Going through a divorce? Why you should work with a certified divorce financial analyst (CDFA)
Going through a divorce is stressful to say the least. Beyond the emotional trauma of it all, there are a myriad of practical (big and small) decisions to make: new living arrangements, possible job changes, division of property, which of course includes financial assets. With all the upheaval, it can be easy to neglect the financial planning aspect of a divorce. Don’t. How assets are divided is rarely as simple and straightforward as it might seem. And as much as you might want to put a divorce behind you, if you don’t take the time to carefully weigh the pros and cons of how assets are divided, the ramifications can haunt you for the rest of your life. Thankfully, working with a certified divorce financial analyst (CDFA) can help immeasurably.
We recently connected with CAISSA Founder Kelly Pedersen, who is credentialed as a CDFA, to learn more about what exactly CDFAs do and why their guidance can prove to be so critical in a divorce.
Kelly, what exactly is a CDFA?
A certified divorce financial analyst is typically a financial advisor who has been specially trained to navigate the unique financial challenges that are inherent in a divorce, particularly when emotions are running high. That includes in–depth analysis of balance sheets, analyzing valuations of assets so they are split fairly (which is NOT the same as equally), and equalizing assets in instances when those assets can’t be sold or cleanly split, such as a family home or business. The key is to engage with a CDFA early in the divorce process. Doing so can make a world of difference.
What special training or credentialing does a CDFA go through?
Good question. To receive the CDFA designation, an advisor must go through a robust training program and pass an exam administered by the Institute for Divorce Financial Analysts (IDFA®). It’s a rigorous exam that requires ongoing recertification to maintain the CDFA credential, which has been around for about 30 years, but that is still relatively rare among advisors.
Tell us more about why it is so helpful for those going through a divorce to work with a CDFA
It’s extremely helpful to work with a CDFA, particularly prior to settling a divorce. A CDFA will bring a perspective that many other advisors may not have. Specifically, the deeply understood knowledge that not all marital assets are created equally. That is imperative to understand in a divorce situation. For example, cash in the amount of $100,000 is not the equivalent of $100,000 in an RIA because of the tax obligation that comes with an IRA. There are countless examples of these sort of inequities in assets in divorce proceedings. To put it bluntly, in a divorce, cash is king.
Of course, there are some assets that can’t be literally split, such as a home if one person decides to stay in the home. If you have $200,000 in equity your home, and your soon-to-be ex-spouse agrees give up ownership of the home, that spouse will want to be fairly compensated. That can get tricky because, again, not all assets are equal, even if they appear to be at face value. Clearly, it gets complicated, and a CDFA can help navigate those sorts of nuances.
What other services or planning does a CDFA provide?
A CDFA can also help with cash flow and tax planning, such as how spousal support might affect one’s tax bracket, which can also result in having to pay quarterly estimated taxes.
It is worth noting that in 2019 the tax law changed so that any person receiving spousal support no longer is required to pay taxes on the support received, and the person required to pay spousal support can no longer take a tax deduction on the support provided.
The overarching goal of a CDFA is to help someone going through a divorce fully understand his or her financial picture early on, so that person can enter divorce negotiations confident in his or her financial well-being and without undue stress or angst about what the future may hold. A big part of what a CDFA does is helping to manage the emotions that are inherent during a divorce in order to help clients achieve peace of mind about their situation.
What do people “leave on the table” if they don’t work with a CDFA when going through a divorce?
For those going through a divorce, the biggest potential pitfall is not knowing what they don’t know, which could result in receiving assets that may have the same dollar amount attached to them, but the actual worth is far less. For example, real estate might have a certain valuation on paper, but the liquid value can be very different. A CDFA can help point out those blind spots so that you emerge from a divorce in the best financial position possible.