Journal of Financial Planning: September 2011
Bonnie A. Sewell (formerly Hughes), CFP®, AIF®, is a principal with American Capital Planning. She holds a bachelor’s degree in family economics and management and a master’s degree in financial planning.
For lots of us, autumn is just as refreshing a time to renew as spring. I’ve had what seems like an inordinate number of clients going through big transitions this year. Two of the most challenging include the death of a spouse or divorce. There are similarities in practice with both transitions—and important differences.
In the death of a spouse, there are special considerations. Grief has its own schedule and cannot be rushed. Only certain decisions must be made immediately, and as planners we can help clients navigate the ones that must be addressed. In working with widows and widowers, I find creeping fears some of the biggest hurdles to advising them. They feel alone and are sometimes lonely. That makes them easier prey for those who would take advantage by simply spending time listening to them and gaining their confidence. In grief, we, as planners, also spend time with them and hopefully help rebuild their confidence if it is temporarily lacking. If we were fortunate enough to be in the widow’s or widower’s life before their loss, they may be prepared for the financial aspects of their loss. If not, there is an opportunity to guide them toward a stable future on their own.
It’s not always true, but often, time can ease the loss from a spouse’s death, whereas in a divorce, the pain can continue for decades. Some divorces are friendly, focused, and fast. This is the ideal situation between parties who decide to end a marriage. But it is far from routine.
The Cry for Help
It always sounds the same—the voice on the other end of the phone when the person calling is thinking about getting a divorce or in the middle of getting a divorce. They speak haltingly, wondering how much they should share with a stranger. They sound mentally exhausted, sighing at points in their story. They use the word “crazy” a lot—“this is crazy” and “he/she is crazy.” A recent caller lamented the $150,000 she and her not-soon-enough-to-be ex spent on attorneys after he bailed on mediation. They lost their home, had little savings to split, and she had not worked for more than 10 years, with two of four children still at home. Having survived the divorce nightmare myself and having helped numerous clients over the last 20 years, I can tell them, it really does get better. They won’t believe me. And it won’t happen without the difficult and necessary work of gathering a financial picture, doing the financial analysis, and walking the client through settlement scenarios. Today matters, and the effect of a settlement 20 years out matters at least as much. Understanding taxes on a settlement matters, too.
Clients who are divorcing are seeking professional help at a time when they usually feel the lowest in their lives. We can improve greatly the chances they’ll get to a good outcome sooner rather than later. The problem is they often seek help very late in their negotiations.
Who You Gonna Call?
Most CFP certificants would be well qualified to do this work for clients. Living in the Washington, D.C., area, however, there is a propensity to quote your grade point average well past middle age, so of course, designations carry weight. I recently submitted a case study to complete my work for the CDFA™, Certified Divorce Financial Analyst™. What is the work of the CDFA, and how is it different from regular financial planning? Divorce is nothing if not potentially financially devastating. In addition to the stress most folks feel when talking about their finances, in divorce planning, one party is often in an underdog position at the beginning of negotiation. That alone intensifies all discussions. But it doesn’t intensify analysis. When a CDFA looks at the financials in a divorce, rather than making a specific recommendation, which we routinely do in regular planning, we offer financial outcomes—now and in the future of proposed settlements. We work with attorneys in court, mediation, or collaborative cases.
What Do Good Settlements Look Like?
The best settlements attain a couple of key goals. Usually when people file for divorce, they actually intend to be divorced and not extend the anguish into the future. Having children together often makes that impossible, but there are still ways to settle that reduce constant exposure to the person you wish to avoid. Good settlements address the primary concerns of both parties while equitably dividing property and income so that one party does not become state-dependent shortly after the divorce while the other party’s lifestyle continues uninterrupted. In the throes of negotiation, it doesn’t always dawn on the party who ends up with less just how poor his or her financial situation will be in a few short years.
We’ve seen some old divorces come back to haunt one of the parties decades after the fact. If your client is going to hire an attorney and the attorney recommends a Qualified Domestic Relations Order (QDRO), the client needs to make sure it gets written and submitted before the divorce is final. Think of a settlement a little bit like a trust—you can make it say or do anything, but it must be written and part of the court record. If it isn’t in there, it doesn’t exist. I have seen folks agree to changes outside the court-approved agreement only to be burned later when the other party reneged on the side arrangement.
Your clients should try to come to terms that don’t keep them involved with their ex over property or income going forward. Income is harder to avoid when the spousal amounts are very unequal, but property can be cleanly split before a divorce. The Internal Revenue Code addresses all aspects of property and income, and it is necessary to hire professionals steeped in the consequences of arrangements proposed and agreed to in settlement. An expert can provide knowledge to clients, such as, if you’re splitting a 401(k) plan there is a one-time opportunity to take a penalty-free distribution before you roll it to your IRA. The money a client spends on a CDFA could be an investment in an equitable settlement scenario.
Alternatives to Litigation
We all know of litigated settlements that ended up just about where the first discussions were, plus the legal costs. So why would smart divorcing people pursue litigation? If you’ve been in a contentious divorce or seen a loved one in that spot, you can appreciate the level of dislike that makes sane people pay insane amounts to “punish” the other person (forgetting they are punishing themselves, too, with substantially less to divide).
Today we have competent help in mediation and collaboration that makes litigation even less appealing. But what if during marriage it never got to the point where things were so lopsided that leaving the marriage forced a fierce fight for financial survival? What if we, as planners, routinely counseled clients about financial power inside a marriage, and how to keep things equitable in all the years of marriage? That might mean that if it ends, things are mostly equal and easier to divide. Or on the flip side, could financially fair arrangements mean that more marriages have a chance to endure?