Effective Use of a Certified Divorce Planner for Financial Analysis and Planning in Divorce Cases

Mary Ann Osborne, MBA, CDP
Osborne Consulting Services, LLC
San Antonio, Texas
210-824-9747

Ernest E. Karam, Attorney at Law
1919 San Pedro at Woodlawn
San Antonio, Texas
210-735-9911

Introduction

Certified Divorce Planners/Certified Divorce Specialists are financial professionals who can help the client and attorney through the divorce process. They are available to study the financial facts, help develop a strategy, articulate realistic expectations, present exhibits to the attorney, client and spouse and, if needed, attend and testify at mediation or trial.

Background

In 1985 Carol Ann Wilson formed Quantum Financial Inc. in Boulder, Colorado. She helped clients with financial aspects of their divorce by reviewing appropriate documents and inputting data into a software program she developed. She created various scenarios to divide assets while considering income and expenses of each spouse. Projections of the financial future for each were then calculated using actual numbers and were shown in both spreadsheet and graph form.

By 1993, Ms. Wilson had become known as an expert in the financial area of divorce and created the Institute of Certified Divorce Planners (ICDP). She developed an independent study course for individuals to earn the Certified Divorce Planner designation. The 4-module course covers Fundamentals of Divorce, Financial Issues of Divorce, Tax Issues of Divorce and instruction in the use of DivPlan Software. Only those who hold a professional designation such as a Certified Financial Planner, Certified Public Accountant, JD, MBA, etc. are admitted to the program. Practitioners are required to complete a minimum of 10 hours of continuing education every 2 years.

In 2002, Ms. Wilson resigned from the ICDP and formed the College of Divorce Specialists (CDS). The end result is that 2 certifications exist, Certified Divorce Planner (CDP) and Certified Divorce Specialist CDS). The training and capabilities of each are comparable and the titles can be used interchangeably. For simplicity, the term CDP will be used throughout this paper.

Texas currently has 29 CDPs. In June 2003, the Texas Association of Divorce Professionals (TADP) was formed by a group of CDPs. The mission is to provide a means of communication through monthly conference calls and to stay abreast of relevant Texas family law educational and legislative issues. To be a member of the TADP, one must be in good standing with the ICDP or CDS and participate in a Collaborative Law training program.

While this specialty is relatively new, its importance is evidenced by Grier Raggio’s presentation at the Advanced Family Law Seminar in August 2003 entitled “Divorce Financial Professionals – CDPs, CDSs and Others – Who Are They and How Can They Help You”.

Business Models

There are 3 distinct business models for CDPs: 1) solely providing divorce financial analysis without product sales 2) divorce analysis with product sales and 3) paraprofessional hired directly by a family law group. While there are pros and cons to each model, the family law practitioner should decide which would provide optimal service for his/her practice and the client.

Who should hire the CDP, the client or the attorney? It can be done either way, however, if the attorney enters a contractual agreement, all information garnered is subject to client-attorney privilege, which may be important in some cases. Regardless of who hires the CDP, the attorney is always the primary strategist.

When should the CDP be hired? Value can be gained before, during and after the divorce, depending on the unique circumstances of each case. Some people contemplating divorce are unsure of its financial consequences. A CDP can complete a projection prior to filing and anticipate how financial circumstances might change. Assistance during the divorce will be discussed in greater detail in the following paragraphs. Post-divorce, many clients are overwhelmed with the tasks of changing deeds, dividing investment accounts, QDROs, etc. These very important matters must not be neglected and a CDP can guide the client through this process.

How Can a CDP Assist the Family Law Practitioner and Client

Certified Divorce Planners are trained financial professionals who can help with evaluating most financial issues related to divorce.

• Income and Expenses: Earnings statements for each spouse can be used to calculate after-tax income. A CDP will be observant of deductions, discretionary and nondiscretionary. Deductions for retirement plans can be eliminated during the divorce to increase available cash. Detailed, accurate estimates of expenses can be complied by inputting data into Quicken which will create multiple types of helpful reports regarding income and expenses. These documents can be formatted for use as exhibits as needed. In addition, the client can review the expenses and look for places to reduce spending and create a realistic budget. Appendix A and B.
• Inventory: The CDP has an understanding of investment and banking statements, insurance policies and other complex financial issues and can prepare the inventory. This preparation also requires knowledge of what constitutes separate and community property as well as reimbursement and equitable interest issues. The inventory serves as a guidepost for some attorneys throughout the entire divorce process and should be done as accurately as possible. The trained eye of a CDP will recognize items that should be examined more thoroughly.
• Property: Many couples have both community and separate property. Holdings claimed to be separate property may need to be examined to clarify the characterization. Texas Family Law Code, Section 3.002 provides multiple ways to trace a property’s origin. Some CDPs will be capable of providing tracing services.
• Retirement Plans: Most retirement plans fall into the categories of Defined Contribution or Defined Benefit. While Defined Contribution plans have a concrete monetary value and are easily divided, Defined Benefit plans sometimes require present value calculations. Also, some employees have or will participate in their Defined Benefit plan a different number of years than the duration of the marriage. A CDP can use a coverture fraction to calculate the marital portion of the benefits in this situation. Appendix C.
  
