Divorce Basics
The topic of divorce planning is expansive. I will cover some of the basics in this article. Please note I am not an attorney and strongly advise all clients to have legal counsel.
If your divorce is civil and your spouse is amenable, mediation is typically the least expensive route. However, there are a couple of downsides you need to be aware of. Most importantly, a mediator’s role is to be unbiased, which means they are not acting or focused on what is in your personal best interest. In addition, mediators often will not provide legal advice or specific direction. Because of this, it is generally recommended that each spouse also retain their own legal counsel. This can be done on a limited basis to keep costs down. For example, your attorney’s role may be limited to reviewing a draft settlement agreement.
There are four main areas involved in a divorce settlement.
Asset/Debt Division
You will need to decide who will own and owe your assets and debts once your divorce is final. Massachusetts is an equitable law state, which means your divorce has to be equitable. Equitable is not the same thing as equal. Generally, you both walk away with roughly the same value. Determining the specifics can be overwhelming. For example, will you sell your house or will one of you keep it? If you keep it, how will the other spouse be compensated for their share of the equity? It is common for one spouse to have more money in retirement and investment accounts. There are processes to transfer retirement money from one spouse to the other in divorce. One common vehicle is a Qualified Domestic Relations Order (QDRO). QDROs are legal documents, so there is added time and money to utilize them. One benefit of a QDRO is the receiving spouse can pull money out of the QDRO without having to pay a 10% penalty that typically applies if you access funds before the age of 59 ½.
Support Payments
In many cases, one spouse is ordered to make support payments to the other. This can either be in the form of child support and/or alimony payments. In Massachusetts, child support is typically paid until the child graduates college. It also can end once your child graduates high school, provided they are working full time. In contrast, alimony is paid for a period of time based on the length of your marriage. A recent court case, known as the Cavanaugh case, requires the court to consider both child support and alimony. In the past, alimony rarely applied if the parties had children.
Parenting Plan
If you have minor children, a parenting plan will be a major part of your divorce agreement. There are parent coaches that can assist in creating one. A good parenting plan will cover everything from which parent has primary custody, when each parent spends time with the children, what happens on holidays, who makes decisions about summer camps, how large expenses are split and much more.
Other areas
There are several miscellaneous areas also addressed in most divorces. A couple of common ones are what happens with health insurance and how much life insurance each spouse must maintain. One critical area is who will receive tax benefits if children are involved. Tax planning is critical as it can save thousands of dollars in taxes each year. In most cases, the benefits are split. For example, if you have two children, each spouse receives tax benefits for one child. Or, if there is one child, you take turns each year receiving tax benefits.
Why work with a CDFA?
A lawyer is obviously a critical party to assist with the legal implications of decisions and options. An equally important party is your Certified Divorce Financial Advisor (CDFA). Your CDFA should be comfortable with laws and rules but does not provide legal advice. His/her expertise is to help you make financial decisions, including the pros and cons of each option and tax implications. CDFAs should also have software to assist in calculating support payments, including Cavanaugh calculations. Having a CDFA on your team generally lowers your legal fees, as your CDFA can typically produce court financial statements for you at a significantly lower cost than your attorney. Lastly, CDFAs should have special software to value pensions if you and/or your spouse has one.
Written by Lars Lambrecht, CFP, CLU, BFA, AMPA, CDFA, CLTC. Lars is a Rehoboth resident and Private Wealth Advisor.