January 1, 2011
Donald Paris, CPA
CDFA stands for Certified Divorce Financial Analyst, a designation I was recently awarded. With approximately one-half of all marriages ending in divorce, we all know people who have been through divorce. Some folks feel that they came out on the good side of it, some the bad. Unfortunately, the answer changes based on how many years have passed since the divorce. This is not always a good thing. You see, a CDFA helps the spouses and their attorneys understand the financial and tax ramifications of the divorce, and forecast the results of the agreements being made. Here are some examples of situations where a CDFA can help.
An attorney called me the other day with a relatively simple settlement proposal, i.e. husband pays $x alimony to wife every month for 5 years, however, if their home sells before the full 5 years of alimony is paid, he owes her the remainder of the alimony out of the proceeds. You might say that this sounds fair, right? Not necessarily, because there could be "Alimony Recapture". If the home were sold in either year one or year two after the divorce, resulting in a huge payment of alimony followed by no further payments of alimony, the husband would likely have to include in his income ("recapture") large amounts of the settlement payment on the marital home. This could result in a huge tax bill for the husband. So, I suggested that the husband pay 3 years of alimony no matter what, and modify the property settlement agreement so that each gets a different share of the home sale depending on when the home is sold.
Another attorney called me to discuss property settlement issues. The couple had been married for 25 years. Husband has a small home-based business but he wants to go back to school to become more qualified to do bigger things; she works as a highly paid executive. The couple has teenagers who are in high school. She has a large 401k, he has some retirement savings. Wife’s proposal is that she pay him alimony for the three years he goes back to school, and child support while the kids are still in high school. She wants to split the assets 60/40, with husband getting the 60% in exchange for her keeping her 401k. Husband keeps the marital home. Sounds fair, right? Nope. You see, after we ran the numbers, husband does fine for the first three years and then has no working capital (he can’t pay his bills). She on the other hand amasses wealth. So, what did I suggest? If she pays alimony for approximately one-half of the time they were married (12.5 years), their working capital and net worth’s yield approximately the same results. She keeps her precious 401k. The couple studied the numbers and agreed that this was a fair approach to splitting up the assets and the issue of alimony.
So, what can a CDFA do? Help the couple and their attorneys understand the financial and tax issues of the impending divorce. When is the best time to get a CDFA involved? Before or during the settlement discussions. Waiting can only hurt all parties.
If you or someone you know has financial issues surrounding a divorce, please feel free to call me.