Divorce can be devastating, but with careful planning and avoiding these all-too-common mistakes, you can help save your client from financial mistakes that could affect them for the rest of their lives.
1) Not getting a copy of the parties’ credit reports.
This may seem obvious, but I seldom see attorneys and clients review these reports.
2) Not having details about life insurance policies.
Life insurance will be needed in many cases to provide assurance that child support and maintenance are paid. All current policies should be reviewed to be certain that they will secure payment of this obligation upon death of the payor. The amount and term need to be sufficient. The party to be responsible for the premium payments, and beneficiaries need to be determined.
3) Not reviewing the individual holdings in investment accounts.
There are many reasons that an analysis must be done. Each holding will have dividend income, taxable consequences and investment risk to be considered.
4) Liquidating your investments for the purpose of splitting the proceeds in a divorce.
Before selling any assets, be sure you consider the tax consequences and any possible penalties. In standard, taxable accounts, selling securities can trigger capital gains taxes. And some assets, such as annuities, can come with steep penalties if you exit the investment early. There's also the question of timing — if your divorce happens to take place during a market decline, it might not be the most opportune time to sell. And liquidation of or early withdrawal from certain investments may carry penalties.
Also, for investment income earned during the year of divorce, which party will be responsible for taxes on the dividends and income?
The process of dividing investment accounts differs depending on the type of account in question. In a standard brokerage account, the divorcing couple may simply provide a letter to their financial institution requesting that the joint account be closed and that new, separate accounts be opened in each person's name. The letter would also detail how the investment assets would be allocated between the two accounts. If one spouse is moving assets to an account with a new firm, it’s important to note that not all assets, such as proprietary investment funds or insurance products, may be transferable, and liquidating such products may incur financial penalties and fees.
5) Failing to consult with a Certified Divorce Financial Analyst who is not a Certified Financial Planner.
Even though the CDFA certification provides financial professionals with specialized knowledge, unless the CDFA is also a Certified Financial Planner, they will not have the broad knowledge to best assist your client through the divorce process and financial planning for their future. (Some CDFAs are commission based salespeople in the asset-gathering business for their broker-dealer and unable to do advanced planning. Beware also of CDFAs who do not charge fees for their analysis.)