September 2024
Here are some key takeaways from their conversation:
- As a CDFA herself, Jenn explains that CDFAs can help clients understand the complex nuances of financial impact before, during and after a divorce.
- Before the divorce process actually begins, it is best to get organized, locate important documents and assess one’s financial situation.
- Jenn emphasizes the importance of cash flow planning and modeling different settlement options to ensure long-term financial stability.
- It is helpful to have an objective party involved like a CDFA, as they can mitigate the risk of making emotional decisions which can potentially lead to mistakes.
- After the divorce, Jenn suggests reviewing and updating estate documents, insurance policies and financial plans.
- Alimony is no longer tax-deductible or considered taxable income for divorces finalized after 2019, except in California where certain exceptions apply.
- A frequent mistake people make is wanting to keep the family home purely because of sentimental reasons, when it may not be financially sustainable.
Watch previous episodes here:
Ep. 101 Market Insights & The Election: What to Expect at Our Investor Symposium
Ep. 100 Grant Williams on Investing vs. Speculating in Uncertain Times
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Wealth Advisor Jenn Caruso. Jenn, thank you for joining us.
Thank you for having me.
So we were having a conversation. You're a wealth advisor here at Morton and you work with a lot of different clients. Our traditional Morton Wealth clients, some of our younger modern clients that are, you know, building their net worth. But you also have a specialty and background, with your degree in certified divorce financial analyst.
CDFA for for short. And, this topic isn't always fun to talk about, but there's some real pitfalls that people can run into around planning for divorce, preparing for a divorce, or how to properly set them themselves up for success post divorce. And I thought we should do an episode, you know, around this topic to not only talk about the myths and the misconceptions or misunderstandings that people make, but also things that they can do to best prepare themselves.
And a lot of different things that need to be addressed during the divorce process.
Definitely. So let's talk first and foremost about that CDFA, kind of what it means to you and your perspective of having that level of expertise.
Okay. Great question. And I think a lot of people don't really understand the role of the CDFA. I think most people are familiar with what a financial planner is, and they understand the benefits of financial planning, whether it be college planning or retirement planning, or can I buy the next house? Can I move out of state, whatever the goal is?
Well, basically a CDFA is a financial planner, but what we're also looking at is how will the divorce impact my future? And so we'll look at, you know, income and post divorce tax planning and I will even get involved with recommending how to divide the assets or debts depending on the situation. And so there are a lot of moving pieces and every divorce is very different.
Yeah. So yeah, that's what I do. I do not make legal advice. I specifically look at the financial decisions.
So the family law attorney is going to help with sort of the legal advice component. And then your knowledge and expertise is going to help somebody better understand sort of what's there, what's going to be the impact to them, how they can best plan long term during this transition. As you mentioned, not all divorces are amicable and some can be very complex, complicated or have a lot of conflict.
Let's talk a little bit about things that people should be aware of before they are getting a divorce or going through this process. Like what does somebody need to do to help set them up for success during this emotional time?
Yeah. Well, you know, when we look at before the divorce now for the person who, is not blindsided and has some sort of preparation, you know, there are certain logistics that can be done. They can start getting organized, they can start their spreadsheet, they can start listing out all of the accounts and account numbers and who owns what.
Those are all going to be needed when they have to fill out court documents. Right? So get your ducks in a row, put everything in one place where you can access them. Start printing out statements. Those are just some of the first steps. They also need to look at bank accounts. And do they need to start opening up their own bank account.
Do they need to look at their credit? Do they have sufficient credit on their own? So those are things that they need to start looking at and considering. And you know, once all of those logistics are, you know, started- then you can think about, okay, well how am I going to get a divorce?
There are several methods and ways to start that process. And so you know, maybe you were a do it yourselfer. It would have to be a very simple, straightforward, I don't recommend most people do it themselves, but, the courts do have a self-help center and they could do it themselves. If, however, things a little bit more complex but still fairly amicable, mediation is usually the, most cost-effective option and the simplest, and then we go into collaboration or traditional divorces.
Collaboration is where both parties have their own attorney. I would usually recommend this if it's a complex divorce, maybe a business owner. There's a business involved. And then, of course, if we get into a high-conflict divorce, where there's just a lot of fighting and no one is agreeing on much, then you need to go the traditional route.
