Financial Planning is Even Harder During Divorce
Few things in life are as painful as the ending of a marriage that began with the promise of a lifetime of happiness. The unfortunate reality is there’s a 50-50 chance that what started out in wedded bliss will end bitterly in a court of law.
If you are facing a divorce, here are a few tips that may make the transition a little easier financially. Continue reading
Even Divorce Requires Planning
One of the more traumatic events in life is when a couple chooses to end their marriage and begin the divorce process. Adding to the trauma are the financial issues of separating assets and agreeing upon various forms of support for the spouse and the children.
In most cases, today’s divorce proceedings are based upon “no-fault,” where the process focuses on dividing assets and not the marriage problems. In short, it’s about the money. Coupled with the raw emotion that often accompanies a divorce, financial questions potentially present a dilemma for both the divorcing client(s) and the attorney(s) handling the legal aspects – how to resolve the divorce in such a way that is not only amicable, but financially sensible for both parties.
Unfortunately, the client, attorney and Family Court judge may not be well trained in financial planning. Divorcing clients need to make important financial decisions and agreements that may have a lasting impact – positively or negatively – on the rest of their lives. With such implications, even cases involving modest assets and income may require divorce financial analysis and the services of a qualified financial professional.
Consider the following example: Sam and Diane decide to divorce after 17 years of marriage. Sam earns a good salary at Smothers Bros. & Co. and Diane earns a small salary at her bakery business. They have two children, Chip and Cookie, a home with a mortgage and some retirement assets, including Sam’s pension at Smothers, which he would like to keep.
Diane wants to stay in the home with her children. Sam agrees to provide $800 per month in spousal support and the state-mandated child support until the children are 18 years old. In addition, he agrees to pay for the children’s college expenses. Since their home has a fair amount of equity, Diane agrees to let Sam have half the savings and his full pension, so the asset split is about even. On the surface, this seems like a fair settlement.
Fast-forward a few years, however; and Diane is in trouble. Though Sam has fulfilled his obligations, Diane has no money in the bank, her retirement savings are gone and the mortgage payments are several months behind, to the point where she is in real danger of losing the house. Suddenly, the settlement that seemed so fair a few years ago doesn’t look so good from her point of view.
This outcome may have been avoided through the use of a full financial analysis that showed while Diane had an equitable share of the marital assets, her “working capital” over time (and with inflation) would deplete rapidly. Though she still has her home, she cannot “eat the equity,” so to speak. An analysis (including tax and other divorce-specific information) prior to the final divorce settlement may have demonstrated to both her and Sam (and their attorneys) that this division may not work for Diane.
The earlier the financial professional is brought into the matter, the more options there may be for the client(s). Divorce financial analysis works well either for one client or for a couple seeking to resolve their issues using mediation or collaborative methods. The divorce financial planner does not in any way supplant the attorney’s role, but works solely as a resource to the attorney and their client for the client’s benefit.
Kevin Worthley is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. He enjoys fly fishing, other outdoor activities and is a dedicated yoga practitioner. Contact with virtually any financial need.
How to Disperse Financial Fog
I lived in San Francisco for three years, from ’68 to ’71. It was a wonderful climatic fit for me. I don’t like the heat. No worries. In San Francisco, fog comes in about 5 PM and stays until 10 AM the next morning. Mark Twain famously remarked that the coldest winter he ever spent was one summer in San Francisco. In the fog, San Francisco looks moody and dark and cold. In the sun, San Francisco is gorgeous, crisp and clear. If San Francisco were only clear, it would be perfect. That would make it the most attractive city in the world, in my opinion. Everyone would move there. Not so. The fog keeps the adulation and the population manageable.
It is impossible to see well in the fog. Fog is a word that we all use for other kinds of occluded vision. Money fog is everywhere on the web, for example. Most online financial sites contain a wealth of information and news on all things financial. But, though they may clarify a concept, they don’t lend themselves to action, because the information is not actionable. Much information is about investments. But family decision makers consider most investment jargon and investment details confusing. Business news seems to be popular. There are lots of opinions about the economy on the web. It’s recovering. It’s not recovering. Unemployment is going up, or maybe down. Business sectors are in a recession, or in a recovery. Most families don’t know what to do with this information. How does it help them? Actionable advice to resolve real family problems seems to be too mundane for economists and too personalized for brokers.
