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Pre-Divorce Financial Planning:
Could This Be the Next Frontier?
Over the past several years, alternative dispute resolution (ADR) methods such as mediation and collaborative law
have been increasingly applied to the divorce process. This phenomenon has been largely due to 1) incompatibilities
between our advocacy system and the need for viable outcomes, and 2) an increased recognition of the
importance of resolving emotional issues, particularly those involving children. In short, these approaches sometimes lead
to better results than traditional methods.
The increasing application of ADR is indicative of the fact that the traditional approach to resolving issues in divorce is
flawed. However, mediation and collaborative law are simply alternative approaches to resolving disputes and not necessarily
approaches for achieving better financial outcomes. Success in ADR is often measured by the ability to achieve the same
results as in traditional litigation, albeit in a less contentious or less prolonged fashion. With the advent of no-fault divorce,
and even with the archaic application of fault in states such as New York, divorce has become largely about money. This has
brought to the forefront a new dilemma for the divorce practitioner — how to resolve the divorce, whether through litigation
or through alternative means, not only amicably but also in a financially workable and sensible way.
PRE-DIVORCE FINANCIAL PLANNING
Divorcing clients need to make important economic decisions as they go through the process. If they make bad decisions,
they will more than likely have to live with the consequences of those decisions, and these can be financially and
emotionally devastating. Since there are serious pitfalls and difficult decisions to be made, people going through divorce
need expert financial advice. While they have traditionally relied on the attorney or the mediator to provide such advice,
and while many mediators and attorneys have come to accept this role, the requisite financial knowledge and skills are
often outside their areas of training and expertise. This can potentially lead to problems.
Failure to add financial expertise to the divorce process means that financial outcomes are often based on the fruits of
strong advocacy or on incomplete or inaccurate information and limited insight (and foresight), creating a house of cards.
Any slight movement or disturbance causes the house to come apart, often with disastrous consequences. The financial
divorce is sometimes so poorly constructed that it simply self-destructs over time.
Some divorce professionals have begun recently to realize they can better serve their clients by directly incorporating
outside financial experts - particularly financial planners - into the pre-divorce process. A new trend is emerging:
Divorce Financial Planning.
ROLE OF THE FINANCIAL PLANNER IN THE PRE-DIVORCE PROCESS
Although most financial planners have the relevant tax and financial knowledge to act as traditional “outside experts,”
their best contributions come from a more intimate involvement in the divorce process. The broad educational background
of the financial planner is ideally suited to this type of work. Because planners have traditionally helped individuals achieve
long-term financial goals, eg, saving for college or retirement, they have specialized training and skills that enable them to
analyze financial issues in their long-term economic contexts. During the divorce process, this often sets a more positive
and productive tone for discussion, provides reality checks, empowers individuals to make wise and workable decisions
and hard, but often necessary, lifestyle adjustments. It also enables them to address insecurities about financial consequences,
power imbalances and emotional agendas that often impede the decision-making process. The parties frequently
feel more comfortable and secure with the choices they are considering, find workable solutions more quickly (often
at less cost) and become more aware of post-divorce changes in standard of living, ultimately making them less likely to
need to revisit support issues in the future.
WHEN SHOULD THE FINANCIAL PLANNER ENTER THE DIVORCE PROCESS?
The earlier the financial planner becomes involved in the process, the more likely the situation will not escalate out of
control, and the more likely good financial decisions will be made. The financial planner can help stabilize the situation,
including helping determine shortterm
support needs or paying abilities,
closing or re-registering accounts,
changing beneficiaries on insurance
policies, notifying credit card companies
or establishing credit.
One of the most important steps in the pre-divorce financial planning process is rigorous discovery — the collection of accurate, complete and reliable financial data. The earlier the discovery process is initiated, and the more scrupulously it is done, the better off the client will ultimately be. Collecting, inventorying, organizing and analyzing historical data is one of the cornerstones of the financial planning process and is probably best done by the divorce financial planner. The less reliable the information, the more likely bad decisions will be made, and bad decisions made early can complicate financial issues and cause more bad decisions or other serious problems in the future.
The more meticulous the data collection
process, the more reliable
and useful the input of the financial
planner will be. Therefore, it is
extremely helpful if the financial
planner is intimately involved in this
aspect of discovery. Proper collection
of data is a time-consuming, but
important, aspect of the divorce
process and should not be left to a
paralegal. Further, negotiation of
financial issues should not be initiated
without a complete understanding
of all financial parameters.
