L AW J O U R N A L
FAMILY LAW MONTHLY®
Volume 6, Number 3 • December 2004
Pre-Divorce Financial Planning:
Could This Be the Next Frontier?
By Carl M. Palatnik
O ver the past several years, alternative dispute resolution (ADR) methods such as mediation and collaborative law
have been increasingly applied to the divorce process. This phenomenon has been largely due to 1) incompat-
ibilities between our advocacy system and the need for viable outcomes, and 2) an increased recognition of the
importance of resolving emotional issues, particularly those involving children. In short, these approaches sometimes lead
to better results than traditional methods.
The increasing application of ADR is indicative of the fact that the traditional approach to resolving issues in divorce is
flawed. However, mediation and collaborative law are simply alternative approaches to resolving disputes and not necessar-
ily approaches for achieving better financial outcomes. Success in ADR is often measured by the ability to achieve the same
results as in traditional litigation, albeit in a less contentious or less prolonged fashion. With the advent of no-fault divorce,
and even with the archaic application of fault in states such as New York, divorce has become largely about money. This has
brought to the forefront a new dilemma for the divorce practitioner — how to resolve the divorce, whether through litiga-
tion or through alternative means, not only amicably but also in a financially workable and sensible way.
PRE-DIVORCE FINANCIAL PLANNING
Divorcing clients need to make important economic decisions as they go through the process. If they make bad deci-
sions, they will more than likely have to live with the consequences of those decisions, and these can be financially and
emotionally devastating. Since there are serious pitfalls and difficult decisions to be made, people going through divorce
need expert financial advice. While they have traditionally relied on the attorney or the mediator to provide such advice,
and while many mediators and attorneys have come to accept this role, the requisite financial knowledge and skills are
often outside their areas of training and expertise. This can potentially lead to problems.
Failure to add financial expertise to the divorce process means that financial outcomes are often based on the fruits of
strong advocacy or on incomplete or inaccurate information and limited insight (and foresight), creating a house of cards.
Any slight movement or disturbance causes the house to come apart, often with disastrous consequences. The financial
divorce is sometimes so poorly constructed that it simply self-destructs over time.
Some divorce professionals have begun recently to realize they can better serve their clients by directly incorporating
outside financial experts — particularly financial planners — into the pre-divorce process. A new trend is emerging:
Divorce Financial Planning.
ROLE OF THE FINANCIAL PLANNER IN THE PRE-DIVORCE PROCESS
Although most financial planners have the relevant tax and financial knowledge to act as traditional “outside experts,”
their best contributions come from a more intimate involvement in the divorce process. The broad educational background
of the financial planner is ideally suited to this type of work. Because planners have traditionally helped individuals achieve
long-term financial goals, eg, saving for college or retirement, they have specialized training and skills that enable them to
analyze financial issues in their long-term economic contexts. During the divorce process, this often sets a more positive
and productive tone for discussion, provides reality checks, empowers individuals to make wise and workable decisions
and hard, but often necessary, lifestyle adjustments. It also enables them to address insecurities about financial conse-
quences, power imbalances and emotional agendas that often impede the decision-making process. The parties frequent-
ly feel more comfortable and secure with the choices they are considering, find workable solutions more quickly (often
at less cost) and become more aware of post-divorce changes in standard of living, ultimately making them less likely to
need to revisit support issues in the future.
WHEN SHOULD THE FINANCIAL PLANNER ENTER THE DIVORCE PROCESS?
The earlier the financial planner becomes involved in the process, the more likely the situation will not escalate out of
control, and the more likely good financial decisions will be made. The financial planner can help stabilize the situation,
including helping determine short- and liabilities and their current and ties need to have a clear under-
term support needs or paying abili- projected income and expenses. standing of their pre-divorce cash
ties, closing or re-registering accounts, Historical information is also impor- flow and both need to be well
changing beneficiaries on insurance tant in that it provides insight into pre- equipped to manage their cash
policies, notifying credit card compa- divorce lifestyle and standard of living. flow post-divorce.
