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Financial Solutions for a Restructured Family

Donna Kline, MBA, CDFA®, CDC®

03/23/2021

Engaging a divorce professional to protect family wealth

Note: Legal considerations are based on Pennsylvania statutes.

In March 2021 HBKS posted a webinar addressing the financial aspects of divorce and combining the expertise of Donna Kline, a financial advisor, and Liberty Weyandt, an attorney. Following are highlights of the discussion. To listen to the full webinar, visit our YouTube page.

How Can the Experts Help?
Kline. The webinar is designed to address financial considerations around divorce, but we would be remiss if we didn’t recognize the emotional aspects: the grieving process, mourning the loss of your marriage, the concerns for your children, the worries about your financial future—concerns of both divorcing parties.

Divorce is rarely a snap decision. One party has been thinking about it for a long time, has maybe even moved on emotionally. But the other is taken by surprise. One party is down the track on the healing train, the other just starting the process. Understanding the emotional aspect of the divorce will help in the negotiations.

How can a divorce professional help? A Certified Divorce Financial Analyst helps the client and lawyer understand how the financial decisions they make will impact the client’s financial future. They help client and lawyer appreciate the emotions that are affecting the decision and keep their focus on what’s ahead beyond the actual divorce.

Weyandt. It’s important to have clients understand that they do have process options in the dispute resolution continuum:

  • Kitchen table settlement—the first option, where spouses meet in the privacy of their home or outside the home to talk about how to resolve their disputes: financial, custody, and/or support. Then one or both parties hire an attorney to do the marital settlement agreement recording the terms they have agreed upon. An attorney can only represent one spouse.
  • Mediation—the dispute resolution process, where a mediator facilitates a conversation between spouses to find a middle ground and reach an agreement. Mediation allows clients to resolve their disputes outside a courtroom. With an agreement, one or each party still hires an attorney to create the settlement paperwork required to obtain the divorce decree. The mediator prepares a memorandum of understanding summarizing the terms of the agreement for the attorney. Types of mediators include attorney mediators, financial professional mediators, and mental health coaches skilled in co-parenting plans.
  • Collaborative practice—Both parties must hire collaboratively trained attorneys and sign a participation agreement setting forth the terms of the negotiation process. They agree not to litigate in court. The attorneys work as a team focusing on the parties’ interests or goals. They can identify specific issues with the family and come up with creative solutions. They work together to prepare the agreement. If the parties don’t settle, the lawyers cannot represent either client. A key ingredient in the process is that the lawyers can bring in trained professionals, such as financial and healthcare professionals, to help their clients make decisions.
  • Litigation—The judge makes the decision. The clients lose much of their control over the outcome in this process. It is adversarial by nature and often destructive and harmful for families. The court makes decisions when the parties otherwise can’t. However, despite going to court, 95 percent of litigated cases settle.

As divorce attorneys, we often work with CDFAs. As financial professionals they can provide input in a variety of ways:

  • Provide litigation support or become a member of the collaborative law team
  • Identify the short and long-term effects of dividing property
  • Integrate tax issues
  • Analyze pension and retirement plan issues
  • Determine if a client can afford the matrimonial home
  • Evaluate a client’s insurance needs
  • Establish projections for inflation and rates of return
  • Determine the value of businesses
  • Bring innovation and creative approaches to settle cases

Dividing Marital Assets
Kline. It is important to remember that not all assets are the same. Dividing assets is a careful process. There are many considerations around each asset:

  • The marital home—the amount of equity, the tax burden, the cost to maintain. Should the home be kept or sold?
  • Vacation home—the cost of upkeep. Is it affordable or should it be sold?
  • Income producing property—What type of income and how is it being held? Does it make sense to sell or would it be better to keep it?
  • Investment and savings accounts—What is cost basis of the assets? The associated risk? Is there a penalty for a premature sale and how does that affect the decision to keep or sell the asset?
  • Qualified accounts like 401(k)s, pensions, and ESOPs—Which is better, to have the assets now or income in the future?