PREPARATION OF STATEMENTS OF FINANCIAL POSITION AND CASH FLOW
Statements of Financial Position and
Cash Flow are additional cornerstones
of the financial planning process.
These are important because clients
need to have a good understanding of
both their current and future assets and liabilities and their current and
projected income and expenses.
Historical information is also important
in that it provides insight into predivorce
lifestyle and standard of living.
The following are examples of
some of the many problem areas that
need to be avoided or addressed in
as careful a fashion as possible:
- Cash flow information is often
extremely limited, inaccurate or
incomplete. Sometimes, based on
premature assumptions, only the
wife’s (for purposes of this discussion,
the husband is assumed to be
the primary income provider) estimated
monthly expenses to support
living in the marital residence
with the children are listed, and
sometimes this information is not
collected or analyzed in a thorough
fashion. There are risks inherent in
this approach, and other scenarios
should not be rejected outright at
this time. For example, being asset
rich and cash poor can have serious
- Cash flow information for the husband
is often even more limited,
or is ignored. Information for both
spouses is important because the
husband may be paying spousal or
child support, and both parties
will need to understand and come
to agreement not just on what the
wife’s needs are but what the husband
can afford to pay.
- Information on assets and liabilities
is often inaccurate or incomplete,
even if formal discovery has
taken place. This is sometimes due
to an incomplete global understanding
of what constitutes property
subject to division, is sometimes
a byproduct of the advocacy
system or is sometimes simply a
consequence of not analyzing
assets and liabilities in depth. A
prime example of assets that are
sometimes ignored or neglected is
- It is sometimes assumed that the
primary wage earner (often the
husband) is well equipped to manage
post-divorce finances, resulting
in inadequate attention to this side
of the equation. In my experience,
this may not be the case. Both parties need to have a clear understanding
of their pre-divorce cash
flow and both need to be well
equipped to manage their cash
I have heard many people say they
had no need to budget in the past
because there was always more than
enough money to go around. From
a financial planning perspective,
budgeting is important no matter
how much money is earned or what
the expenses might be. Further, total
expenses are likely to increase once
the parties have separated. While
some people view a budget as a
“financial diet,” perhaps even a punishment
for sins they might have
committed in the past, this could not
be further from the truth. A budget is
simply a basic type of financial plan,
a plan for managing cash flow. It is
important that it be understood by
both parties, and it is also important
that it be balanced.
In addition, the parties need to
construct a historical budget. This
means going through the checkbook,
bank, brokerage and credit
card statements, etc., and compiling
and organizing actual expenses. This
is a time-consuming task and may
not always be completely achievable,
but going through the process
can, in addition to providing insight
into pre-divorce lifestyle, teach individuals
how to use and adopt financial
management tools, such as
Quicken®; educate them about the
value of budgeting; and help them
become better able to manage their
money as they move forward.
CHILD SUPPORT, SPOUSAL SUPPORT AND DEPENDENCY EXEMPTIONS
The general strategy for handling
these issues is to calculate the needs
and paying abilities associated with
particular settlement scenarios to
determine how best to fund them.
Tax planning is often an important
component of this process. On the
surface, it might seem that the
best solution would be to allocate
as much of the support as possible
to spousal support and give
the dependency exemptions to the husband. In many situations, however
- especially under the new tax law
- the calculation is much more complex.
- The husband’s income might result
in a phaseout of the value of his
itemized deductions or a reduction
in the value of his dependency
- If there are substantial mortgages
on certain properties, and the husband
is deducting large mortgage
payments, he may be subject to the
alternative minimum tax. This
could also affect the value of the
itemized deductions and dependency
- The husband’s income could make
him ineligible for the Child Tax
Credit, which is currently $1000
If the husband is a high wage earner
in a high-income state like New
York, he might otherwise be affected
by the alternative minimum tax, and
this may severely restrict the tax benefits
he receives from his spousal
support payments. Depending on the
amount of spousal support, and the
income of the recipient spouse, it is
possible that she might also be affected
by the alternative minimum tax.
The amount of spousal support,
and how periodic payments should
be allocated between spousal support,
child support and a distributive
award, should be related to needs,
paying abilities, tax consequences
and potential financial risks. It will
vary with different settlement scenarios
and therefore needs to be
calculated each time a specific scenario
is being considered. The duration
of spousal support should be
determined by the time needed to
rehabilitate the recipient as well as
the agreed-upon parenting plan. It
should not be calculated using a formula
such as one based on length of
the marriage or the respective gross
incomes of the parties.
