In the mid-1990s, one of my clients divorced their spouse, who was not my client. I did an adequate job helping him, but I could have done better. Shortly after the settlement had been signed, I read about a course that specifically helped CFPs like me better understand the divorcing process. I signed up and became one of the first Certified Divorce Planners (which is now known as a Certified Divorce Financial Analyst) in Massachusetts. Looking back on the experience, I knew enough to be dangerous and am lucky I didn’t make a serious error.
There are several areas where inexperienced planners dealing with divorce can make a mistake especially if they are working with an attorney not specializing in divorce:
Property
- All property divided incident to divorce is a non-taxable event, however the cost basis of the holding does carry over. It is my job to determine the origin of the holding.
Retirement Assets
- Determining what retirement assets require a Qualified Domestic Relations Order (QDRO)
- ERISA plans require a QDRO, a document that will divide an ERISA plan of an employee and their spouse incident to divorce. They are generally drawn up by an attorney, submitted to the employee’s company and once approved by the company signed by the court. If the employee dies with an incomplete QDRO, an unintended person will inherit.
- Individual Retirement Accounts (IRAs) do not require a QDRO because they are not ERISA plans. Clearly they need the proper paperwork to split the asset. Every fund company has their own protocol for dividing the asset without a tax consequence along with the decree signed by the court. Although I don’t draw up QDROs, I typically help the couple divide the IRAs.
Future Value
- There are times it is difficult to determine from the statement whether the plan is a pension or defined contribution plan. An inexperienced attorney will assume the latter and just divide the face value in half, leaving a great deal of money on the table for their client. It is not the job of the opposing attorney to tell them to evaluate the present value of the future income stream.
Tax Considerations
- Alimony is deductible by the payer and taxable to the payee. Child support is an after-tax expenditure. Recipients intuitively want child support, which is not always the best solution.
Often when there is a large disparity in income, using alimony will free up more available income due to the deduction. The goal is to have as much available cash for the family. Using divorce-specific software will determine the best route to go.
State-Specific
- Divorce laws are state-specific. If your client lives out of state, it behooves you to find a Certified Divorce Financial Analyst in that state. Yes, division of property being a non-taxable event incident to divorce is universal, but what constitutes property? Rhode Island is different from Massachusetts, which is different from Ohio. The age of emancipation to terminate child support is also different state to state.
State of Mind
- Probably the most difficult aspect of dealing with clients going through divorce are their emotions. Normally bright, articulate, rational people, they are likely to be so stressed and anxious that they don’t process what they are told, they swear their lawyer never said things, or the advisor told them the opposite of their attorney. Without the ability to listen, the case can become frustrating and difficult for both the professionals and the client. With that in mind, I created the Circle of Support to help the client through the nightmare of divorce. Each professional deals directly with the client, explaining things on the clients’ level of understanding and also communicates with each other to determine a suitable equitable settlement.
This shows why it is important to have a Certified Divorce Financial Analyst designation and related experience if dealing with clients getting divorced.
Barbara Shapiro is the president of HMS Financial Group in Dedham, Mass. She is a Certified Financial Transitionist, CFP, Certified Divorce Financial Analyst and a member of the Financial Planning Association of Massachusetts. She is also co-author of He Said, She Said: A Practical Guide to Finance and Money During Divorce.