Even Divorce Requires Planning
by Kevin Worthley
One of the more traumatic events in life is when a couple chooses to end their marriage and begin the divorce process. Adding to the trauma are the financial issues of separating assets and agreeing upon various forms of support for the spouse and the children.
In most cases, today’s divorce proceedings are based upon “no-fault,” where the process focuses on dividing assets and not the marriage problems. In short, it’s about the money. Coupled with the raw emotion that often accompanies a divorce, financial questions potentially present a dilemma for both the divorcing client(s) and the attorney(s) handling the legal aspects – how to resolve the divorce in such a way that is not only amicable, but financially sensible for both parties.
Unfortunately, the client, attorney and Family Court judge may not be well trained in financial planning. Divorcing clients need to make important financial decisions and agreements that may have a lasting impact – positively or negatively – on the rest of their lives. With such implications, even cases involving modest assets and income may require divorce financial analysis and the services of a qualified financial professional.
Consider the following example: Sam and Diane decide to divorce after 17 years of marriage. Sam earns a good salary at Smothers Bros. & Co. and Diane earns a small salary at her bakery business. They have two children, Chip and Cookie, a home with a mortgage and some retirement assets, including Sam’s pension at Smothers, which he would like to keep.
Diane wants to stay in the home with her children. Sam agrees to provide $800 per month in spousal support and the state-mandated child support until the children are 18 years old. In addition, he agrees to pay for the children’s college expenses. Since their home has a fair amount of equity, Diane agrees to let Sam have half the savings and his full pension, so the asset split is about even. On the surface, this seems like a fair settlement.
Fast-forward a few years, however; and Diane is in trouble. Though Sam has fulfilled his obligations, Diane has no money in the bank, her retirement savings are gone and the mortgage payments are several months behind, to the point where she is in real danger of losing the house. Suddenly, the settlement that seemed so fair a few years ago doesn’t look so good from her point of view.
This outcome may have been avoided through the use of a full financial analysis that showed while Diane had an equitable share of the marital assets, her “working capital” over time (and with inflation) would deplete rapidly. Though she still has her home, she cannot “eat the equity,” so to speak. An analysis (including tax and other divorce-specific information) prior to the final divorce settlement may have demonstrated to both her and Sam (and their attorneys) that this division may not work for Diane.
The earlier the financial professional is brought into the matter, the more options there may be for the client(s). Divorce financial analysis works well either for one client or for a couple seeking to resolve their issues using mediation or collaborative methods. The divorce financial planner does not in any way supplant the attorney’s role, but works solely as a resource to the attorney and their client for the client’s benefit.
Kevin Worthley is an investment adviser representative of the Retirement Planning Company of New England, a registered investment advisory group in Warwick, and a registered representative of Cambridge Investment Research Inc. (member FINRA/ SIPC). He can be contacted with questions or comments at 401-453-5558.