Most people would agree that divorcing successfully requires at least one professional: an attorney. And in many cases, that truly is the only professional needed. But in cases with complexity or confusion about the financial elements, something more is needed. Even the most talented and experienced attorney isn't trained to handle some of the intricate financial planning and tax elements present in some cases.
In 1993, the Institute for Divorce Financial Analysts began training a new type of professional: the Certified Divorce Financial Analysist™ (CDFA®).[1] A CDFA® professional is an expert in the intersection of money and matrimony. They are trained to help clients and their attorneys understand the short- and long-term financial consequences of any given divorce settlement.
When it comes to doing divorce right, the old saying that "an ounce of prevention is worth a pound of cure" couldn't be truer. The primary role of a CDFA® professional in divorce is to help you avoid financial landmines that neither you nor your attorney can see. In this edition of Graceful Exits, I'll explore how CDFA® professionals are trained, where they can be useful in a case, and how you should go about deciding whether to hire one.
Pre-requisites & Training
To earn the CDFA® designation, an individual must have three years of professional experience in finance or divorce and hold a bachelor's degree. In addition, a candidate for the CDFA® designation must complete a course of self-study across three content areas (Fundamentals of Divorce, Financial Issues of Divorce, and Tax Issues of Divorce), and successfully pass a written exam for each content area. Finally, candidates must successfully complete a comprehensive 50-question case study-style exam that incorporates knowledge and skills from all three content areas.[2]
Once a professional earns the CDFA® designation, they must complete 15 hours of divorce-related continuing education every two years in order to maintain their status.
When you hire a CDFA®, you are hiring a degreed, experienced, and highly trained professional bound by a code of ethics.
So how exactly does a CDFA® professional prevent trouble before it starts?
Valuation & Division
One key step in any divorce is to list and value all of the assets a couple owns. If all that is owned are a few bank accounts, a couple of 401(k)s, and a house, then this task is relatively simple. But what if there are multiple pension plans, complicated executive compensation schemes, business interests, annuity contracts, large stock portfolios, or exotic investments? This seemingly simple task could turn into a frustrating ordeal.
In a case where the estate is complex (or one party is not as familiar with the estate as the other), a CDFA® professional is well-equipped to assist with building a comprehensive inventory of assets and liabilities, help value assets that are less straightforward,[3] and explain the nature of any assets you might not understand yet. Further, knowing your goals and the goals of your soon-to-be-ex-spouse, your CDFA® professional can help formulate a thoughtful division of assets that puts you in the best position possible to emerge from your divorce with your financial health intact - ready to pursue your goals.
For example, if one spouse earns a high income and the other is just returning to the workforce, a CDFA® can help determine how much cash needs to be set aside for the lower-earning party without depriving the higher-earning party of enough ready funds to cover an emergency. The CDFA® would also make sure that the lower earner is allocated those assets that are easiest to access, so they can use those assets without being subject to adverse consequences (like unexpected taxes and penalties). And speaking of taxes…
Tax Impacts & Implications
Unfortunately, financial professionals often see their clients dealing with unplanned tax consequences when emerging from divorce - a poor outcome indeed. One classic example is the non-working, slightly younger spouse who receives retirement plan assets and little else. But when they try to tap those assets to support themselves, they are confronted with taxes and penalties that seriously decrease the value of the assets awarded.
A CDFA® can help clients avoid such costly errors by educating them on the tax consequences associated with one asset vs. another, and advocating if one party finds themselves at a potential disadvantage due to a lack of ready cash. A CDFA® is also well-positioned to optimize a settlement for the highest possible after-tax value to each party. For example, if Party A is the breadwinner who earns significantly more than Party B, there could be a meaningful difference in the after-tax value of a given asset in the hands of either party. There may also be a meaningful difference in the ongoing tax burden associated with an asset in the hands of either party. By considering tax consequences in the context of each party's goals, it is possible to achieve a better outcome for everyone with just a little thoughtful planning.
Projecting Long-Term Outcomes
So far, most of what we've discussed is the value of thoughtful analysis to prevent near-term problems. But long-term pitfalls often have the biggest impact - and are the hardest to see clearly during a divorce.
It is not uncommon for one party in a divorce to be reluctant to agree to a settlement offer –any settlement offer - because they are unsure if they will be OK in the long run. This is where a CDFA® can offer the greatest value. A competent CDFA® professional will use planning software, a few educated assumptions (including how assets will be divided), and their knowledge of client goals to project whether the client will be able to meet their goals with the resources available.
For example, say that both members of the divorcing couple are in their mid-30s, employed as well-compensated professionals, and will walk away from the marriage on a roughly equal financial footing. In this case, no professional planning is needed to determine whether both parties will be OK. There is ample time to save and invest for their future, and both parties are likely to agree on a settlement in due time.
Now change a few elements. Assume that both parties are in their mid-50s, one party is highly compensated, and the other is lower compensated. Both parties will walk away with 50% of the estate, but now the lower-earning party has a puzzle to solve. Can the lower earner survive the coming 40 years with their more modest income and the assets awarded? Do they need to increase their earning potential or make lifestyle changes? How should they use their limited resources today and into the future? If there is debt, how should they prioritize paying it off? These are questions that can only be answered effectively using sophisticated analysis, which is best provided by a highly trained professional like a CDFA®.
Further, the product of that analysis can be a handy tool in settlement negotiations. While it's not a magic wand you can wave to pry dollars from the clenched fist of an angry soon-to-be-ex-spouse, it can help soften a hardened stance or assist you in making your case for being allocated one asset vs. another.
Do I Need a CDFA®?
This is the million-dollar question, so to speak. And the answer is: maybe. When you consider whether to hire a CDFA® professional, ask yourself:
- Do I understand the assets and liabilities that make up my marital estate?
- Do I understand the settlement offer that has been made to me?
- Do I understand the tax consequences of owning one asset vs. another?
- Am I confident that I'll emerge from my divorce on a footing that will allow me to pursue my financial goals and enjoy good financial health?
If you can't answer each of these questions with a confident "yes," it's time to consider adding a CDFA® professional to your team. In my practice I assist with all stages of divorce, so it's never too early or too late to find the right professional for you. You can find a listing of CDFA® professionals in your area by visiting the Institute for Divorce Financial Analysts website at https://institutedfa.com/find-a-cdfa/.
Ready to see if a CDFA® can help you?
[1] https://institutedfa.com/
[2] 70% or higher is considered a passing score for each exam.
[3] A good CDFA® professional will know which assets he or she is qualified to value and which may require the input of another expert.