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When dealing with a divorce, it can be difficult to focus on your future finances. However, it is very important to face them sooner rather than later.
“People often say, ‘I just want to break up,’ but the reality will hit you later,” said Certified Financial Planner Niv Perso, Managing Director and Certified Divorce Financial Analyst at Transition Planning and Guidance in Atlanta.
Perso found that low-income spouses are often unaware—and surprised—of the true cost of living. For example, if they want to keep their home, they often overlook expenses like lawn maintenance, roof replacement, and property taxes.
Perso developed a 10-point list to help clients understand what she calls “lifestyle costs.” (See list below.)
Another big misconception is that people think they will get spousal support for the rest of their lives, but the legal system works differently, Perso says.
In addition, she says, “each state and each county has different laws and a lot depends on the judge, so it’s important to use a lawyer from your county.”
The average person also doesn’t understand that not all assets are created equal, says CFP Cristina Caragiulo, a certified divorce financial analyst and BDF asset manager in Chicago.
“For example, $10,000 in [individual retirement account] or a brokerage account is not the same as $10,000 in cash due to their different tax implications,” she said. “IRRA and brokerage accounts can result in taxable profits.”
“Financial advisors should be involved in the divorce process because there are so many financial decisions that can affect the rest of the process. [clients’] lives,” Carajulo said. “This is the only time in your life when you can see the impact of a decision before you make it.”
She added that, among other things, advisers could examine the asset class breakdown of brokerage accounts to develop rate of return assumptions. “In turn, they can show different scenarios and the likelihood of success in covering your expenses after a divorce.”
CFP and Certified Divorce Financial Analyst Claudia Mott, owner of Epona Financial Solutions in Basking Ridge, New Jersey, said there is a huge amount of change to deal with.
“I call it The Year of Fear,” she said. Mott listed several important ways financial counselors help divorcing couples deal with financial problems, including:
- Education: Mott often answers basic questions about home equity, mortgage components, and insurance principles.
- Consolidation of accounts: Counselors handle post-divorce transfer documentation and set up accounts correctly (eg, retirement or non-retirement).
- Planning and investing before and after divorce: They work to achieve your immediate and long-term goals.
Financial advisors may also be invited to act as divorce counselors. CFP and Certified Divorce Financial Analyst Michael Black, owner of Michael Phillips Black Wealth Management in Scottsdale, Arizona, provides lawyers with financial analysis they can present in court for a judge to make a decision.
Black describes himself as a “judicial [certified divorce financial analyst] which reveals financial implications for various scenarios and various marital interests.” His input is needed, he says, because “lawyers who apply the law are not trained to develop and present a case to a judge in terms of what it means financially for the client.”
“Their job is to present a case that meets the requirements of local laws and customs,” Black said. “They don’t focus on the most beneficial financial outcome for clients because that’s not their training, responsibility, or interest.”
Therefore, Black performs financial modeling for lawyers and courts to determine the financial needs of a client after a divorce and establish a financial roadmap. The hardest part, he says, is knowing which assets best fit customer needs.
“Unless they are working with a financial advisor, the client often has to advise their attorney on what assets are right for their needs,” Black said. “But often, customers don’t plan ahead for what they need, but instead react to what they get.”