ANALYSIS OF ALTERNATIVE SETTLEMENT SCENARIOS
Once the financial parameters are
completely understood — and only
then — should the parties begin the
negotiation process. The two most
important factors in this process are the workability of the settlements
and the short- and long-term goals
of the parties. Assistance with these
issues is probably the most important
role of the financial planner in the
The planner can:
- Help the parties translate their
goals into workable solutions;
- Determine which proposals are
workable or what actions might need
to be taken to make them workable;
- Educate the parties about the longterm
consequences of specific proposals.
This helps the parties feel
more secure about the process and
more comfortable about reaching
an agreement. For example, they
should fully understand whether
they will have sufficient assets or
income to manage their finances,
whether they will be able to afford
support payments or whether they
will be able financially to survive
or prosper over time;
- Suggest alternative scenarios to the
parties when necessary.
Potential Benefits of Pre-Divorce
Financial Planning to Clients
Benefits to Divorce Professionals
- More thorough treatment of financial issues.
- Better settlements.
- Avoidance of mistakes.
- Increased likelihood that an eventual settlement will work.
- Better understanding of post-divorce financial situations and what might be needed to make them work (reality checks).
- Reduction in emotional distractions and fears and greater focus on financial issues.
- Greater focus on needs and paying abilities and less on entitlements.
- Greater confidence in results and reduced stress in achieving results.
- Empowerment through knowledge, making work sessions more productive.
- Acquisition of money management tools, such as proper budgeting.
- Increased client optimism for the future.
- Same as the client benefits listed above.
- Reduced liability or concerns about liability.
- Reduced stress.
- Increased efficiency and productivity.
- Reduced need to revisit financial issues.
- Increased long-term client satisfaction, potentially leading to additional client work and expanded referrals.
- Increased ability to focus on the negotiation process and not get bogged down with the financial issues.
PROCEDURAL DIFFERENCES BETWEEN LITIGATED AND MEDIATED CASES
Although this may seem surprising,
the divorce planning process is similar
in both litigated and mediated
cases. There are some major differences,
however. For instance, the
discovery process in litigated cases is
more formal and implies a lack of
trust. The formality of the process
often makes it difficult to feel confident
with the respective needs and
paying abilities of the parties. The
financial planner in litigated cases
might be asked to provide expert testimony
in court. Alternatively, the
informality of the discovery process
in mediation is potentially subject to
abuse, especially if there is a power
imbalance during the mediation
process. Involving a financial planner
in the process is a good compromise
in both mediated and litigated cases.
During litigation, the financial
planner acts as a litigation adviser to
the client and the client’s attorney. Information provided by the financial
planner may help the attorney or
client 1) identify discovery needs; 2)
determine the need for hiring outside
financial experts such as forensic
accountants; 3) prepare experts
for depositions; 4) prepare pendente
lite motions; and 5) get ready for
trial, etc. The financial planner may
also participate in two-way or fourway
meetings. During these meetings,
as in mediation, the planner’s
input will help to achieve a workable
FINDING A PRE-DIVORCE FINANCIAL PLANNER
There are some potential problems
that may be encountered when
engaging a pre-divorce financial
planner, but they should be minimal
as compared with the benefits that
will be derived from the collaboration.
For one, the divorce professional
will likely lose some control over the process, so it’s important that the
divorce professional and financial
planner interact well. Second, the
later the financial planner enters the
process, the more likely financial
errors will have been made. Since
the planner will see these errors, this
can be disruptive to the process and
may set it back. In addition, the
negotiation process may be periodically
interrupted to collect, organize
and analyze financial information.
If these considerations are not offputting,
the attorney may find the
following resources to be helpful in
finding a divorce financial planner:
The Association of Divorce
Financial Planners (www.divorce
andfinance.com; 800-270-1886), a
professional association of divorce
financial planners and divorce professionals
with an interest in divorce
financial planning, maintains a membership
directory, including information
about background and experience,
on its website.
Two companies offer divorce
financial planning training programs
to financial planners and maintain
listings of divorce financial planners
on their Web sites: The Institute for
Divorce Financial Analysts (www.
institutedfa.com; 800-875-1760), which
confers the designation Certified
Divorce Financial Analyst (CDFA™),
formerly designated Certified Divorce
Planner (CDP), to its graduates; and
the Financial Divorce Association