Millions of people are divorced each year. Sadly, even the best efforts of legal consultants and other professionals often leave one partner penniless, while the other continues to prosper. This affects children as well as the couple involved. With this being said, the financial ramifications of a divorce can be devastating. However, with proper planning and help from professionals specializing in financially equitable divorce settlements, you can increase your chances of arriving at a settlement that fully addresses your long-term financial needs. What's missing in most divorce processes is financial professional. A Certified Divorce Financial Analyst® (CDFA®) professional can forecast the long-term effects of the settlement. By using a CDFA® professional, both partners have a clearer view of their financial futures. Only then can they reach a settlement that fully addresses the financial needs and capabilities of each.
The role of the CDFA® is to assist clients and their attorney to understand how the financial decisions made today will impact the client’s financial future.
After his divorce, David went to a financial advisor to determine how to best position his assets. Together, David and his planner decided to do a total financial plan for him. During the planning session, it became apparent that during his marriage his wife had done all of the investing. She chose all the investments, made all the decisions, and invested all the money.
At the time of their divorce she said, “Let’s just split everything 50/50. You take this half of the assets and I will take that half. Is that OK?” David answered, “Well, I guess that sounds pretty fair. That’s OK with me.”
Unfortunately, there was something he neither knew nor understood; neither did his lawyer, and neither did the judge. They didn’t realize that David would have to pay taxes on his half of the assets when he tried to access them. His ex-wife, on the other hand, could access her half of the assets tax-free. His 50/50 split cost him an additional $18,000 in taxes. Had David met with a CDFA® before the divorce was finalized, he would have been in a better position to ask for a more equitable settlement.
This parable has an unfortunate ending, but pre-divorce financial counseling can help people going through a divorce arrive at a settlement that is fully understood by all involved.
Who do people turn to for such assistance? When people think about getting a divorce, the first professional that comes to mind is an attorney. Typically a financial advisor – whether it is a CPA, CFP®, or a CDFA® – is not considered until later in the divorce process – or even until after the divorce is final.
Financial problems can tear a marriage apart, and are often the primary factor that leads to divorce. Once a decision to separate or divorce has been reached, all sorts of questions bubble to the surface. These questions are often clouded by wounded emotions and accompanied by mutual accusations, which comes as no surprise. If a couple cannot solve their financial difficulties while the marriage was underway, it is unlikely that they will be able to agree on pressing financial issues when it has fallen apart.
Many divorcing couples have questions such as:
These are the questions that divorce lawyers face with each divorce case. Many lawyers struggle with the intricate financial details that concern tax issues, CRA rulings, capital gains, dividing pensions, and so on. Lawyers attend law school to become professionals in the law, not to become financial professionals. Additionally, even if lawyers happen to have accumulated a degree of financial knowledge, they are not allowed to testify on behalf of their clients in court. This is why more and more lawyers have seen the virtue of bringing a financial professional into the divorce process at the very start. Solid information and analysis are important resources in their search for the best possible resolutions for their clients.
Fortunately, with the advent of Certified Divorce Financial Analysts™ and Divorce Settlement Analyst™ Software, help is on the way.
To understand this role, we first have to distinguish between a CDFA® and other financial professionals, who go by various titles, such as: Chartered Accountant (CA), Certified General Accountant (CGA), Certified Financial Planner® (CFP®), and Chartered Financial Consultant® (ChFC®).
The role of the financial planner, CFP® or ChFC® is to help people pursue their financial goals regardless of whether they are divorcing or happily married. After identifying those goals, the next step is to take an inventory of the clients’ current assets and liabilities, then examine what must be done to pursue those goals. Some goals might be reached within a year; others could be realized 50 years down the line. To look that far into the future, certain assumptions must be made. These include income, expenses, inflation rates, interest rates and rates of return on investments. After these assumptions are settled on and adjusted for changes, the scenario must be reviewed on a regular basis. If during the review process the planner determines that the client is not on track, he or she will recommend a number of necessary or advisable fine-tunings. In other words, the financial planner looks at financial results in the future based on certain assumptions made today, and keeps the client moving toward stated objectives.
Conversely, accountants typically confine themselves to examining the details of a present-day scenario. If called upon to participate in a divorce proceeding, they might calculate the taxes on dividing property combined with the effect of child support and spousal support over a very short period of time. They typically do not project further into the future. They also may be retained to perform an audit of account activity or to perform forensic accounting functions to help uncover “hidden assets".
To best meet the needs of a divorcing client a blend of these two ideologies is needed. To meet this need a new professional designation was created – the Certified Divorce Financial Analyst® (CDFA®). The role of the CDFA® is to help both client and lawyer understand how the financial decisions made today will impact the client’s financial future, based on certain assumptions.
A CDFA® is someone who comes from a financial planning, accounting or legal background and goes through an intensive training program to become skilled in analyzing and providing knowledge related to the financial issues of divorce. The CDFA® becomes part of the divorce team, providing litigation support for the lawyer and client, or becomes a member of a Collaborative Law team. In either event, the CDFA® will be responsible for:
CDFA® professionals help clients determine the short-term and long-term financial impact of any proposed divorce settlement. They also provide valuable information on financial issues that are related to the divorce, such as tax consequences, dividing pension plans, continued health care coverage, stock option elections and much more. CDFA® professionals also help attorneys by helping the client make financial sense of proposals. CDFA® professionals give attorneys the tools they need to help prove their case.
Definitely not! The Institute for Certified Divorce Financial Analysts (IDFATM) highly recommends that any person getting a divorce seek legal counsel. The CDFA® professionals role is to assist the attorney – not to replace the attorney.
CDFAs® are trained to advocate for men and women. The CDFA® interprets the numbers and helps the attorney build a strong case that’s in the client’s best interest.
Many CDFA® professionals are also trained mediators and/or collaborative professionals who can take a role in facilitative mediation or collaborative divorce. However, most CDFA® professionals are not also lawyers, and they cannot give legal advice. The IDFATM always recommends that any person going through a divorce receive independent legal advice.
The designation of Certified Divorce Financial Analysts is awarded by The Institute for Certified Divorce Financial Analysts (IDFATM) to individuals who successfully complete the training and test requirements set by IDFATM. IDFATM is the premier national organization dedicated to the certification, education and promotion of the use of financial professionals in the divorce arena.