The Hidden Costs of a Divorce: Expert Advice on Key Financial Considerations
byLaurie Wexler Gerber, MBA, Director of Marketing
In 2014, more than 4.2 million Americans got married. And more than 1.6 million got divorced [i]. That means a lot of families are dealing with significant, often unexpected financial consequences. Their questions and concerns about some unforeseen costs of their divorce are the inspiration for this post.
Recently I had the pleasure of sitting down with Wellesley family law attorney and mediator Jonathan Fields of Fields Dennis & Cooper LLP, alongside our very own Kelli Adams, Financial Counselor, CFP®, EA who has counseled many clients through the financial planning side of divorce. The goal was to gather their insights on the cost of a divorce and how to prepare. See what the experts had to say below.
The cost of a divorce is a tough number to pin down. What are some factors that can affect cost?
KA: When it comes to estimating the cost of a divorce, a big determinant at the start is usually amicability. How agreeable are you and your spouse? Are you committed to being fair and honest with one another? Are you equally motivated to seek an efficient resolution? If the answer is yes, a mediated or collaborative divorce may work for you. Often times a financial advisor isn’t considered a necessary part of your team. However, it is extremely important to have someone guide, advise, and represent your best interests on the financial aspects and intricacies of any divorce. It cannot hurt to have someone who is knowledgeable about the financial side of divorce help you protect your financial well-being.
JF: In both cases you still need to hire your own attorney, but staying out of court (avoiding a lawsuit, expert interviews and depositions) is often a big cost saver. Also keep in mind that mediation is not for every couple—including some who believe they are good candidates. A mediator cannot counsel you, advocate for your best interests, or even guarantee you are getting a fair settlement. Also, in divorce mediation and collaborative divorces, all financial information is disclosed voluntarily. So if you suspect your spouse is hiding/undervaluing assets, you probably shouldn’t go this route. Finally, the relative cost savings of a non-traditional divorce aren’t worth very much if you end up with an unbalanced settlement landing you back in court shortly after—or if — you never reach any agreement at all.
How do the needs of affluent families affect the cost of a divorce or the planning process?
JF: If your balance sheet contains more than a few basic assets—your bank accounts, your home, your car—the cost of your divorce will probably be affected. Stock options, restricted stock, trusts, executive compensation packages, business interests: assets like these require more nuanced negotiations. You’ll want to make sure your lawyer has experience dealing in complex financial instruments. Some lawyers routinely work with tax experts and forensic accountants (or even have these professionals on their in-house teams); others don’t.
KA: The tax side of divorce settlements is a key consideration, especially for high-net-worth individuals. Your attorney might not understand the tax implications that arise. In working with clients and their different attorneys, I’ve found that settlement requests aren’t always as well thought out as they could be. I’ve actually caught a lot of misassumptions on provisional documents that might otherwise have fallen through cracks. The tax implications alone of splitting assets can be significant figures. In terms of tax management, some attorneys don’t know what they don’t know.
How does planning (or lack thereof) affect the cost of a divorce?
JF: The cost of a divorce is often a function of time. Attorney fees, mediator fees, time lost from work… It all adds up by the day. If you’re not prepared to ask the right questions at the outset, you’ll waste time in meetings, or end up revisiting the same issues multiple times. Having a financial advisor educate and help you ask for what you need is crucial.
KA: Believe it or not, household budgeting is a common area wherein people lose time during the divorce process. If you weren’t the person in charge of paying the bills during your marriage, you may not have any idea what your monthly expenses are. Financial planning can help you substantiate your child support request or identify any necessary post-divorce lifestyle changes (e.g. a more modest home, different schools, etc.). A financial planner will run various projections to see how you and your family can live reasonably within your new parameters.
Aside from household budgeting, what kind of financial planning needs to happen during the divorce process?
KA: You need to anticipate your financial situation 5 and 10 years down the road. For example, what will happen if you or your spouse loses your job? How will you eventually divide your children’s college expenses? Even things like future veterinary bills for a family pet are worth considering. A good financial planner will make sure these items are written into your divorce agreement so you don’t have to revisit them in five year’s time, incurring additional divorce costs.
Is there any downside to the DIY financial route: creating a post-divorce budget and financial plan on one’s own?
KA: Although some aspects of budgeting and financial preparedness seem like DIY undertakings, there are lots of “details” the average person might overlook. (Based on your tax bracket, do you know if it makes sense to petition for head of household status, or claim your children as dependent?) For this reason, it never hurts to at least meet with a financial advisor. Having been through this process many times before, he or she can ensure you are equipped to argue for your own best financial interests.
JF: Again, it all comes down to asking the right questions. It’s extremely valuable to have someone who is dedicated to your financial interests working alongside your attorney. The two of them can collaborate to produce the best results.
KA: If possible, I would even recommend working with a Certified Divorce Financial Analyst (CDFA). Full disclosure: I am in the process of completing my certification now. But the fact that there is a professional credential devoted to this niche within the financial planning discipline is a good indicator of how pivotal the right advice can be.
What’s the benefit of working with a Certified Divorce Financial Analyst (CDFA)?
KA: CDFA professionals support clients and attorneys with data that illustrates the short and long-term financial effects of any given settlement. CDFAs bring knowledge and analytical processes to a divorce team, helping to tackle financial issues like:
How best to divide property
How to evaluate pensions and retirement plans
Determining the affordability of the marital home after divorce, or proposing viable alternatives
Understanding the tax consequences of different settlement proposals
Divorce can have a lasting effect on personal finances. If you or a loved one need help getting back on track, this resource can help: Divorce Financial Planning: 20 Actions to Take Before, During and After Your Divorce. Among other recommendations, the guide talks about the value of hiring a financial planner who can help you understand the consequences of certain decisions—e.g. selling your home versus buying out your spouse, requesting child support versus alimony, dividing your assets in specific ways (and the tax consequences of doing so).
The information provided above is general in nature and is not intended to represent specific investment or professional advice. Views expressed are those of the author and not necessarily those of GW & Wade. GW & Wade does not assume any duty to update any of the information. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.
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