Which can be challenging. And so let's say somebody is blindsided by this decision, and they weren't the one that was sort of in charge of the family finances. Do you recommend going back and trying to get access to last year's and maybe the year before his tax return? So that way you can better understand where maybe his accounts and income is coming from, like, well, what what would you say to help the person that's maybe caught off guard by this decision?
Here in California? The courts will look back two years on tax docs. So if they are able to, hopefully they file joint returns, if they don't know where the returns are, hopefully a CPA prepared those returns and they could go directly to the CPA to obtain those, in the perfect world, right? They know where the returns are and they have full transparency and access to them.
Because if you don't, then you're likely to go down this process of like, okay, how am I confident that I know where things are, what the values are? And then if it's a high conflict divorce, you're probably stuck leveraging you know, somebody to get like a forensic accountant to go do some digging. Is that right?
Yeah. You know, I'm always, just a little surprised when people don't know where things are. It still happens today. And it's more common than you think. And, you know, if you suspect that your spouse is not being transparent, then I would recommend getting a CPA, a forensic CPA involved. That really is the only way to get all records.
And so let's say now, okay, you've gone through sort of the before divorce phase. Now you're going through the divorce. This is where the component of financial planning can really come into effect. Let's talk about some of the key components that go into things that people should be aware of and start doing during this process.
Yeah. So, you know, what we want to start thinking about is what is our life going to look like after divorce? What is our income going to look like? What is our spending needs going to be. They're going to change, right. You know, often people think, oh, I'm going to have a very similar lifestyle post divorce because I'm going to receive a support payment of some sort, but that's not always the case.
So, we need to start looking at some cash flow and do some cash flow planning and, figure out, you know, what? What is life going to look like later? And sometimes we need a model, a settlement option or two. Perhaps you're in the position where, you can accept a monthly payment as a support payment or perhaps a lump sum is an option to you.
So then we need to model, you know, what is the better decision? If you're the one who has to pay out, whether it be stock options or part of the business or income from the business, you know, those are all things that we need to look at and model and figure out what is the best scenario.
Yeah, I mean, the importance of financial planning, being able to take a look at what assets might be coming to you, where the income would be coming from, a better understanding about what your lifestyle needs are going to cost going forward will help you analyze whether or not you should keep a piece of real estate versus a retirement account, versus a trust account, and so on.
It can get very complicated if you don't have knowledge or expertise in terms of the tax benefits around some of these things.
Yeah. And you know, usually, when you're making financial decisions while you're going through the divorce process, it's very emotional. And oftentimes you make a wrong decision because you made an emotional decision. And so we try to take the emotion out of it as best as we can and just look at the numbers and, and try to make the best decision we can by numbers.
The reason why I think that that's so important is it seems somewhat basic level thinking, but oftentimes my guess is that people are going through this. They have their family law attorney or they're trying to be amicable and do it with their spouse, but they don't have someone on their side that really understands the financial planning and the investment component side of this. Family law attorneys may know this, their side of the business very, very well, but they are not experts when it comes to, certain types of accounts, the taxes, the financial planning, the income needs and the investment structure.
Taxes in particular is very important. You know, especially if one person is a business owner, you know, you can run a lot through your business and your tax bracket benefits from it. So for the person who is not the business owner post-divorce, they're going to be a little surprised at where they fall in the marginal brackets.
Right. It could be considerably higher than they realized. So we need to look at that and factor that in. If especially if there's considerable amount of pretax assets, retirement defined benefit plans, whatever the employer plan is, you know, we need to account for the new tax rate that that person will be in post-divorce.
That's helpful. So as you mentioned, post divorce, let's say they've now gone through this process and they've gone through the divorce. Now the divorce is finalized. What are some tips and recommendations that you have for people kind of post-divorce?
You know, this is where you get to... this is the fun part. Finally, this is a finally this is where you get to breathe and, just reevaluate where you are. And so we want to look at trust documents, estate documents, what changes need to be made. We also want to look at any kind of life insurance or long term care needs.
