How advanced financial analyses can be used to support your case in court, giving you an advantage in obtaining the best possible settlement for your client.
By J.A. Licciardello, Financial Advisor
Divorce settlements are an exercise in financial planning. But many divorces move through the courts with nothing more than financial affidavits and a spreadsheet of assets to assist clients and the court in assessing whether a particular settlement is fair and equitable.
But with the availability of advanced financial software, and with divorce financial analysts as consulting partners, it is now possible to create compelling and accurate financial projections that tell a powerful story to clients, opposing attorneys, and the court.
This article discusses some ways advanced financial analyses may be used to support your case in court, giving you an advantage in obtaining the best possible settlement for your client.
Building Your Case
Some of you may remember Joe Friday from “Dragnet,” who was famous for dryly saying in many episodes, “Just the facts, ma’am.”
As in crime fighting, getting the financial facts straight is essential in building your financial case. This means going beyond the financial affidavit, and getting additional information from your client on present and future living expenses, income, asset valuations, savings rates, and details on any complex assets like business interests, rental properties, or executive compensation. It also means making an initial assignment of marital property, debt, and calculating child support. There are helpful questionnaires and planning tools available to help you gather this more detailed information.
Determining Your Best Settlement Options
Once you have your data in place, you are ready to generate settlement alternatives. You will want to use specialized divorce planning software and partner with a Certified Divorce Financial Analyst (CDFA).
Several standard reports are created to start the process. An income summary, marital property division, and a multi-year cash flow and net worth projection will give you a quick understanding of your client’s financial position and guide you to issues that need attention. You will see your client’s annual cash flow and projected net worth, and quickly identify major defects in your initial settlement design.
Next, you create alternative settlements for consideration. A powerful “what-if” feature lets you see the impact of adjusting any aspect of your agreement, from the basic to the most involved. Complex asset transfers, alimony and business equity buyouts, and the division of pensions are some areas where this capability is valuable.
Making Your Case
Division of Property
Not all property is created equal, and if you have a divorce with a variety of assets, such as retirement plans, real estate, and executive compensation, taxes and selling costs can make a supposedly “fair” property split dramatically imbalanced.
Two reports will help you make the strongest case that a proposed division of assets is, or is not, fair to your client.
A “Property Division on an After Tax Basis” report shows you what the client is indeed receiving after all taxes and credits. These include capital gains on investments, income tax on short-term investments, and real estate values after any home sale tax exclusion.
A “Projected Net Worth” analysis will show how a client’s assets increase or diminish in value in the years following divorce. You can also demonstrate the impact of future property transfers such as those from real estate sales, the vesting of stock and stock options, and property transfers paid in installments.
In many states, spousal support is not determined by statute; it is negotiated or left to the discretion of the judge. It is here that accurate financial projections can be used to your advantage to powerfully demonstrate the need for income, and the ability to pay for it.
The first step is to create a “Cash Flow Projection.” It aggregates all income inflows and outflows for the receiving spouse and gives you a view of the net deficit your client will face over several years, and the impact on their net worth. A simple line graph comparing each spouse’s cash flow over time can powerfully illustrate significant differences in lifestyle.
The second step is an “Alimony Breakeven Analysis” which calculates the exact pre-tax payment required to support the living expenses of the receiving spouse. It factors in the tax benefits received by the payer and taxes paid by the receiver, so you have an accurate and justifiable payment amount
The last step is showing the paying spouse’s ability to pay. The pretax payment calculated in the breakeven analysis or another amount is added as a new income stream, and a final cash flow projection is created showing the net effect on paying spouse’s cash flow.
Supporting analyses include a “Multiyear Alimony Tax Benefit” report which calculates the total tax savings from alimony payments, and an “Alimony Present Value” report shows you what an alimony buyout would be in the form a single upfront payment instead of a multi-year income stream.
More Successful Negotiations and Happier Clients
This article is not just about making a financial case powerfully in court; it is about having a less stressful experience for the people you represent.
Divorce can be a confusing and challenging time, and clients can become frozen with indecision. The use of these analytical tools will help them feel confident and involved as they work in partnership with you to develop their settlement options and respond to proposals from the other side.
J.A. Licciardello is a Certified Divorce Financial Analyst and the President of Wentworth Divorce Financial Advisors. He is also the author of “The Financially Smart Divorce” and “The Financially Smart Divorce Planner.” www.divorcefinancialally.com
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