  Since the retirement plan can be the single largest asset a couple owns, it is extremely important that nothing is overlooked. It is advisable to obtain a copy of the plan and/or have a CDP talk to the plan administrator to discuss distribution to an alternate payee incident to divorce. This process typically occurs by a Qualified Domestic Relation Order (QDRO), but plans vary from business to business and a QDRO cannot demand something that is not outlined in the plan. Thus it is prudent to ask relevant questions. Are there provisions for a spouse to receive benefits before the other spouse retires? Will the administrator distribute a lump sum? Can the alternate payee remain in the plan with a separate account? Signing of the decree and QDRO are only the beginning of securing the assets. Some clients can benefit greatly by having a CDP help them through this process. If not handled properly, this can unnecessarily become a taxable event.
  
  In the event additional cash is needed following the divorce, the Internal Revenue Code Section (72)(t)(2)(c) allows early withdrawal from a retirement plan without penalty incident to divorce. Taxes are not eliminated, but this can be an effective way to generate funds for attorney fees and other immediate post-divorce expenses.
  
  Individual Retirement Accounts do not require a QDRO to name an alternate payee. They can be rolled over from one spouse to another but this process requires proper procedure so the transfer does not become a taxable event.
  
  Some retirement benefits end upon the death of the employee. Therefore, it is important that the decree include careful wording regarding survivor benefits. Otherwise, an ex-spouse might be left without anticipated benefits in the event of the former spouse’s death.
• House: The options are usually: 1) sell and divide the proceeds 2) offset the home with item(s) of similar value or 3) continued joint ownership. After examining the financial condition of the couple, a CDP can help determine what is most beneficial.
• Alimony: According to Section 8 of the Texas Family Law Code, little provision is made for alimony in marriage dissolution. However, in some cases, it can benefit both parties when payments are structured as tax-deductible alimony rather than child support. The decree must be carefully worded so the alimony does not decrease within 6 months on either side of a child’s emancipation thus creating tax recapture.
• Social Security: When retirement accounts are divided by divorcing couples, social security benefits become increasingly important. The provisions regarding Social Security Benefits can be discussed with a CDP to develop a strategy for retirement planning. Appendix D.
• Health Insurance: In 1986 the Consolidated Omnibus Budget Reconciliation Act (COBRA) was passed. It provides that employers must cover former spouses under their health plan for 36 months if the spouse chooses. Many spouses do not realize that the premiums are not necessarily at the lower group rate and could obtain a more reasonable plan independently. Also, potential health problems due to age, heredity, etc. may dictate that an independent policy be purchased at the time of the divorce. This will eliminate concerns about becoming uninsured or uninsurable at the end of 36 months. A CDP should discuss the importance of this issue with the attorney and client.
• Life Insurance: Life insurance can be a crucial tool for protecting settlement agreements in the event of the death of the payer spouse. In some cases a CDP will discuss with the client and attorney who should own the policy(s) to prevent changes in beneficiary or lapses due to nonpayment of premiums.
• Taxes: According to Section 1041 of the Internal Revenue Code, transfer of property other than cash incident to divorce is nontaxable and the property retains its cost basis. However, there are many areas in the division of assets which can trigger taxable events. A CDP can help plan the division assets in a cost effective manner.
• Projections: As part of the CDP training, candidates become proficient in the use of, DivPlan, software developed by Ms. Wilson. After entering all data, the program generates a 5-page report. The first page consists of assets such as investments, real estate and retirement plans. Percentages allotted to each spouse can be altered in proposed scenarios. The second page states income and expenses for each party. The numbers from the first two pages transfer to a spreadsheet for each showing income, expenses, cash flow and net worth projected over 20 years. The final page plots the numbers from the spreadsheet into a graph that visually indicates the financial condition of each spouse from the date of divorce and over the following 20 years.

Case Study 1

Scenario: Husband and Wife have been married 10 years; they are each about 40 years old. This was his second marriage, her first. He has custody of 3 children from a previous marriage. He recently retired from the military and is receiving benefits, but also employed by a civilian company. She is currently in the military and eligible for retirement in 3 years.

Issue: Wife had separate property prior to marriage which was commingled.

Attorney: The attorney representing the husband wants to achieve an equitable settlement providing the wife with a reasonable portion of her “separate property” while also providing his client a share for contributions made during the marriage. Due to the convoluted commingling of assets, the attorney called in a CDP to evaluate the situation.

