Add a Break-Up Quarterback

Another problem Wilson has seen is that couples think about dividing assets without recognizing their true value. One wife even argued that she should take the retirement plan rather than the cash account, which the husband had offered her. She wanted the plan assets to make sure that she would have retirement income, she said. Wilson explained to her that the retirement plan wasn't worth as much as cash because of the taxes due on withdrawal. She didn't get it. She remained hooked on wanting the retirement account. It took a lot of explaining, even to the attorney, but then they understood that the wife's solution wasn't in her best interest.

Joyce Pearson is a CFP and a CDFA (Certified Divorce Financial Analyst) in Scottsdale, Arizona, who specializes in working with clients going through divorce and working with their other advisors through her firm, NetVEST Financial LLC. She consults for couples in mediation through Equitable Divorce Solutions LLC. She says she started thinking about this specialty in 1990 when a client who had just moved from Chicago handed her a check for $800,000 to invest. The amount represented the proceeds from selling a building in her divorce settlement. Pearson started brainstorming about the various ways by which some additional dollars could have come her client's way rather than just a flat-out selling of the asset followed by paying the taxes.

Financial Traps in Divorce

Financial planners who specialize in divorce cases focus on four major planning issues:

• "Equal" is relative. As with the wife who wanted the retirement plan assets instead of cash, clients and even other advisors don't always understand the true net value of assets, which aren't always as obvious as this example. The primary and vacation homes are other examples–both have continuing financial obligations. A divorce specialist would provide an in-depth analysis of whether such assets provide a good solution for the client's particular circumstances.
• The story behind earnings potential of the higher-income earner. If a wife supported her husband as he worked on his MBA or stopped her career to raise the children, she may be entitled to additional payments.
• How taxes affect settlement amounts. That $2 million IRA brings taxes at the time withdrawals are made. A divorce specialist would look carefully at the tax implications of selling homes or property as part of the settlement. It can also be a negotiating tactic. Wilson notes that if a wife gets the primary house and even if she lives there for four or five years, she'll get her $250,000 exclusion–and so can the husband. He needs to have lived in the house for at least two years and stay on the deed as an owner so the IRS recognizes him. The arrangement also needs to be part of the divorce decree.
• Depending on a spouse for major financial support. Long-term financial dependency of one spouse on the other may raise concerns. If the husband will depend on the wife for monthly payments, for example, he may need to secure his income stream with a life insurance policy on her. The payment of the premiums would be part of the settlement and the insurance expert on the team will need to confirm premium payments. Before both parties reach a settlement, the team should receive confirmation of insurance companies' willingness to underwrite the insured and then purchase a policy from a carrier.

For the same reason, the spouse making the payments needs long-term disability coverage at the maximum insurable amount, which by law is still less than 70% of annual salary. A person is ten times more likely to have a long-term disability during his or her work years than to die during that time.

"One of the biggest challenges I have in working with wives undergoing a divorce is to help them understand that they may not be able to have the same lifestyle that they were afforded before," says Pearson. "That's where I spend time showing them the cash flow and the numbers. Then, they come to that realization." It's emotional, especially in a situation where they're not voluntarily downgrading.

Pearson points out the emotional advantage held by the spouse asking for the divorce. "Let's say you've been married 15 or 20 years. One day, your wife walks in and announces she wants a divorce. She wants it now. The trick is she's been thinking about it for quite a while–and it has hit you over the head like a ton of bricks. You have to play catch-up. Mentally, you have to get to the same mindset that your wife has."

Typically, you go through several different phases: this will blow over; she'll come back to me; we'll make it work; we'll go to counseling, etc. Then, when the realization hits that, no, this is serious, comes the anger. "When we get past that, they're ready to deal with the financial issues and the reality," observes Pearson. "During that period of time, I'm showing them cash flow numbers, but also realizing that many of them will not accept that until they've caught up emotionally."

Then, they're ready to deal with the financial questions. She explains the details so a spouse without a financial background can understand the potential settlement agreement. For example, she'll show a wife how her husband's stock options work–and if she does accept a portion of them as part of the settlement, what's involved. Can they be transferred? What are the tax implications for her? What growth can she anticipate? What is the downfall of accepting? If she doesn't accept them, what will be a potential offset for them?

Divorce specialist also run scenarios of different settlements. If a spouse accepts a particular settlement offer, how will it look five or ten years later? What will be the cash flow?

"I've always said that there are three divorces going on here," say Pearson. "There's an emotional divorce, there's a legal divorce, and then there's a financial divorce."