Over the last 18 years I’ve experienced the joy of couples welcoming newborns and adopted children into their families, the excitement when business aspirations turn into reality and the relief when hard-earned retirement dreams come to fruition. I’ve also observed the heartache and torment caused by divorce and in-fact, experienced that same pain in my own divorce in 2010. Unfortunately, divorce is much too common in today’s society and comes with both emotional and financial costs. Over the years I’ve noticed most divorcees don’t understand the financial challenges ahead ranging from higher taxes to furnishing not one but two bedrooms for children, to determining what rights an ex-spouse has when filing for Social Security. All too often, legal advisors are ill-equipped to properly advise and guide clients through the many financial pitfalls associated with divorce.
From personal experience, I noticed that divorcees will receive a lot of legal advice, but very little financial advice throughout the process. For example, my ex-wife and I have shared time with my two daughters. They are with me on Mondays and Tuesdays, with their mother Wednesdays and Thursdays then we alternate weekends. Essentially, it’s a 50/50 split for time. Oddly, it was arranged that I pay child support rather than spousal support. In my professional opinion, as a financial advisor, these payments would have been more financially beneficial to my ex-spouse (as well as my daughters) as spousal support not child support. Here’s why.
Child support is not deductible by the payor, therefore it’s tax free to the payee. For example, I paid $1875 per month for child support. My effective tax rate is about 30%. So, my pretax payment is $2679, with the difference of $804 being paid to the IRS. If the payments had been negotiated and arranged as spousal support, I could have paid $2679 and deducted the payments. My ex would have received $2679 and paid taxes at her effective rate, about 15%, and she’d put $2,277 in her account, an additional $402 per month which would have been better than sending it off to the government black hole.
This is but one of many examples in my career where someone with expertise in analyzing financial issues in a divorce would have had a huge impact. Think about it, $402 per month over 8 years equates to over $38,000. That’d sure be nice to have for college! Given the great need for financial advice during a divorce, I became a Certified Divorce Financial Analyst or a CDFA®.
Amidst the chaos caused by divorce, it’s unlikely you’ll think of all the financial impacts on your own.` In the unfortunate event you or someone you know finds themselves facing divorce, a CDFA professional equips you and your attorney with vital financial information necessary to argue for the best possible outcome.
Chris Powers is owner and advisor of Empower Wealth Advisors in San Antonio, TX. He has been a financial advisor for 18 years. If you have any questions or would like to learn more visit Empower Wealth Advisors website: www.EmpowerWealthAdvisors.com or call (210)-EMPOWER.