“I want to make sure that the settlement you sign works for you—not only for the coming years, but for the coming decades.” – Shawn Leamon, MBA, Certified Divorce Financial Analyst
During a divorce, you only get one chance to get things right. It is a messy, complicated, difficult process—emotionally, legally, and financially.
At its core, divorce boils down to 3 areas:
1) Dividing property
2) Spousal and child support
3) Child custody
An attorney will help you navigate the complex, confusing family-law process. But who helps you make the appropriate financial decisions? It is easy to make costly financial mistakes during the divorce process, which is where a Certified Divorce Financial Analyst comes in.
What Is a Certified Divorce Financial Analyst?
A Certified Divorce Financial Analyst (CDFA) helps you and your attorney understand the financial impact of decisions made during the divorce process. A CDFA is an experienced financial professional (such as a financial planner or accountant), who has completed the training, education, and certification process that was approved by the Institute for Divorce Financial Analysts (IDFA). According to the IDFA, there are more than 5,000 CDFAs in the United States and Canada.
A CDFA can help you formulate a better divorce settlement agreement by:
1) Making Your Divorce Process More Efficient and Less Expensive
“The longer it takes for your divorce, the more expensive it will be.” – Shawn Leamon, MBA, CDFA
A CDFA can help you collect, organize, and prepare financial information (for both you and your attorney), and identify which financial information is most important. You may have considered working through a myriad of financial details with your divorce attorney or (more likely) a paralegal, but generally, neither is a financial expert.
Therefore, you can save time and money on expensive hourly fees by having a CDFA handle routine financial details and many of the critical calculations. For example, A CDFA can help you prepare a marital balance sheet, which is an easy-to-understand summary of your assets and debts. Or he or she can help you complete the all-important statement of net worth, which is required in almost every case.
2) Understanding Tax Consequences of Your Divorce Settlement
“In divorce, it is not what you get, but what you get to keep.” – Shawn Leamon, MBA, CDFA
In divorce, a dollar is not always worth a dollar. The equivalent amount of cash in a bank account is worth more than cash in a retirement account, which is worth more than a home at the same value. What is the reason for this discrepancy?
When you use this money, every asset has its own tax liabilities. Therefore, if you take money from a retirement account, you may have to pay income taxes, as well as potential penalties for withdrawing the funds. Spousal support has tax consequences, while child support does not.
When deciding between different assets, a CDFA can help you understand how much you get to keep.
3) Managing Expectations and Keeping You Focused on the Long Term
“Divorce may be the most important business deal you will ever make.” – Shawn Leamon, MBA, CDFA
When facing the end of your marriage, it is helpful to have a neutral person help you make rational decisions, given the high emotions involved. A CDFA can help you understand different divorce-settlement scenarios, including how they may impact you. They can also help you navigate decision-making that could be rash.
It is easy to want to fight too much or too little, or waste money fighting for something that is unimportant in the long run. A CDFA can help you keep the big picture in mind, so you make decisions that will put you in the best position for your future.
4) Helping You Understand Your Current Finances
Throughout the marriage, the finances may not always be equally handled by both spouses. Sometimes, one spouse invests more of the marital funds, or budgets more strictly than the other. If you happen to be the spouse on the outside, you might be completely clueless about your marital finances. A CDFA can help educate you about your current situation, so you have a better grasp on how your finances work and which moves might be more advantageous.
Because CDFAs charge lower hourly rates and are not as emotionally involved, they have more time and freedom to spend educating you on your finances, so you can better prepare for the future. They might be able to help you figure out future investments and budgets, which could be particularly helpful if you were not the spouse who handled the money during your marriage.
5) Creating a Post-Divorce Financial Plan
“Before you sign that settlement, ask yourself: ‘Can I afford it?” – Shawn Leamon, MBA, CDFA
One day, your divorce will be over—even if it does not feel like it right now. Before you sign the divorce-settlement papers, are you sure that the agreement will make sense for you in the long term? Many settlements may make sense for the first year or two, but later down the line, you can find yourself realizing that you made a major mistake.