nies or establishing credit. The following are examples of BUDGETS
One of the most important steps in some of the many problem areas that I have heard many people say they
the pre-divorce financial planning need to be avoided or addressed in had no need to budget in the past
process is rigorous discovery — the as careful a fashion as possible: because there was always more than
collection of accurate, complete and 1. Cash flow information is often enough money to go around. From
reliable financial data. The earlier the extremely limited, inaccurate or a financial planning perspective,
discovery process is initiated, and the incomplete. Sometimes, based on budgeting is important no matter
more scrupulously it is done, the bet- premature assumptions, only the how much money is earned or what
ter off the client will ultimately be. wife’s (for purposes of this discus- the expenses might be. Further, total
Collecting, inventorying, organizing sion, the husband is assumed to be expenses are likely to increase once
and analyzing historical data is one of the primary income provider) esti- the parties have separated. While
the cornerstones of the financial plan- mated monthly expenses to sup- some people view a budget as a
ning process and is probably best port living in the marital residence “financial diet,” perhaps even a pun-
done by the divorce financial plan- with the children are listed, and ishment for sins they might have
ner. The less reliable the information, sometimes this information is not committed in the past, this could not
the more likely bad decisions will be collected or analyzed in a thorough be further from the truth. A budget is
made, and bad decisions made early fashion. There are risks inherent in simply a basic type of financial plan,
can complicate financial issues and a plan for managing cash flow. It is
this approach, and other scenarios
cause more bad decisions or other important that it be understood by
should not be rejected outright at
serious problems in the future. both parties, and it is also important
this time. For example, being asset
The more meticulous the data col- that it be balanced.
rich and cash poor can have seri-
lection process, the more reliable In addition, the parties need to
and useful the input of the financial construct a historical budget. This
2. Cash flow information for the hus-
planner will be. Therefore, it is means going through the check-
band is often even more limited,
extremely helpful if the financial book, bank, brokerage and credit
or is ignored. Information for both
planner is intimately involved in this card statements, etc., and compiling
spouses is important because the
aspect of discovery. Proper collection and organizing actual expenses. This
husband may be paying spousal or
of data is a time-consuming, but is a time-consuming task and may
child support, and both parties
important, aspect of the divorce not always be completely achiev-
will need to understand and come
process and should not be left to a able, but going through the process
paralegal. Further, negotiation of to agreement not just on what the
wife’s needs are but what the hus- can, in addition to providing insight
financial issues should not be initiat- into pre-divorce lifestyle, teach indi-
ed without a complete understanding band can afford to pay.
3. Information on assets and liabili- viduals how to use and adopt finan-
of all financial parameters. cial management tools, such as
ties is often inaccurate or incom-
PREPARATION OF STATEMENTS Quicken®; educate them about the
plete, even if formal discovery has
OF FINANCIAL POSITION AND taken place. This is sometimes due value of budgeting; and help them
CASH FLOW to an incomplete global under- become better able to manage their
Statements of Financial Position and standing of what constitutes prop- money as they move forward.
Cash Flow are additional cornerstones erty subject to division, is some- CHILD SUPPORT, SPOUSAL
of the financial planning process. times a byproduct of the advocacy SUPPORT AND DEPENDENCY
These are important because clients system or is sometimes simply a EXEMPTIONS
need to have a good understanding of consequence of not analyzing The general strategy for handling
both their current and future assets assets and liabilities in depth. A these issues is to calculate the needs
Carl M. Palatnik, CFP® CDFA™, is prime example of assets that are and paying abilities associated with
founding president of the Association sometimes ignored or neglected is particular settlement scenarios to
of Divorce Financial Planners. He is executive perks. determine how best to fund them.
president of DivorceInteractive. 4. It is sometimes assumed that the Tax planning is often an important
com in Mineola, NY, host of “Divorce primary wage earner (often the component of this process. On the
Talk” radio and a member of the husband) is well equipped to man- surface, it might seem that the
Editorial Board of this publication. age post-divorce finances, resulting best solution would be to allocate
He can be reached at carlp@ in inadequate attention to this side as much of the support as possible
divorceinteractive.com or by tele- of the equation. In my experience, to spousal support and give
phone at 516-747-2259. this may not be the case. Both par- the dependency exemptions to the
2 New York Family Law Monthly ❖ www.ljnonline.com/alm?nyfam December 2004
husband. In many situations, however are the workability of the settlements PROCEDURAL DIFFERENCES
— especially under the new tax law and the short- and long-term goals BETWEEN LITIGATED AND
— the calculation is much more com- of the parties. Assistance with these MEDIATED CASES
plex. For example: issues is probably the most important Although this may seem surprising,
• The husband’s income might result role of the financial planner in the the divorce planning process is simi-
in a phaseout of the value of his pre-divorce process. lar in both litigated and mediated
itemized deductions or a reduction The planner can: cases. There are some major differ-
in the value of his dependency • Help the parties translate their ences, however. For instance, the
exemptions. goals into workable solutions; discovery process in litigated cases is
• If there are substantial mortgages • Determine which proposals are more formal and implies a lack of
on certain properties, and the hus- workable or what actions might need
band is deducting large mortgage trust. The formality of the process
to be taken to make them workable; often makes it difficult to feel confi-
payments, he may be subject to the • Educate the parties about the long-
alternative minimum tax. This dent with the respective needs and
term consequences of specific pro- paying abilities of the parties. The
could also affect the value of the
posals. This helps the parties feel financial planner in litigated cases
itemized deductions and depend-
more secure about the process and might be asked to provide expert tes-
more comfortable about reaching timony in court. Alternatively, the
• The husband’s income could make
an agreement. For example, they informality of the discovery process
him ineligible for the Child Tax
should fully understand whether in mediation is potentially subject to
Credit, which is currently $1000
they will have sufficient assets or abuse, especially if there is a power
income to manage their finances, imbalance during the mediation
If the husband is a high wage earn-
whether they will be able to afford process. Involving a financial planner
er in a high-income state like New
York, he might otherwise be affected support payments or whether they in the process is a good compromise
by the alternative minimum tax, and will be able financially to survive in both mediated and litigated cases.
