An advisor can help you plan for a new financial future during your divorce proceedings and after the ink has dried
Written by Molly Grace | Read original post here
Key takeaways
- A financial advisor specializing in divorce can help you understand your financial needs, so you know what to ask for during negotiations.
- They can also help you understand the tax implications of splitting certain assets and ensure you get a fair deal.
- If you have complex finances, a lot of shared assets or a high net worth, hiring a divorce financial advisor could be worth it.
There are arguably few events in life that cause financial disruption as much as a divorce can. That’s why working with a financial advisor who specializes in divorce can be so valuable.
When you’re going through a divorce, you’ll have to think beyond the emotional component and make sure you’re setting your finances up for success over the long term. A divorce financial advisor can help you do that.
What does a divorce financial advisor do?
A divorce financial advisor can help you determine your financial needs and ensure those needs are met in the divorce settlement. After the divorce, they can help you develop a new budget and manage your finances.
Lawyers don’t receive the same financial training that financial advisors do, so having an expert in your corner can be vital. For example, a divorce financial advisor can:
- Develop a new budget that considers your post-divorce income
- Help you understand the tax implications of the divorce
- Evaluate the true value of different assets to ensure they’re split in a fair way
- Determine if you can afford to stay in your home
- Ensure you’ll have enough money for retirement after your assets are split
“In my experience, my clients rely on me more than they rely on their attorneys,” says Cary Carbonaro, CFP and managing wealth advisor for Ashton Thomas Private Wealth. Carbonaro says that in addition to financial advice, she also often provides clients with emotional support and advocates for them throughout the process.
When should you hire a divorce financial advisor?
Carbonaro says whether you need a financial advisor to help with your divorce depends on the complexity of your situation. If you have children, a high net worth, a lot of shared or commingled assets or other factors that complicate the divorce, an advisor could be helpful.
“Differentiating marital versus separate property is always a high point of contention,” says Ekaterina Klimentova, CPA, CDFA and tax partner at Cerity Partners.
Klimentova says working with a financial advisor during divorce negotiations can help ensure you receive the money and assets you need to remain financially secure.
“Coming out with a settlement and then engaging a financial advisor is almost like doing tax planning after the tax year has closed,” Klimentova says.
For example, you might go into the proceedings wanting to keep your house, even if it means giving up other assets. A financial advisor can run simulations showing you the importance of getting a piece of your shared retirement savings, since that will ensure you have income in retirement.
Working with a financial advisor can also be helpful if your spouse was the main earner and you aren’t as knowledgeable about your shared finances.
“If we’re working with a non-monied spouse who has not been participating in a lot of the financial decisions and relied on the [other] spouse to make all of them, all this is new information,” Klimentova says.
Post-divorce, a financial advisor can help you adjust to your new situation and create a budget for you.
How do advisors help with assets, liabilities and taxes?
A divorce financial advisor can help you understand how to split assets equitably.
“Not all assets are created equal,” Carbonaro says.
If you have a variety of investment and retirement accounts, the tax treatment of those accounts should be factored into how they’re divided. For example, because Roth IRAs are funded with post-tax dollars, you can withdraw from them tax-free once you’re in retirement. On the other hand, pre-tax retirement accounts like traditional IRAs and 401(k)s require that you pay taxes when you make withdrawals.
For example:
If a couple has a Roth IRA with $500,000 in it and a traditional 401(k) with $500,000 in it, it wouldn’t be equitable for one person to get the IRA and the other to get the 401(k).
Klimentova says taxes can become unexpectedly complicated for divorcing couples. She says dividing private investments is a common issue that arises with high-net-worth households. Additionally, when you get divorced, you’ll no longer benefit from the higher deductions you might be getting as a married couple filing taxes jointly.
“You get a $500,000 deduction from your capital gains when a primary residence is sold,” Klimentova says. “However, if you’re not selling it as a married couple, that goes away. Now, at best, you would get a $250,000 deduction.”
What credentials and experience should you look for?
Some financial advisors who specialize in divorce are certified divorce financial analysts (CDFAs). The Institute for Divorce Financial Analysts (IDFA) offers this designation, which requires professionals to pass an exam testing their knowledge of divorce law, the tax implications of divorce, common financial mistakes made in divorce settlements and other divorce-related topics.
A common certification for financial advisors is the certified financial planner (CFP) designation. CFPs are tested on a wide range of financial planning topics, and the exam does touch on planning for divorce. However, if you’re considering working with a professional who doesn’t have a divorce-specific credential, you should ask whether they have experience helping clients during divorce proceedings.
How to choose the right advisor for your needs
Klimentova says you can ask your attorney for recommendations if you’re struggling to find a divorce financial advisor. You can also search on the IDFA’s website for CDFAs in your area.
“If you already have a financial advisor that you work with, they probably could help to some degree,” Klimentova says. “But they might not be specifically trained in divorce-related issues: separate vs. marital property, spousal support, dividing assets, dividing retirement accounts.”
FAQ
How much does a divorce financial advisor cost?
The cost to hire a financial advisor varies and might depend on the services you use them for. The average hourly fee a financial advisor charges is $268, according to Envestnet. However, if you require ongoing assistance, they might charge a yearly fee, flat fee or percentage of the assets they manage for you.
Can a financial advisor replace a divorce attorney?
While financial advisors can help with the financial aspects of divorce, only licensed attorneys can give legal advice.
What tax implications should I prepare for?
If you’re going through a divorce, you should understand the taxes you’ll pay on any assets you retain. Your tax situation will also change if you’re going from filing jointly to filing as a single person, which could impact your tax bracket and certain deductions.
How do advisors help with alimony and child support?
A financial advisor can look at your assets, income and spending to help you understand how much money you or your children need to live and maintain your lifestyle.
What happens after working with a divorce financial advisor?
You can continue working with your financial advisor post-divorce if you still find their help valuable. If they don’t offer services you need beyond divorce assistance, you can look for another financial advisor who does.
