family needs, but retirement needs as well.
4) CDFA professional's can assist their clients with developing detailed household budgets to help avoid post-divorce financial struggles.
A CDFA professional can help clients think through what the divorce will really cost in the long run and develop a realistic monthly budget during the financial analysis process. Expenses such as life insurance, health insurance and cost of living increases must be taken into consideration when agreeing on a final financial settlement.
5) Using a CDFA professional can reduce the amount of apprehension and misunderstanding about the divorce process.
Misinformation and misconceptions about the divorce process can be detrimental. Many have false expectations that they will be able to secure a divorce settlement allowing them to continue with their accustomed style of living. Financial divorce analysis helps to ensure a good, stable economic future and prevent long-term regret with financial decisions made during the divorce process. MYTHS
MYTH: Everything is automatically split 50-50.
While Texas is a community property state, a 50-50 split is not guaranteed. You need to understand which 50% you will get. All assets are not created equal. Your 50% may include the house. If you are forced to sell it when the real estate market is down, you end up with less than 50% - plus having to pay closing costs and commissions. You need to know if you can afford the 50% you get before you sign on the dotted line.
MYTH: I will keep all my separate property.
Separate property is anything that was gifted during the marriage, inherited during the marriage, or brought into the marriage and left in separate name. If the wife owned a home before she married and changed the title on the home from her name to both names, she made a presumptive gift to the marriage. Now the house is likely to be in the marital pie and up for division. If she has an inheritance in an account with only her name on it, that is her separate property to keep. But, income earned from separate property is generally community property.
MYTH: Divorced individuals are better off financially than they were when married.
This is particularly applicable to women. Studies show that one year after a typical divorce, the standard of living of the woman and minor children has dropped by 27%. Women are 70% more likely to spend their retirement in poverty than men. Many times women in divorce have priorities other than long-term financial planning. They choose to solve the short-term problems at the expense of the long-term benefit. Agreeing to a financially fair settlement is one thing, but getting actual possession of a settlement asset can be another.
MYTH: Only divorce lawyers produce financial statements.
A Certified Divorce Financial Analyst (CDFA) can produce financial statements. A CDFA works with your attorney as a team to achieve the best results for you now and for the long run. Your settlement will determine your standard of living for many years to come. Consult a divorce financial expert before establishing or agreeing to the terms of your divorce settlement.
MYTH: Division of property in divorce is tax-free.
Sometimes it is and sometimes it isn't. Your property split will not be equitable unless income taxes are taken into account. This is true for stocks, mutual funds and real estate. If retirement money is split using the wrong procedure, there can be income taxes and penalties to pay.
MYTH: The wife should automatically get the home.
Many women try to keep the home without carefully considering the long-term costs. Misjudging what she can afford will put her in financial trouble down the road. If she needs to sell the home later, she will have to bear the entire cost, risk and expense of the sale.
MYTH: All property is equal.
Again - all assets are not created equal. You have one shot at negotiating your property settlement. You need to understand how income taxes impact the property you receive. If you get stock and your spouse gets the bank account, you might have to pay income tax on the gains when you sell the stock to get cash. If you get the house and your spouse gets the retirement, you won’t have an income producing asset to fund your retirement years.
MYTH: The husband is obligated to pay for the children's college.
In Texas, the judge cannot require one parent to pay for college. However, both spouses can agree to put a provision in the settlement agreement about who pays for what when it comes to the children's college costs. Child support stops after the child reaches 18 years of age or once your child graduates from high school (whichever occurs last), unless both spouses include further child support as part of the divorce agreement.
Q & A's
Q. How do I know which assets are the best ones to keep?
A. Not all assets are created equal and some assets may have more of a beneficial effect on your financial future. Assets such as businesses and retirement accounts continue to grow. Other assets may require money for their upkeep, such as a home and automobiles, and those costs must be considered in the overall settlement. Certified Divorce Financial Analysts are experienced in assessing these situations.
Q. Will I lose my pension?
A. Pensions and retirement plans are marital assets if earned during the marriage. However, it is possible to keep your pension and have it offset with other assets.
Q. Should the custodial parent keep the house?
A. This is a great question, and it's one of the most important overlooked questions. While the answer is sometimes yes, there also may be times when the answer is no. It's important to pinpoint exactly what it will cost to maintain the home, factoring in taxes and inflation and expense of upkeep. An analysis must be performed to determine if there is enough money to stay comfortable in the home and pay all the bills without being overextended. Once that has been determined, the advisability of retaining the home must be compared to that of giving up other assets (such as liquid accounts, retirement plans, etc.). Finally, all decisions need to be weighed against current economic and stock market conditions. Certified Divorce Financial Analysts are trained to help people answer this question before they commit to a settlement that cannot be changed.
Q. What if I bring a house into the marriage that is in my name only, and I add my spouse's name to the deed?
A. In this case, the whole house could be considered marital property. You might have made a "presumptive gift" to the marriage and should consult with a family law attorney to discuss your options.
Q. Is my IRA considered marital property if it's in my name only.
A. Everything acquired during the marriage, no matter whose name it's in, is typically considered marital property. In some states, the increase in value of separate property could also be considered marital. If you are going through a divorce, it would be important to evaluate the financial drawbacks to having your IRA included in the list of assets you retain, post divorce. Remember, the funds in the IRA cannot be accessed before age 59 1/2 without paying a 10% penalty for early withdrawal. Note: Inheritances and gifts may be considered to be separate property
Q. I have never worked. Can I get Social Security?
A. If your spouse has worked and if you have been married for 10 years or more, than you are entitled to one-half of your spouse's Social Security or your own, whichever is higher--even if you are divorced. Your spouse still retains 100% of his/her Social Security benefit. This is an automatic guarantee and therefore it is not a negotiation point in a divorce.
Q. What is a QDRO and why do I need one?
A. A QDRO (or Qualified Domestic Relations Order) is the legal document that divides up a qualified pension or retirement account (including 401k's) pursuant to a divorce. The Divorce Decree is not sufficient to divide up the qualified plans; a QDRO is needed, preferably before the divorce is final. There are many nuances that go into QDRO's and make it an advocating (versus neutral) document. In order to protect your assets, be sure to obtain qualified advice in this area from a specialist.
Copyright © 2019 Damon J. Wykrent, CFP®, CDFA™, CFE - All Rights reserved.