Divorce embodies emotional, legal, financial, and interpersonal challenges that all require careful and thoughtful consideration to resolve. It also frequently requires professional guidance to navigate successfully.
Divorce commonly implies the division of assets and debts, which can be a challenging endeavor even under the most amicable of circumstances. Determining a fair and equitable distribution to both parties and providing financial stability after divorce can sometimes bring many uncertain feelings surrounding the process.
This is where a financial advisor and Certified Divorce Financial Analyst (CDFA) can offer structure and clarity. They both play essential roles in helping individuals navigate the financial aspects of divorce. Their expertise can be invaluable given their focus on achieving fair and informed financial outcomes from start to finish.
Here is why you should consider hiring a financial advisor and/or a CDFA when facing a divorce.
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Understanding the Financial Implications of Divorce
First, let’s talk about the division of marital assets. Typically, the division of assets and debts in a divorce involves the equitable distribution of property and financial obligations acquired during the marriage. While the specifics of this process vary based on location and individual circumstances, it generally includes items such as:
- Real Estate: The family home, vacation properties, rental properties
- Financial Accounts: Bank accounts, investment portfolios, retirement accounts, pension accounts
- Personal Property: Vehicles, furniture, jewelry, electronics
- Business Interests: Ownership in a business that was developed during the marriage
- Intellectual Property: Patents, copyrights, royalties
- Debts and Disabilities: Mortgages, loans, credit cards
It’s vital to understand the definition of “equitable” because it’s likely not what you think. In an equitable distribution system, the goal is to divide marital assets and debts fairly based on factors like the duration of the marriage, contributions to the marriage, earning capacities, health and age, debts and liabilities, and custody and child support.
Determining Spousal and Child Support
This part of the process involves assessing the financial needs of both individuals and establishing financial arrangements that ensure the well-being of both spouses and children.
Spousal support, or alimony, is financial assistance paid from one spouse to another to help them maintain their living standards after a divorce. The process typically looks like this:
- Eligibility Evaluation: The assessment of whether either spouse is eligible for alimony. Considered factors are the length of the marriage, the financial contributions of each spouse, and the recipient’s ability to support themselves.
- Needs Assessment: What financial needs does the spouse seeking support have? This considers living expenses, medical costs, and lifestyle adjustments from the divorce.
- Ability to Pay: Evaluating the income, earning potential, and financial obligations of the potential paying spouse.
- Duration and Amount: Options can be lump-sum payments, temporary support solely during the divorce process, or ongoing periodic payments.
- Modification: Spousal support may be altered in the future based on changing circumstances (such as changes in income or other types of financial needs).
On the other hand, child support is financial assistance paid by the non-custodial parent (i.e. has the child on a limited basis) to the custodial parent (i.e. cares for the child most or all of the time). The process for determining child support typically involves:
- Income Assessment: The income of both parents is assessed to calculate the combined family income available to support the child.
- Child Support Guidelines: Many jurisdictions have child support guidelines or formulas.
- Custody Arrangements: The custody arrangement can significantly impact the child support calculation.
- Child-related Expenses: Child support covers housing, food, and clothing. Additional expenses like healthcare, education, or extracurricular activities can also be considered.
- Modification: Child support orders can be modified if there are significant changes in either the parent’s financial situation or the needs of the children.
- Enforcement: These orders are legally enforceable. Specific measures exist to ensure that the obligated parent fulfills their financial obligations.
Determining spousal and child support can involve negotiations between the two parties, mediation, or, if needed, court litigation.
Tax Implications of Divorce
Divorce can have significant tax implications for both spouses and are an often overlooked factor. Here are some common tax implications to consider if going through a divorce:
- Filing Status: Your filing status will likely change from “married filing jointly” or
“married filing separately” to “single” or “head of household.” This can impact your tax brackets and deductions.
- Child Custody and Support: The parent with primary custody of the children typically claims the child-related tax benefits. Also, child support payments are usually not tax-deductible for the payer and are not considered taxable income for the recipient.
- Alimony: Any payments made under divorce or separation agreements finalized before a specific date may be tax-deductible for the payer and considered taxable income for the recipient.
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Financial Planning During Divorce
Financial planning during a divorce is critical to ensuring your financial stability and well-being as you transition into a new season of life.
Navigating the complexities of divorce requires careful consideration of your assets, debts, income, and expenses. Financial planning can be tricky, especially during significant events like a divorce. You can kickstart the financial planning process by following these steps:
- Gather Information: Collect all relevant financial documents, including bank statements, tax returns, loan documents, and credit card statements, among others.
- Establish a Budget: Create a comprehensive budget that outlines your monthly income and expenses.
- Evaluate Alimony and Child Support: If you’re eligible for alimony or child support, plan how those funds will be used.
- Update Beneficiary Information: Review and update beneficiary designations on your accounts, insurance policies, retirement plans, and estate plans. Remember your will, trusts, power of attorney, and others.
- Secure Independent Credit: If you don’t already have one, establish your credit history. This will be crucial for obtaining future loans and credit.
- Develop a Long-term Financial Plan: Work with a financial advisor to create a post-divorce financial plan that addresses your short- and long-term needs and goals, such as retirement planning, investment strategies, and more.
Divorce can be emotionally taxing, so having a comprehensive financial plan in place can give you a feeling of control and security during an already stressful, challenging time. Working closely with professionals throughout the process is also advisable because they can provide specialized guidance for your needs.
This is where a financial advisor and Certified Divorce Financial Analyst (CDFA) can be of genuine value.
How the Expertise and Experience of Financial Advisors/CDFAs Can Help
A financial advisor and CDFA can provide invaluable support during a divorce. By working as a team, you can approach the divorce with a clear financial strategy, ensuring that your interests are protected and that you’re making well-informed decisions to set you up for future success. Their guidance can reduce stress, save time, and increase the likelihood of achieving a fair and stable financial outcome.
Here’s a brief overview of the various skills and knowledge that a financial advisor and CDFA can bring to the planning table.
Peace of Mind and Confidence
Every marriage is different, which also means that each is unique in the event of a divorce. It can be a profoundly emotional and challenging life event that can evoke intense feelings and experiences for those traveling through it.
Coping with these emotional challenges requires time, support, and self-care. Working with a financial advisor and CDFA gives you added mental space and time to work through the emotional side of divorce without stressing about the financial decisions.
Healing from a divorce is a gradual process; reaching out to friends, family, and professionals can be instrumental in finding emotional healing and moving forward successfully. If you are considering a divorce, or if you are curious how a financial planner might help your situation, reach out today and schedule a call with an Abacus advisor to find out more.