You know, if there are minor children in the picture, you know, do we need to make some adjustments there? Right. Most, most of the time we do. So that's definitely something that we need to consider. And then we need to look at, you know, financial planning all over again. Right. All right. What are some of your new goals?
And oftentimes that's hard for the first year to, really kind of decide where do I want to be next year or two years from now or five years from now? But it's a process. And, again, that's where the fun starts.
You mentioned in terms of California being a community property state during our other conversations, a long term relationship here in California is, what, a ten year relationship. And so with that comes certain requirements in terms of division of assets, income or alimony or support needs being paid. Talk about that a little bit.
Yeah, yeah. So, ten years of marriage, even ten years of cohabitating. That's considered a long term divorce. And most everything is considered community property. Gifts and inheritances are usually excluded. But everything else is up for grabs.
And everything that you accumulated together during that time, everything you accumulated during the the time together, the marriage together.
And then in the past, there was some tax changes as it relates to alimony. What happened there?
Yeah. So effective 2019. If you were getting a divorce after that, you can no longer, write off alimony. You can no longer claim or you no longer have to claim alimony as income. Now, that's alimony only. So it is important to make sure that you segregate child support from alimony because child support is not a taxable income.
So, be very careful not to throw everything in one bucket because you don't want to overpay in taxes.
And that's a good point. I mean, I guess prior to 2019, if you went through a divorce, if you're the one paying out alimony, you could deduct that from your income. So it felt like you were getting at least some tax benefit by paying that out. But now that that has changed and someone can no longer deducted from their income, the person receiving it doesn't have to claim it as income as well.
And this is on the federal side.
On the federal side, how about California?
California does allow it up to a certain count.
Got it. So like most things, California operates different than, than than we do federally. You've noticed that there are some misunderstandings or mistakes that are made, during this process. A lot of it has to do with emotions and emotions tied towards that family home and, foregoing assets or income in order to retain, that asset or that family home.
What are some other sort of misunderstandings or mistakes that you've seen people make?
Well, the home is the most common mistake. You know, oftentimes, especially if there are children in the home or even older children, people want to keep the house. So that is usually, a topic of conversation every single time I meet with someone. It's not about whether or not you want to keep the home. It's a matter of should you or can you comfortably keep the home?
You know, even people with great wealth, they have homes that are quite expensive. Yeah. Even if the home is paid in full. Right. Can you continue to maintain that home comfortably on your new income? Because your income is going to be cut in half, most likely, at least. So, so yeah. So we do need to look at, you know, some other options there.
You know, one thing that I suggested to people is to consider a leaseback. Go ahead and sell it. Get your exclusion now. Lease it, lease it for another year or two. You know, yes, it's more expensive in the short term, but that gives you a little time to transition. But you know that that would be a consideration.
Also, you know, it depends on whether or not the home is paid in full and if there's enough post-tax assets to offset that. But, you know, can you restructure the ownership and continue to own it jointly for investment purposes? You know, that's something to consider. But, you really have to do the numbers to really decide is it feasible.
And I'm sure in an environment like this where people that had owned a home for a decent period of time that maybe have a really low interest rate on their home, if they were to have to sell that and go buy a new home or rent a new place today, just basically where interest rates are today compared to where they were just a few years ago.
That ties into the emotional component as well, because the affordability could be quite different. You might be going from a 4 or 5000 square foot house to a 2000 square foot house, just because of how much more expensive not only the value of the homes are today, but the cost of borrowing.
And it is a very emotional trigger for many people that they have to downsize or rightsize or whatever you'd like to call it. You know, there are a lot of things during the divorce process that seem unfair, but, it's part of the process.
Jenn, thank you so much for talking about this today. I know it's not sometimes the most fun topic to talk about, but it's one of those life events that us as financial advisors can be there for our clients. When you think of loss, when you think of divorce, when you think of job transition, that's the role that we're able to step in and be that partner with our clients to help guide them through these waters, to understand the impact that it's going to make to them long term, and how we can best set them up for success.
This is life and this is life planning.
In California it's over 53% of all marriages ending in divorce. It was 50, you know, and unfortunately second marriages have a 60% ratio of divorce. So, it is something that we have to address. It is something that touches our families one way or another.
Disclaimer: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
