction costs, expiration dates, and tax effects.
Step 7: Developing a strategic plan
Once all of your financial assets have been reviewed and interpreted, a divorce financial planner will discuss your needs, wishes for money and your life. This is the only way to ensure that a financial plan is created that aligns with all of your personal objectives, helping you to understand the consequences of your decisions before you make them.
Step 8: Litigation and settlement support
Working in concert with your family law attorney, a divorce financial planner will also be able to provide valuable input by gathering and organizing critical financial information that can be used to create a Schedule of Assets and Debts and Income and Expense Declarations.
Your attorney will be able to use this information to effectively defend and negotiate a settlement either through mediation, arbitration, or in a divorce hearing.
When needed, a Certified Divorce Financial Analyst can also be called upon as an expert witness to help explain and support equalization payments, spousal support issues, alimony buyouts and complicated settlement issues.
What Expense and Income Tracking do I Need Provide?
When you are working with a divorce financial planning expert, the rule of thumb is to be thorough when it comes to providing your expenses and income. Not only will this assist you in creating realistic financial goals, but it will also help you with settlement, alimony, and child support issues to follow.
Although it may seem a bit tedious to track and report your expenses and income, it is necessary to document several months of information to help demonstrate an established standard of living that can be used as a basis for a future standard of living.
Alimony, child support and even any forms of temporary support during the divorce process will all be used to calculate amounts post-divorce.
In addition to monthly expenses, it is also important to document any special or irregular expenses that may have come up. This can include educational expenses, medical expenses, childcare or other costs that are not normally paid every month.
Factoring in and reporting all of this information is the only way to come up with a fair settlement, alimony and child support amount and gives the court important historical context when deciding upon a case.
What Information do I Need to Provide on my Assets, Debts and Liabilities?
Depending on the state you are getting a divorce in, you will need to provide full financial disclosure either at the beginning or throughout the process of your divorce.
Each spouse is expected to provide financial disclosure during a divorce and this information comes from all sources of income, investments, deeds, mortgages, tax returns, expenses, debts and other financial information that is owned jointly with your spouse and any separate property as well.
This information will be used in settlement proceedings during the divorce, but for financial planning purposes, it will give an accurate summation of your financial standing and help a financial planner to lay out the best possible strategy for your particular situation.
Aside from using this information for financial planning, the best reason to fully disclose all assets, debts and liabilities is that the financial information submitted to the court is a legal document.
If you do not disclose everything, or if you or your spouse purposely withheld information, you could be punished for your transgression. This may include being cited for contempt of court resulting in a fine or jail time, or the court may decide to award more assets to the other spouse as a form of punishment for non-disclosure.
How is Alimony Calculated in Divorce Financial Planning?
Each state approaches the subject of spousal support/alimony differently. Some states are generous when it comes to providing for the needs of one spouse following a divorce. Other states will set a limited time frame that a spouse can receive spousal support, depending on a number of factors, including:
- The length of the marriage
- The earning capacity of each spouse
- The needs and standard of living of each spouse
- Age and health of both spouses
- Existing debts and assets
- Child custody arrangements and whether or not the primary care spouse can hold a job while taking care of the children
- Did one spouse help the other with education, career training or other ways to assist them in advancing their career
Because alimony speaks directly to the quality of life of a spouse following a divorce, making your best case for a maximum amount as allowed by the courts is critical to protecting your future.
The best way to do this is to gather income and expense records, financial records, bank statements and other related documents that will provide an overall picture of the financial health of each spouse.
In some states, as part of the settlement and determining the amount and duration of alimony, courts may also look at the value of each spouse’s property after a division of assets has taken place. Even in community property states where assets are divided evenly, if one spouse entered the marriage with a large amount of separate property or was given a sizable inheritance, it could impact how alimony is determined.
Factoring in alimony is an important part of the financial planning process to prepare someone for life after divorce. In addition to determining an amount, consideration must also be given to whether or not the alimony is for a fixed and finite term, if it will remain open ended, and what the impacts will be in cases of death or remarriage.
How is Child Support Calculated in Divorce Financial Planning?
The amount of child support that a parent receives will vary due to a number of factors.
However, many states take much of the guesswork out of determining the amount of child support by using predetermined formulas.
Laws will vary from state to state and it’s best to work with your family law attorney and your divorce financial planning professional to make sure you understand what you will either be required to pay or what you will receive if you are the primary custodial parent.
In some states, judges have the discretion to adjust the amount of child support either up or down based on a number of factors.
Each parent’s wages, benefits, investments, and other sources of income can be included as part of the determination. Some states also factor in how much time each parent will spend with a child as part of a support and custody agreement.
In addition to a basic monthly child support amount, virtually all states want to see open and ongoing involvement in a child’s life by both parents, and that means other costs may also be factored in as well that are not paid on a monthly basis.
For example, if a child needs orthodontics or has a large educational expense, both parents could be responsible for paying for those types of items. The overall goal of child support is to make sure the best interests of the child always come first, and this extends to financial matters as well as quality of life custodial issues.
Because of all these factors, it is critical to make sure that you gather all financial information to be used as part of the financial planning process.
Accurate information makes it easier to request a proper amount of child support, especially in cases where one spouse may have taken steps to conceal assets or financial records.
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