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During a divorce, it can be difficult to focus on your future finances. However, it is crucial to confront them as soon as possible.
“People often say, ‘I just want to get out,’ but the reality will hit you later,” said Certified Financial Planner Niv Persaud, managing director and Certified Divorce Financial Analyst at Transition Planning and Guidance in Atlanta.
Persaud finds that low-income spouses are often unaware of — and surprised by — the true cost of living. For example, if they want to keep the house, they often neglect expenses such as lawn maintenance, roof replacement and property taxes.
Persaud has compiled a 10-point checklist to help clients become aware of what she calls “lifestyle costs.” (See list below.)
Another big misunderstanding is that people think they’ll get child support for the rest of their lives, but that’s not how the legal system works, according to Persaud.
Also, she said, “every state and county has different laws and a lot depends on the judge, so it’s important to use an attorney in your county.”
The average person also doesn’t understand that not all assets are created equal, said CFP Kristina Caragiulo, certified divorce financial analyst and wealth manager at BDF in Chicago.
“For example, $10,000 in a [individual retirement account] or a brokerage account is not the same as $10,000 in cash because of their different tax implications,” she said. “IRAs and brokerage accounts can trigger taxable gains.
The role that financial advisors play
“Financial advisors need to be involved throughout the divorce process because there are so many financial decisions that could impact the rest of the family. [clients’] lives,” Caragiulo said. “It’s the only time in your life where you can see the impact of a decision before you make it.”
Among other things, advisors can look at asset class allocations in brokerage accounts to develop rate-of-return assumptions, she added. “In turn, they can show different scenarios and the likelihood of success in covering your post-divorce expenses.”
CFP and certified divorce financial analyst Claudia Mott, owner of Epona Financial Solutions in Basking Ridge, New Jersey, said there were an overwhelming number of changes to manage.
“I call it ‘the year of fear,'” she said. Mott listed a few important ways financial counselors help divorced spouses with their financial problems, including:
- Education: Mott often answers basic questions about home equity, the components of a mortgage, and how insurance works.
- Consolidation of accounts: Advisors manage post-divorce transfer documents and set up accounts correctly (eg, retirement vs. non-retirement).
- Planning and investing before and after divorce: They work to achieve your immediate and long-term goals.
Financial advisers can also be called upon as consultants for divorce proceedings. CFP and Certified Divorce Financial Analyst Michael Black, owner of Michael Phillips Black Wealth Management in Scottsdale, Arizona, provides financial analysis for attorneys to present in court for the judge to make a decision.
Black describes himself as a “litigator [certified divorce financial analyst] which lays out the financial implications for different scenarios and different marital interests. His input is needed, he says, because “attorneys who apply the law are not trained to develop and present a case to a judge with a perspective of what it means financially to 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 it’s not their training, responsibility or interest.”
Therefore, Black performs financial modeling for attorneys and courts to identify client’s post-divorce financial needs and build the financial roadmap. The trickiest part, he said, is knowing which assets best meet customer needs.
“If they’re not working with a financial adviser, it’s often up to the client to advise their attorney on which assets suit their needs,” Black said. “But often customers don’t plan ahead for what they need; instead, they react to what they get.”