Rocky Mountain Mediation Bulletin Board

Divorce Planning and Finances: A Fertile Ground for Mistakes
David J. Drucker | 04-14-04
4/15/2004

http://advisor.morningstar.com/advisor/doc/print_article/1,8911,3587,00.html 4/15/2004

"What I see [in working with divorce attorneys] is a limited knowledge of financial matters in general.
Some have been ill-prepared and couldn't think/respond to numbers on the fly in court."

--Richard Hall, CDFA, B&H Wealth Management, Albuquerque, N.M.

As a client seeking a divorce, you ask around, get the names of two or three divorce attorneys that
friends and acquaintances have used, and interview each one. They all seem good. They know the law,
they know your rights, and you pick the one who you think will do the best job of championing your
cause. Perhaps he or she is the one who promises to get you the biggest settlement.

What you don't know about any of these attorneys is their financial acumen, or lack thereof. Indeed,
complaints about divorce attorneys' lack of financial savvy by advisors who have earned a divorceplanning credential are plentiful. Let's examine some of these complaints for the good of both
professions. (Who knows, you may be guilty of some of these errors yourself.)

Says Faye Doria of Financial Guidance Associates, Inc. in Dover, N.H., "One thing I see is that attorneys
do not understand the difference between defined benefit and defined contributions pension plans. I
often see people going through divorce who've been advised to split the amount on their defined benefit
statement shown as 'employee contributions.' What these people don't understand is that the employee
contributions are just the tip of the iceberg."

Doria illustrates: "In New Hampshire, the [defined benefit payout] formula for public school teachers
and state government employees is 1/60 times each year of service times the five-year final average
salary. That benefit for a 30-year employee may be $25,000 a year with a COLA, starting at age 60. Yet
their total contributions at 5% of wages plus 8% interest may only be $100,000."

By allocating to the non-pension owner half of the contributions and allowing the pension owner to
collect his eventual benefits, the non-pension owner spouse loses big time.

It would seem that pension types and the financial ramifications thereof should be a fundamental part
of the divorce attorney's education, but some advisors' experiences make one wonder.

Morris Armstrong, CDP, an advisor with Armstrong Financial Strategies in New Milford, Conn., talks
about his own divorce (which prompted him to become a Certified Divorce Planner): "While trying to
negotiate with my ex, it was suggested that I buy her out of the house dollar-for-dollar using IRA
money. I didn't go through with that, but it shows how some attorneys fail to take taxes into account."

And do they! This is a common complaint by advisors and smarter-than-average clients. John
McFarland of Life Plans of Richmond in Midlothian, Va., has seen many cases like Armstrong's and puts
an even finer point to it: "Many attorneys work to have their clients awarded substantial portions of
their spouses' 401(k) assets. It goes like this: 1) attorney attacks 401(k) assets and client is awarded
half, 2) 401(k)-owning spouse withdraws the awarded sum and pays to client, 3) IRS demands full
payment of taxes from spouse plus, if the spouse is under 59 ½, a 10% penalty, 4) spouse has no
other assets and taps the 401(k) again to pay the taxes [on the first withdrawal] and, of course, now
must pay taxes and penalty on [the second withdrawal] as well."

Of course, most financial advisors--even those not credentialed in divorce planning--know that these
problems could have been avoided had the attorney filed for a QDRO (Qualified Domestic Relations
Order) and then rolled the award directly to his client's personal IRA with no tax consequences. Like
McFarland, Paul White of Independent Financial Planning, Inc. in Manassas, Va., also had a client whose
divorce attorney was unfamiliar with QDROs.

Says White, "He advised my client to take half the money from the spouse's retirement plan in one
year, and half in the next year, to reduce taxes--rather than roll it over to her own retirement plan
under a QDRO."

Pensions are not the only place where attorneys drop the ball. "I've also seen attorneys fail to require
life insurance on a spouse who would be paying alimony and child support," says White.

Adds Hall, "In determining adequate support payments, attorneys tend to look only at current income
and expense levels and not into the future to see what the parties will need then. They also aren't good
at looking at income and expense statements and seeing what may be hidden or not fully disclosed."

According to Linda Patchett, CFP of Woodward Financial Advisors in Chapel Hill, N.C., "The problem is that an attorney's objective is different than a financial planner's. The attorney wants to put together an
agreement that is valid, conforms to state law, and is acceptable to both parties. They don't generally
see the financial package as an integrated whole. Rather, they work out a property division, and then
work out an alimony award without adequate information about one spouse's ability to pay or the other
spouse's ability to live on the proposed support amount. Also, they don't see the client after the
divorce, so they never see the financial effects of their work, which are often devastating to the lowerincome spouse."

These real-life scenarios show the urgency of having someone involved in divorce planning who knows
more than just the law.
Says Patchett, "A financial advisor, working on behalf of a divorcing client, is looking at issues like
whether there's adequate liquidity, whether both liquid and illiquid assets have been fairly allocated
between the parties, whether future cash flow will be adequate, and the likelihood the clients will come
out of negotiations with the best possible financial solution."

Ditto, says McFarland: "Whatever the source, having a Certified Divorce Financial Analyst assisting with
the financial package can be a godsend to both spouses."

David J. Drucker, MBA, CFP, a fee-only financial advisor since 1981, is editor of the Virtual Office News monthly newsletter and a principal in Practice Merger Consultants, Ltd.
You can reach him at dd@daviddrucker.com.
The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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