A CDFA can help you prevent the worst-case scenario: Just a few years after the divorce, you could be scrambling for money or considering bankruptcy. A CDFA can help protect you from ending up asset-rich but cash-poor. Most of the time, divorce settlements are tough to change, so when you sign on the dotted line, you must be sure that you can afford the settlement.
When Should You Hire a Certified Divorce Financial Analyst?
Once you make the initial plans to file for divorce, you need to hire a Certified Divorce Financial Analyst as soon as possible. Many individuals will even want to hire a CDFA before they hire a divorce attorney or file the initial paperwork. Ahead of time, this professional can help you organize all of your documents to take to your divorce attorney, which will save you time and money on costly attorney’s fees.
Based on the financial information you provide, a CDFA might even be able to refer you to attorneys and other specialists who can assist you in the local area. These referrals can save you from having to do extensive research about these professionals. It is always beneficial if your CDFA has a great working relationship with the other professionals on your divorce team.
A good CDFA can also help you create a financial plan before you leave your spouse. Drafting a budget that demonstrates the specifics of splitting your household into two can be tricky, particularly if you plan to proceed with the same income level. He or she might be able to offer suggestions about how to create a new source of income for stay-at-home parents, or spouses who are currently unemployed.
The benefit of having a CDFA help draft this new budget with you is that he or she is not involved in the emotional turmoil of splitting the home, which gives this professional the ability to look at the situation objectively. Based on your current income level, it is very possible that there might not be a great way to maintain two households. While you both still reside in the marital home, he or she could suggest creative solutions to maintain your separation with your spouse.
You will also find that a qualified CDFA is essential during the early stages of discovery. For instance, he or she can assist the attorney with interviewing clients, in order to collect more information about the marital assets and finances. A CDFA’s time is much less expensive, and he or she can often provide more insightful information than a divorce attorney. If you ever need an expert witness in court, your CDFA can testify at the very first hearing, if he or she is already hired and well-versed in your particular case.
What Should You Bring to Your First CDFA Appointment?
At your first appointment, you should be prepared to discuss your finances in great detail. It can help to bring a list of well-thought-out questions and concerns , including those related to your current financial status. A CDFA can use these questions as a guideline for defining the most important aspects of the divorce process, as well as a way to give you the information you need and want upfront.
Bring all of the pertinent financial documents that reveal your current status. They might include your W2s, paystubs, bank statements, retirement account statements, and investment accounts. All of these documents can point to the true nature of your finances, and they can start to show areas where a spouse might be hiding assets and keeping money set aside for his or her own personal gain. If you are not the spouse who handles the money, it might take you some time to round up these documents, so start preparing for this first meeting immediately.
Bringing a copy of your current household budget is also a great starting point for future discussions about ways that you can better manage your money, in order to adjust to a single-income household or maintain two households. A CDFA’s objective eye may quickly identify areas where you could minimize your monthly expenditures, in order to make this major adjustment more comfortable. It could also help you develop a new sense of financial responsibility for your single lifestyle.
What Are the Fees for Certified Divorce Financial Analysts?
CDFA fees vary, depending on your location, your needs, and the financial complexity of your divorce. Some CDFAs charge an hourly fee, which can range from $150 to $450. Other CDFAs charge several thousand dollars when handling more complex cases or a high-stakes or high-asset divorce.
Your Attorney Can Make Costly Financial Mistakes
“Attorneys often tend to feel they have the knowledge and experience to take care of many complex financial matters on their own, even though most do not hold any sort of business degree. This can create costly mistakes for their clients, if they do not fully understand the complicated financial concerns at hand.”