CDP: The CDP provided the following services:

• Reviewed W-2 of husband to determine after-tax income; calculate after-tax income for wife via military pay scale tables. Discussed with client expenses for he and his children. He had a realistic budget and further Quicken reports were not necessary.
• Reviewed wife’s inventory to determine what assets she considered to be her separate property. IRA and after-tax investments were hopelessly commingled. The house she owned at the time of the marriage was sold and proceeds used as a down payment on the current home. That amount was traceable.
• Reviewed military retirement plans and calculated present values and marital portions.
• Ran DivPlan software to generate multiple ways to divide assets equitably.
• Compiled a list of issues which could create dissention at the mediation. Allowed time for attorney to prepare for such issues. Appendix E.
• Attended mediation and ran DivPlan as new proposals were suggested producing results instantly to illustrate consequences of changes.

Case Study 2

Scenario: Husband and wife are both in their early 40s and have been married 15 years. He is a professional with a high salary; she has always been a homemaker. They have 1 teenage daughter. The wife wants to be home for the daughter until high school graduation. During that time, the wife will attend graduate school to prepare for a career.

Issues: Wife has little experience managing financial affairs and needs assistance in developing a realistic budget. Wife will need contractual alimony if she is to stay at home with the child and attend graduate school.

Attorney: The attorney representing the wife is concerned about her lack of understanding regarding her finances. He calls in a CDP to assist the client and evaluate how the assets might be divided so that the husband will provide financial support while the wife prepares to enter the workforce. The husband would like to provide some help but requested concrete numbers regarding actual needs.

CDP: The CDP provided the following services:

• Went to the client’s home to discuss her spending. CDP gathered 1 year of checking and credit card statements and entered the data into Quicken. Budget reports were generated to provide husband with accurate information regarding spending in the past and how it might be adjusted in the future.
• Met with husband to review Quicken reports and discuss what the needs of his wife and daughter would be over the next few years. Also discussed the advantages of providing contractual alimony as a tax-deductible means of support.
• Husband had multiple investment accounts. CDP reviewed statements to verify that withdrawals had not been made in preparation for divorce. Also, a review of specific investments was preformed to evaluate how the accounts might be divided.
• Discussed use of life insurance to secure settlement. Also discussed health insurance to be provided for child by father.
• Provided information to couple about 529 Plans so they could incorporate into the decree how the daughter’s college education would be funded.
• Reviewed husband’s retirement plan. It was a Defined Contribution and easily divided.
• Ran multiple scenarios on DivPlan to divide assets and project financial condition of each spouse.
• Post-divorce help for client to learn how to manage her finances.

Case Study 3

Scenario: Husband and wife have been married 28 years, both are in their early 50s. Unknown to wife, husband is having an affair. Husband moves out. Wife discovers she has sexually transmitted disease and files for divorce. Husband is professional and makes a good salary, wife has been homemaker most of the marriage.

Issues: Wife has little work experience and is concerned about how she will support herself. She has some separate property. A significant sum was used to establish a business venture in her husband’s name. Her relatives made large gifts to the family and she feels an unequal division of assets is justified.

Attorney: The attorney representing the wife is concerned about attaining an equitable settlement for his client considering the contributions from her family. He also would like to recover the sum from her separate property used for her husband’s business venture. The attorney contacted a CDP to help accomplish time-consuming tasks in a cost effective manner.

CDP: The following services were provided by the CDP:

• Met with wife and determined what assets were owned by couple. Prepared financial affidavit and inventory for attorney.
• Reviewed retirement plans. Assets were held at three companies and the CDP talked with the administrators of each plan to determine what needed to be done to expedite the preparation and implementation of the QDROs.
• Traced assets used for husband’s business and clearly established funds as wife’s separate property.
• Traced gifts from wife’s family throughout the marriage.
• Discussed need to incorporate into the decree permanent medical responsibility of the husband if wife should have problems related to the sexually transmitted disease she contracted from him.
• Established that due to husband’s lack of cooperation, wife should own life insurance policies on his life to avoid change of beneficiary and nonpayment of premiums.
• Counseled client about her entitlement to Social Security benefits based on her husband’s record.
• Assisted client with rollover of IRA post-divorce.
• Assisted client with transfer of assets from retirement accounts post-divorce.

Conclusion

Certified Divorce Planners/Certified Divorce Specialists are trained financial professionals who can help the client and attorney during the divorce process. Services include preparation of budgets and inventory; review of financial statements, retirement accounts and tax returns; evaluation of health and life insurance; compilation of questions for deposition or interrogatory and exhibits for trial; and projections of how various scenarios of asset division will impact the divorcing couple. Financial professionals focusing on divorce is a relatively new specialty. They are demonstrating their value and are increasingly being utilized in the legal community.