EP Wealth Vice President, Advisor, Kathy Costas, CDFA^®, explains how a Certified Divorce Financial Analyst^® can help you navigate the financial complexities of divorce, from asset division and tax implications to long-term planning. 

Financial Planning Before Divorce: How a CDFA^® Can Help You

It goes without saying that a divorce can be a stressful time in someone's life. No matter what the reasons, it's frequently complex, with money and emotion entangled in a way that can make decisions difficult. I'm a Certified Divorce Financial Analyst (CDFA®) and that means I've helped many people navigate these choppy waters with the help of divorce financial planning.

In this blog, I walk through some of the ways a CDFA^® can support you through the financial side of divorce, including:

• Why working with a CDFA^® early in the process can make a difference
• How the CDFA^® role differs from what a divorce attorney or mediator provides
• What to expect from your first session with a CDFA^®
• Common financial blind spots that can affect the outcome of a divorce settlement
• How to prepare for life after divorce with the help of a long-term financial plan

Why Work With a CDFA^® at the Beginning of the Divorce Process?

A CDFA^® specializes in helping individuals and couples understand the financial aspects of divorce and develop a fair, informed approach to dividing assets. We must pass a final exam that covers topics such as property characterization, tax issues, estate planning, and other types of financial planning through the context of divorce.

Everyone has preconceived notions about divorce, and there are many myths and misconceptions that circulate on the internet, among acquaintances, etc. A friend might tell you one thing, your aunt might have her own anecdote, while the internet has literally millions of people's opinions about the topic. What you'll want are the real facts that are relevant to you. How does divorce work in your state? What are you entitled to? What is realistic? These are all topics that a CDFA^® can help you understand better. 

For higher net worth individuals and families, the financial picture in a divorce tends to be more layered. When the marital estate includes business interests, stock options, or multiple real estate holdings, the analysis required to understand what a fair settlement looks like becomes more involved. A CDFA^® can help you work through these complexities early in the process, before key decisions are made—and before assumptions about asset values or tax consequences become locked into an agreement.

How the CDFA^® Role Differs From Other Divorce Professionals

When you're going through a divorce, you may work with several professionals at once, and it can be helpful to understand what each one focuses on.

• A divorce attorney handles the legal side of the process. That includes filing paperwork, advising you on legal rights and obligations, negotiating terms on your behalf, and representing you in court if the case goes to litigation. If there are custody matters involved, your attorney is typically the one guiding that process as well.
• A mediator, when one is involved, serves as a neutral facilitator. The mediator's role is to help both spouses reach agreement on the terms of the divorce. A mediator does not represent either party and does not provide legal or financial advice.
• A CDFA^® focuses specifically on the financial dimensions of the divorce. That includes analyzing and characterizing assets and debts, evaluating the tax implications of different ways to divide property, and modeling how various settlement proposals could play out over time. Your CDFA^® works alongside your attorney or mediator to help you make financial decisions that are grounded in analysis rather than guesswork.

In practice, these professionals complement each other. Your attorney is focused on your legal position, your mediator (if applicable) is focused on reaching resolution, and your CDFA^® is focused on making sure you understand the financial consequences of the decisions being made along the way. 

What to Expect from Your First Session with a CDFA^®

My first session with a new client is generally devoted to education around their situation and laying the groundwork for what's coming up. In addition to "myth busting," I sit down with what I call the divorce menu — a list of all assets, debts, income, and expenses for both parties. I evaluate each of these items and give my client a complete picture that allows them to start making informed decisions.

Often the largest assets a couple owns can be difficult to divide. For example, a house still likely has a mortgage on it, and whoever keeps the home must qualify for that mortgage in its entirety on their own. Large retirement accounts such as 401(k)s will have to be split with a separate legal document and an agreed-upon calculation. Throughout all of this, there are also tax implications to consider.