– Joseph E. Cordell, Partner at Cordell & Cordell (the largest family law firm in the United States)
Your divorce lawyer is essential for advising you about the legal aspects of your divorce. However, most divorce lawyers are not financial experts, so your attorney can make costly mistakes that could end up hurting you for many years after your divorce is over.
Here are just a few common mistakes that divorce lawyers can make:
1) Errors dividing investment accounts
Investment accounts are some of the most complicated financial assets in the world. There are hundreds of thousands—if not millions—of different investment options. After a decade of exclusively working in the financial services industry, there are some areas that I still find complex.
How can you expect someone who studied law to make the proper decisions about your investments and finances? Numerous times, I have seen even the highest-rated family- law attorneys make easily preventable mistakes when dividing investments.
For example, a common mutual fund may come with risks that your attorney may not consider as you negotiate with your soon-to-be ex-spouse. Is the money in a taxable or tax-deferred account? Is there is a high-portfolio turnover in the fund? In other words, is there frequent buying and selling of the associated investments?
If the answer is yes to any of the above questions, there could be a large, unexpected tax liability, which you will not discover until the end of the year. Furthermore, there are hundreds of different strategies and structures of mutual funds, so you should be very selective about which ones you fight to keep.
What if you are thinking about keeping an individual stock? Do you know its cost basis? If you sell the stock, the cost basis will have a huge impact on calculating future taxes. If the stock is a big portion of your overall assets, do you know how to hedge it or diversify the risk? Regarding stocks, there are some incredibly complex considerations, and many books are solely dedicated to this subject. If you take the word of your family law attorney—or worse yet, your spouse—without getting specialized help, it could be an expensive mistake.
Are you trying to split a hedge fund or private-equity fund? Do you even know what these assets are? Be very careful: Many of these funds cannot be sold for up to 10 years. Therefore, if you need the money, you could find yourself in a tough financial position.
2) Failing to search for hidden assets
You may have suspicions that your spouse is hiding money from you. Sometimes, it is obvious, but other times,it can be difficult to tell. When your marriage is on the rocks, it is very common for money to start disappearing. And if you and your spouse own a business, then hiding money becomes much easier.
Given the financial complexities of identifying red flags, many divorce attorneys often inadequately search for hidden assets (in other words, secret money that you may be entitled to receive). Your spouse may transfer money to friends, report lower income or higher business, create fake or inflated debts, withdraw money in cash and hide it, overpay the IRS and keep the refund, or mislead you about the value of assets.
Since finding hidden assets may require you to employ a forensic accountant or private investigator, it is complicated, and it could be expensive. That said, failure to examine this kind of misdeed could cost you a lot of money.
3) Neglecting to secure support payments with insurance
What happens if your spouse unexpectedly stops making support payments (child or spousal) because he or she dies or becomes disabled? These payments may be an essential income source for you, soa sudden loss of them could cause a host of financial complications.
Many attorneys fail to advise this cost-effective way to protect you: getting insurance to make support payments, should the unforeseen happen. The specific implementations can take many forms, but if you are the beneficiary of the policy, you will be protected.
However, you should make sure that you own the policies, and that any premium payments are kept current. Otherwise, you will find yourself at a loss when you need the funds.
Conclusion: During divorce, a CDFA can help level the playing field.
Attorneys handle the law, while financial experts handle the math. Divorce is a legal transaction, with important financial implications for your future. Although your attorney is an expert in your state’s laws, he or she is not necessarily a financial expert. In fact, most attorney’s service agreements will have you disclaim any financial responsibility. Therefore, if your attorney discourages you from hiring a CDFA, it is a red flag.
A CDFA can serve as an essential addition to your divorce team, whether or not you are going through litigation, mediation, arbitration, or a collaborative divorce process. As The Wall Street Journal identified, a CDFA can help “watch out for tax snafus, help clients obtain health insurance after a split, and demystify tough-to-value private-equity or hedge-fund investments.”
If you have any financial questions or considerations, consider hiring a CDFA to help you.