Helping spouses plan

(September 2006) Until recently, divorcing spouses often lacked the counsel needed to look into the future of a settlement agreement to determine its financial fitness. Yes, lawyers, pension analysts, business valuators, social workers and accountants have played an important role in advising spouses about their financial futures (“after-tax”). However, none of these specialists have been properly positioned to look behind a proposed settlement arrangement to determine a divorcing spouse’s financial well-being down the road.

The Financial Divorce Specialist is a designation now being acquired by financial planners to zero in on a difficult area of transition in a divorcing individual’s life. The FDS brings a divorce settlement to life to illuminate the financial opportunities and limitations that a spouse could face over the short and long terms.

Take the fictional, but close-to real life, example of Kenneth and Kate. Kate is 46 years old and Kenneth is 52 years old. They have been married for 18 years and they have two sons, aged 11 and 7.

Kenneth’s offer to Kate is to split the mutual funds and the RRSPs on a 50/50 basis. Kenneth would keep the business and Kate would keep the house. Both would end up with a net equity of $332,000. Kenneth is also willing to pay $1,000 a month in child support and $1,500 a month in spousal support for 5 years. With her own income of $21,600 and her RRSPs growing at a rate of 7.5% a year, this seems like it would be a fair offer, but how can Kate really tell?

Kate’s take home pay is $21,600 and Kenneth’s take home pay is $132,000. These are their assets:

Home equity	$180,000
Mutual funds	$92,000
RRSPs	$212,000
Business	$180,000

A simple chart (see Limited Support, right) demonstrates the financial track that each spouse would face. The reality is that Kenneth’s offer will put Kate into a position of financial hardship in about 10 years, at a time when she should be thinking about retirement. In fact, by sixth year Kate would have to tap into her RRSPs to make ends meet. Kenneth, meanwhile, would be financially healthy at that time.

Half the assets and an income stream for a number of years seems okay but, the negative financial situation does not become clear until about five years later. A lawyer’s worst nightmare is a client who comes back after that amount of time wanting to renegotiate their separation agreement. It happens all too often.

The divorce professionals we would normally think of would not be able to advise Kate and Kenneth on this basis. Conversely, an FDS does not replace lawyers or other divorce specialists. While these specialists provide financial information regarding the potential settlement being considered, they do not offer advice and do not answer legal questions.

Existing financial planners who do not have the FDS specialization might question why a FDS cannot give advice. Financial planners advise their clients all the time. The answer is that giving a divorcee advice is akin to telling them how to live their life. A FDS cannot say, “I think you should downsize your home and work full time to sustain your lifestyle.”

What they can do is show that if the client keeps their house and works part-time they will be put in a position of financial hardship going forward. With that in mind the client can make adjustments to their life depending on what is important to them and make their own decisions about the right financial options.

In this situation, Kenneth is likely to ask, “How much can I give Kate without putting myself in a position of hardship?” If Kenneth offers Kate $5,000 a month in spousal support for five years, then $4,000 a month for another five years, and another $3,000 a month for the final five years, will it actually rectify Kate’s financial situation? And can he afford to be that generous?

A second chart (see An Amicable Divide, above) demonstrated the improved financial outcome where Kate has been advised about the long-term projections.

With Kenneth’s new offer Kate is now in a position to be financially healthy on her own. Kenneth’s net worth is still healthy as well. It is a win/win situation.

Software-supported projections are one thing an FDS can offer. However, there are other advantages: They are trained to find hidden assets to ensure that an equitable, not just an equal, division of assets occurs. They can also tell the spouse how things like an insurance policy and pensions configure into the settlement package. Another consideration is how to ensure spousal and/or child support is maintained in the event of a death or disability of the paying spouse.

Ultimately, it is important to make a correct calculation of income earned and the income tax and estate implications of separation of assets so that financial security for the individual is assured. Divorce is a highly emotional time and offering a viable financial solution can add emotional stability for someone moving forward in life on their own.

A financial planner with the FDS designation cannot invest a client’s money while advising them through the divorce process. This is considered a conflict of interest.

A concern of many lawyers is that sending their clients to a financial planner can work against the client because the planner may be more interested in investing a ‘windfall’ settlement than informing the client of the financial issues surrounding their divorce.

Not many divorces end up in court these days. However, if that happens a FDS can be called to testify regarding the financial issues surrounding the divorce and the cash flow and planning projections can be admitted into evidence. The credibility of the reports and a FDS’s testimony is strengthened by the recognition of the designation by the Financial Planners Standards Council and the International Association of Collaborative Professionals — both have standards that members must adhere to in order to maintain their designation. AER

Kathryn Jankowski is a financial divorce specialist and financial planning consultant at TE Wealth and a member of the Collaborative Practice Toronto. The company’s specialists assist clients in times of financial transition including divorce, employment change, retirement, inheritance and death with a full service wealth management program.