When can we retire? Are we saving enough for our kids education? How can we pay less taxes? Do we need an emergency fund? Families want help in answering these questions, then setting goals to make them happen. But, all family planning decisions are confused, not helped, by financial blather. This is where the fog has its worst effects. Confused and afraid of the consequences of making wrong decisions, many of us don’t navigate well in this fog. We either abandon our goals or move along cautiously, delaying decisions until things “feel” right, a formula for failure.
What does success look like? Successful financial planning sets family goals and objectives, then seeks help from an advisor who can speak the languages of both “family” and “finance”. An expert advisor helps families make good decisions that can’t hurt them. Investment decisions must be tax wise and safe; insurance decisions must protect assets rather than consume them with premiums; benefits selections must preserve and protect life and health, setting aside funds and programs for future use.
Only your family can set family goals, and pursue them until achieved. But effective steps to achieve family goals may require specialized knowledge, constant re-assessment attention, timely adjustments and regular review. For this you can pay an advisor. Your advisor’s commitment to you should be to deliver objectivity, fiduciary care (that puts your family first), ethical practice, competence and discipline. In short, a professional advisor can help you navigate through financial fog. A goal is a destination. Achieve your goals safely. Good advice and better decisions clear the fog and reveal the beautiful life you envision.
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Divorce is a Major Factor in College Financing
I recently spoke with divorce attorneys on the benefits of pre-divorce financial planning and how the financial consequences of a particular settlement could make a large difference to their clients after the divorce is finalized. The consequences on college planning for the children of a divorcing couple are often overlooked in divorce negotiations. Family cash flow during the college years, financial aid, and the ability (or not) to meet the Estimated Family Contribution (EFC) are all factors that are heavily influenced by divorce and how the divorce is structured. Given some cooperation and planning by the divorcing parents, they and their student(s) may avoid costly mistakes and actually benefit from a properly-structured divorce settlement.
For financial aid calculations, most colleges (especially the public schools) usually only consider the “custodial family” of the student. This means the “non-custodial” parent living elsewhere may not have his/her income or assets as part of the aid calculations. (Private schools requiring the CSS Profile financial aid application will ask for the non-custodial parent’s financials, however). There may be a significant difference in the financial resources between the two biological parents and ideally, the student could potentially benefit by being the custodial child of the parent with the lower income and assessable assets. Parents should be careful though, as a parent with higher income and assets may also have more obligations that may lower their net EFC below that of the other parent.
Although some state laws (such as RI) do not require provisions for college payments by divorcing couples, many parents often negotiate such obligations into their agreement to make sure one or the other contributes toward college in the future. If their students apply to private schools, documenting such obligations may actually work against the family, since colleges often ask (on the Profile application) whether the parents are divorced and if there is such a provision in the divorce decree. If so, the college chosen will often ask for copies of the divorce decree and this could work against the student in qualifying for aid. Assuming both parents are truly earnest in meeting college costs for their children, it may be better to leave such obligations un-documented if financial aid could be realized in the future. (Of course, if there’s a possibility someone will welsh on their promise, that’s another consideration and one’s attorney should certainly be consulted).
Many times, a student’s chosen college(s) will request financial information on the non-custodial parent, who then balks and refuses to provide tax returns, asset and income information. This is due to fears the college may require contributions from that parent that were not part of the divorce agreement. What many parents fail to realize is that colleges only assess certain assets in the aid calculations and even then, the percentage of value actually assessed of those assets are very low; often only 3-4%. Home equity and retirement accounts are often not even a factor either.
Divorcing parents with college-bound children may benefit by putting aside bitter memories or past conflicts and cooperate together to find the most efficient and cost-saving solutions to pay college costs. With open discussion and a little less ego-protection, divorcing parents might be able to give their children some financial benefits or even find some cost-savings for themselves in college financing. Such measures may go a long way in at least giving the children the best start possible in their own lives.
Kevin Worthley is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. He enjoys fly fishing, other outdoor activities and is a dedicated yoga practitioner. Contact with virtually any financial need.
Ron Peremel
Kevin Condon
