Financial Gotchas in Midlife Divorce

Breaking up a marriage is always difficult, and divorce at midlife brings a whole set of financial issues on top of the emotional ones.

If you're contemplating divorce, of course, you'll speak to an attorney, but who will help with financial planning for you and your family? Certified divorce financial analysts, or CDFAs, come from a financial planning, accounting or legal background and go through an intensive training program to become skilled in analyzing and providing expertise related to the financial issues of divorce.

We spoke with Marianna Goldenberg, a CDFA with Penn Wealth Planning in New Hope, Penn, to find out what divorcing couples sometimes overlook.

When should someone work with a divorce financial analyst? Is there a certain level of assets or income?

When people are going through the divorce, they have lots of questions,  most of which boil down to this:  "Am I going to be OK financially?"

Theoretically, all individuals going through the divorce process could benefit from the financial counseling and advice.  However, if the situation is simple – uncontested divorce, no children or assets —  it may not warrant the level of analysis that the CDFA provides.  Most CDFA clients come from a marriage where joint assets are greater than $100,000, with some couples having no debt while others having substantial debt. 

How does the CDFA cooperate with an attorney? Should the CDFA be brought in after the attorney or instead of one?

In my opinion, the CDFA should be brought in together with the attorney, because they will work hand-in-hand to negotiate the best settlement. The attorney will concentrate on the legal aspects, and the CDFA will focus on the financial aspects of the divorce process. 

The CDFA will be responsible for:

• Identifying and collecting the financial data from the marriage
• Determining if the client can afford the matrimonial home, and, if not, what might be an affordable alternative
• Identifying the short-term and long-term effects of dividing property
• Integrating tax issues
• Analyzing pension and retirement plan issues
• Evaluating the client's insurance needs
• Establishing assumptions for projecting inflation and rates of return
• Bringing an innovative and creative approach to settling cases

You advise not accepting an equal split of property if it's not  fair and equitable. Isn't a major source of dispute in a marriage what is fair?

It absolutely is the major source of dispute. And it's not a simple question to answer.  All assets and liabilities, as well as non-financial needs, have to be considered during the division process. Do not disregard the long-term impact of inflation. Its effects on the cost of a child's college education 15 years in the future or retirement 20 years hence can be dramatic. Here are a few other things to consider:

• What was owned by each party before the marriage versus was acquired during the marriage
• Tax implications for each spouse now and in the future
• The type of assets: $100,000 in retirement assets that will grow tax-deferred over time is not the same as $100,000 equity in the house that will be incur a tax liability if it's sold. 

You say that another common mistake is keeping the house when you can't afford it. In this housing market, the situation is more complicated, isn't it? How do you know?

The tough housing market is hitting divorcing couples in several ways. If the home's value has fallen below the amount owed on the mortgage, neither spouse wants to be saddled with that liability. If one wants to keep the home, it's difficult to refinance the mortgage so the departing spouse can be cut loose from the debt. And evaporating home equity can take with it the means to pay lawyers for the divorce itself.

A lot of times both spouses cannot agree on what to do. It can be a huge financial mess.  Some spouses simply dump the problem on their soon-to-be-ex. They just leave — they move out and they're gone. The remaining spouse may have few options but to move out and try to rent the home, assuming that brings in enough to keep up with the payments. Or the home could be lost to foreclosure.

Women often have sentimental reasons for wanting to keep the house. Unfortunately they don't review their budget, including mortgage, taxes, up-keep costs and home owners' insurance, before they make a decision. Another common mistake is trading retirement assets, which will go up in value over time, for equity in the house that might go down and is illiquid.  They might be better off downsizing to keep their expenses under control.

One of the couple may not take appropriate measures to guarantee alimony and/or child support payments. What are some of these measures?

Premature death or disability of your ex-spouse can result in loss of maintenance, child support, college tuition or property settlement. They should ensure that the paying spouse has a life insurance policy for the term of the alimony, child support or property settlement payments, as well as either a personal or group disability policy. The spouse who depends on the alimony/child support payments should receive a duplicate statement to ensure that policy wasn't cancelled and no premium payments are missed.

Also, after heavily contested divorces, many people forget to change the beneficiaries on their life insurance policies, IRA's and wills. The result is that the ex-spouse ends up inheriting the estate that they really wanted to leave to their children, new partner or favorite charity.

What are other overlooked factors to consider when determining long-term financial needs after a midlife divorce?

Spouses have been planning their retirement together and worked towards the common goal. Now they have to revise their plans individually and it's not that easy. For example, estate plans that were designed to limit taxes and transfer funds to the intended beneficiaries will no longer apply. Also, if one spouse might be eligible for retiree medical insurance, that will no longer carry over to the other, post-divorce.

Find out more about the issues of gray divorce:

Should I Leave? Here's how to figure out whether you're just going through a bad patch or you'd be better off apart.

Thinking Twice about Divorce: Don't let anger or disappointment blind you to what's still good about your marriage.

What Will Midlife Divorce Cost Me? How would divorce affect your retirement plans? What about the kids' college?