Once we've built out the full financial inventory, I can begin modeling different settlement scenarios so you can compare how each one might affect your financial position over the long term. For instance, one spouse might prefer to keep a larger share of the retirement accounts while the other takes more of the liquid investments. By projecting how each scenario could play out over 10, 20, or more years, you can evaluate the trade-offs with a much clearer picture of what each option could mean for your financial future.

A CDFA^® focuses on the details and consequences of all of these matters and can work as a team with your divorce attorney or mediator to create a strategy based on your short- and long-term needs and goals.

Information That May Be Helpful to Gather Before Your First Meeting

You don't need to have everything perfectly organized before sitting down with a CDFA^®. Part of our role is helping you sort through the financial picture. That said, having some of the following on hand can help make the first conversation more productive:

• Recent federal and state tax returns (typically the last two to three years)
• Bank and brokerage account statements
• Retirement account statements (401(k), IRA, pension, deferred compensation)
• Mortgage documents and property tax records
• Pay stubs or other documentation of income for both spouses
• Information about stock options, restricted stock units, or equity compensation
• A general sense of monthly household expenses—even a rough estimate is a starting point
• Any existing prenuptial or postnuptial agreements
• Business financial statements or valuation documents, if applicable
• Insurance policies (life, disability, long-term care)

Common Financial Blind Spots in Divorce

Working with a CDFA^® can help you avoid some of the more common financial blind spots that come up in divorce.

Not all assets have the same after-tax value.

A $500,000 brokerage account and a $500,000 traditional IRA may look equivalent on a balance sheet, but the tax treatment when you access those funds can be very different. Pre-tax retirement accounts will be subject to income tax upon withdrawal, which means their effective value to you may be lower than an after-tax investment account of the same size. A CDFA^® can help you evaluate assets on an after-tax basis so that comparisons in a settlement are more meaningful.

The true cost of keeping the family home.

Holding onto the house can feel like the right move, especially when children are involved. But the financial reality of homeownership on a single income—including the mortgage, property taxes, insurance, maintenance, and utilities—can add up in ways that aren't always obvious. In some cases, the equity tied up in the home may be better deployed elsewhere to support long-term financial goals.

Retirement account division has long-term implications.

Splitting retirement accounts requires careful attention to the type of account, the rules that govern it, and the legal process involved. A 401(k), for example, typically requires a Qualified Domestic Relations Order (QDRO) to divide. How and when those funds are accessed after division can also affect your tax situation for years to come.

Spousal support assumptions may not reflect the full picture.

Individuals sometimes enter negotiations with assumptions about spousal support—what the amount will be, how long it will last, or whether it will be awarded at all—that may not align with how courts in their state typically approach it. A CDFA^® can help you model different spousal support scenarios and understand how they interact with your overall income, taxes, and long-term cash flow.

Prepare for the Next Step with Help

The most important thing you can do when moving through your divorce process is to try to separate emotion from the financial matters. I know this can sound impossible, but that's a potential reason why you hire professionals to handle the technical aspects of your divorce. Many of my clients are stay-at-home moms and other people who have trusted the other party to handle money matters for them. Now, they feel lost and worried about their financial futures. Where are they going to find enough income to live on moving forward?

In my role as a CDFA^®, here at EP Wealth our process includes an assessment of cash flow to plan ahead and assess your future living expenses, which include 5, 10, 20 years and beyond. By doing this, I help provide my clients with a roadmap to their financial future beyond divorce. When you can see your income, expenses, and assets projected forward over time, it can bring a sense of clarity to decisions that otherwise feel overwhelming.

In addition to hiring a divorce attorney and CDFA^®, I recommend that my clients seek the assistance of people who can help with their emotional journey. Family and friends can carry some of this burden, but a specialist like a parenting coach can offer the balance of professionalism and personal support to make this process less painful.

To learn more about what a CDFA^® like me can do to help you before, during, and after divorce, review our Life Transition financial planning services and schedule an appointment to talk to an EP Wealth advisor.

DISCLOSURES:

• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
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• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.