this may severely restrict the tax ben- or prosper over time; During litigation, the financial
efits he receives from his spousal • Suggest alternative scenarios to the planner acts as a litigation adviser to
support payments. Depending on the parties when necessary. the client and the client’s attorney.
amount of spousal support, and the
income of the recipient spouse, it is
possible that she might also be affect- Potential Benefits of Pre-Divorce
ed by the alternative minimum tax.
The amount of spousal support,
Financial Planning to Clients
and how periodic payments should
• More thorough treatment of financial issues.
be allocated between spousal sup-
• Better settlements.
port, child support and a distributive
• Avoidance of mistakes.
award, should be related to needs,
• Increased likelihood that an eventual settlement will work.
paying abilities, tax consequences
• Better understanding of post-divorce financial situations and what might
and potential financial risks. It will
be needed to make them work (reality checks).
vary with different settlement scenar-
• Reduction in emotional distractions and fears and greater focus on finan-
ios and therefore needs to be
calculated each time a specific sce- cial issues.
nario is being considered. The dura- • Greater focus on needs and paying abilities and less on entitlements.
tion of spousal support should be • Greater confidence in results and reduced stress in achieving results.
determined by the time needed to • Empowerment through knowledge, making work sessions more productive.
rehabilitate the recipient as well as • Acquisition of money management tools, such as proper budgeting.
the agreed-upon parenting plan. It • Increased client optimism for the future.
should not be calculated using a for- BENEFITS TO DIVORCE PROFESSIONALS
mula such as one based on length of • Same as the client benefits listed above.
the marriage or the respective gross • Reduced liability or concerns about liability.
incomes of the parties. • Reduced stress.
ANALYSIS OF ALTERNATIVE • Increased efficiency and productivity.
• Reduced need to revisit financial issues.
Once the financial parameters are • Increased long-term client satisfaction, potentially leading to additional
completely understood — and only client work and expanded referrals.
then — should the parties begin the • Increased ability to focus on the negotiation process and not get bogged
negotiation process. The two most down with the financial issues.
important factors in this process
December 2004 New York Family Law Monthly ❖ www.ljnonline.com/alm?nyfam 3
Information provided by the finan- the process, so it’s important that the tion about background and experi-
cial planner may help the attorney or divorce professional and financial ence, on its website.
client 1) identify discovery needs; 2) planner interact well. Second, the Two companies offer divorce
determine the need for hiring out- later the financial planner enters the financial planning training programs
side financial experts such as foren- process, the more likely financial to financial planners and maintain
sic accountants; 3) prepare experts errors will have been made. Since listings of divorce financial planners
for depositions; 4) prepare pendente the planner will see these errors, this on their Web sites: The Institute for
lite motions; and 5) get ready for can be disruptive to the process and Divorce Financial Analysts (www.
trial, etc. The financial planner may may set it back. In addition, the institutedfa.com; 800-875-1760), which
also participate in two-way or four- negotiation process may be periodi- confers the designation Certified
way meetings. During these meet- cally interrupted to collect, organize Divorce Financial Analyst (CDFA™),
ings, as in mediation, the planner’s formerly designated Certified Divorce
and analyze financial information.
input will help to achieve a work- Planner (CDP), to its graduates; and
If these considerations are not off-
able settlement. the Financial Divorce Association
putting, the attorney may find the
FINDING A PRE-DIVORCE following resources to be helpful in
FINANCIAL PLANNER finding a divorce financial planner: —❖—
There are some potential problems The Association of Divorce
that may be encountered when Financial Planners (www.divorce
The publisher of this newsletter is not engaged in
engaging a pre-divorce financial andfinance.com; 800-270-1886), a rendering legal, accounting, financial, investment
planner, but they should be minimal professional association of divorce advisory or other professional services, and this publi-
cation is not meant to constitute legal, accounting,
as compared with the benefits that financial planners and divorce pro- financial, investment advisory or other professional
will be derived from the collabora- fessionals with an interest in divorce advice. If legal, financial, investment advisory or other
tion. For one, the divorce profession- financial planning, maintains a mem- professional assistance is required, the services of a
competent professional person should be sought.
al will likely lose some control over bership directory, including informa-
4 New York Family Law Monthly ❖ www.ljnonline.com/alm?nyfam December 2004