Liberty. In terms of supplemental income, there are three types of support:

  • Spousal support—requested when the parties are living in separate residences. It is provided before the filing of the divorce complaint.
  • APL (Alimony Pendente Lite)—support to be paid during the litigation until the property distribution is made. It is determined by consent agreement or by a judge.
  • Alimony—support provided subsequent to the divorce decree and property distribution. The calculation is based on both spouses’ net incomes and is need based. The court considers 17 factors and once they are applied determines an alimony amount. Alimony typically trends down over time.

In terms of child support, typically the most support is awarded for the first child and then less for each subsequent child. The amount is variable and can increase or decrease according to the court guidelines, such as who’s paying for healthcare and if a child has special needs.

Kline. I approach divorce like a financial planning process. There are likely two households to maintain, so what is the best way to accomplish that task? We consider not only the value of an asset, but its growth potential and the cost of holding it. We look at the relative incomes of the parties. There are many instances where state guidelines are in the families’ best interests, but the parents often can work together to determine the costs to run the households and supporting the children and who can pay what to come up with a support number that makes sense.

It is not always advisable to sell assets immediately. It might not be a smart long-term decision. So we help families be flexible around the guidelines of the law. The planning process involves thinking about the parties’ financial futures. One way to analyze an asset is from the top down, but you have to look further, into the needs of the family.

I ask for a lot of financial detail, like the cost of a vet visit, or money to set aside for vacations. We want to have an understanding of what it takes to run that home as it now is. We consider things like car loans and maintenance, the children’s activities, charitable contributions, and the cost of the second residence. We use software to chart relative net income after expenses and taxes.

If a spouse has money leftover after expenses it can be invested, so we also have to understand each party’s relative net worth as time progresses. So my goal as a CFDFA is to narrow the gap as much as possible between the two parties so they both have prosperity in the future. If you look at everything only in terms of liquidity, you might miss the long-term view.

Liberty. In terms of child support, the court’s guidelines are the guidelines. The law puts child support before all other expenses. The paying party can try to modify the payments if they can’t afford them, and sometimes an agreement can be negotiated where the spouse accepts less than the guideline amount. When they don’t agree, it escalates to a hearing and the court makes a decision on the modification request. If a party doesn’t agree with the court’s decision, they can appeal to a higher court.

There are a lot of factors involved in determining a child support amount, including the party’s custody level.

Creative Solutions
Kline. My favorite question of the divorcing spouse is: What about your children? If the parents are in court once a year attacking each other, how does that affect the children? Do you want your children to spend their formative years watching you argue in court? You can get caught up in the conflict and forget what’s important to the family. If parting parents can keep their focus on the common goals, like the children, they can create a deal that both parties agree to.

What expenses are mandatory? Where is there some flexibility? It is a trial and error process of examining multiple possibilities to come up with one that works best. It’s about the family and getting through the emotions to make good practical decisions.

One mutually acceptable resolution option:

  • Alimony grows with salary
  • Education costs are funded including funding college
  • Divide future bonuses

There is also a role for an insurance professional. Any financial plan includes evaluating what-ifs. You want to protect your assets and your income stream; you are looking to protect what you have. Your future has an insurable interest. Not just your life, but such things as children driving cars. And are the support payments secured?

It is important to gather and work as a team. The right professional can have a positive affect on the outcome. You can’t know everything so you have to lean on someone to help you make decisions that are best for your family.

Liberty. It’s important to focus on the future as opposed to the past. In a court process, the past doesn’t always impact the future: How do you transition? How do we use the resources for your children? For your retirement? How do we work with cash flow problems? How can we generate cash flow? We prefer to put the client in the most favorable position as opposed to the court process where they have to live with the court’s decisions.

Kline. Even when it doesn’t seem possible, it’s worth a try.

The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.


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