Q. What are one or two financial mistakes people make when getting a divorce?
A. Trading their share of a spouse’s pension for the marital home is one of the most common mistakes divorcing people make. The marital home and the retirement plans are likely to be the largest assets in a marriage. Many people have such an emotional attachment to their home that they cannot think about life in another house. The house, though, can come with high mortgage payments, maintenance and repair bills that can devastate a person’s finances. Even though the value of the house might be equal to the value of the pension at the time of the divorce, they are not comparable. A house requires income to pay for repairs, maintenance, improvements, property taxes, and assessments; a pension, however, produces income without costing income. A 50/50 division of assets may sound equal, and it may in fact be equal in value as of the date of divorce, but it may not meet a person’s long-term needs. Therefore, it’s important to understand that it’s not how many assets a person receives in the divorce – it’s what they can do with the value of those assets that matters most.
Another common mistake people make is thinking that retirement assets have the same value as an equal dollar amount of non-retirement assets. However, not all assets have the same tax consequences: retirement assets are generally before tax assets. This means that in order to access the money, you have to pay income tax on any distributions you receive. In some cases, you may also have to pay a penalty on the distribution in addition to any income tax you pay. For example: One divorcing spouse agrees to keep the retirement assets valued at $100,000 and the other one takes the money market account valued at $100,000. When the spouse who took the retirement assets retires, he/she will pay tax on the distributions. If they pay tax at a rate of 25 percent, he/she would end up with only $75,000 versus the $100,000 tax-free money market assets the other spouse received.
Q. Why can some divorces be financially complex?
A. Because, in most cases, there are many financial issues that need to be considered. These include but are not limited to: the amount of alimony and length of time it will be paid, the tax implications of receiving alimony, the amount of child support, how debt will be paid, how the retirement plans will be divided and the tax implications of retirement distributions, how to divide the marital property and whether or not the family home should be sold.
Q. You’ve recently become a certified divorce financial analyst. What does that mean and what does it allow you to do?
A. As a CDFA, my role is to assist my clients and their lawyer to understand how the financial decisions he/she makes today will impact their financial future. I help my clients understand:
-The difference between personal and marital property;
-How property is valued and divided;
-The present and future value of retirement assets and pensions;
-Spousal and child support;
-Whether he/she can afford to keep the house;
-Tax problems and solutions;
-Which settlement to choose.
A CDFA offers peace of mind that an individual’s settlement is financially feasible, an objective viewpoint in an emotional situation, and professional advice about special financial needs.
Q. Where does a CDFA fit in, in terms of the divorce process? Can they be used in lieu of an attorney?
A. When a person is thinking about or going through divorce they need a lawyer to provide legal advice, but they also need a CDFA to provide financial advice.
A CDFA becomes part of the “divorce team,” providing litigation support on such issues as: short-term and long-term effects of any property division proposals, tax consequences, division of retirement funds and future pensions, determination of whether they can afford to keep the martial home, and more. A CDFA also provides the data that shows the financial effect of a proposed divorce settlement and, if needed, appears as an expert witness in court.
