|Pre-Divorce Financial Planning:
Could This Be the Next Frontier?
By Carl M. Palatnik, CFP®, CDFATM
Over the past several years, alternative dispute resolution (ADR) methods
such as mediation and collaborative law have been increasingly applied to the divorce process. This phenomenon has been largely due to 1) incompatibilities between our advocacy system and the need for viable outcomes, and 2) an
increased recognition of the importance of resolving emotional issues, particularly those involving children. In short, these approaches sometimes lead to better results
than traditional methods.
The increasing application of ADR is indicative of the fact that the
traditional approach to resolving issues in divorce is flawed. However,
mediation and collaborative law are simply alternative approaches to resolving
disputes and not necessarily approaches for achieving better financial
outcomes. Success in ADR is often measured by the ability to achieve the
same results as in traditional litigation, albeit in a less contentious
or less prolonged fashion. With the advent of no-fault divorce, and even
with the archaic application of fault in states such as New York, divorce
has become largely about money. This has brought to the forefront a new
dilemma for the divorce practitioner — how to resolve the divorce,
whether through litigation or through alternative means, not only amicably
but also in a financially workable and sensible way.
|PRE-DIVORCE FINANCIAL PLANNING
Divorcing clients need to make important economic decisions as they go
through the process. If they make bad decisions, they will more than likely
have to live with the consequences of those decisions, and these can be
financially and emotionally devastating. Since there are serious pitfalls
and difficult decisions to be made, people going through divorce need
expert financial advice. While they have traditionally relied on the attorney
or the mediator to provide such advice, and while many mediators and attorneys
have come to accept this role, the requisite financial knowledge and skills
are often outside their areas of training and expertise. This can potentially
lead to problems.
Failure to add financial expertise to the divorce process means that
financial outcomes are often based on the fruits of strong advocacy or
on incomplete or inaccurate information and limited insight (and foresight),
creating a house of cards. Any slight movement or disturbance causes the
house to come apart, often with disastrous consequences. The financial
divorce is sometimes so poorly constructed that it simply self-destructs
Some divorce professionals have begun recently to realize they can better
serve their clients by directly incorporating outside financial experts
— particularly financial planners — into the pre-divorce process.
A new trend is emerging: Divorce Financial Planning.
ROLE OF THE FINANCIAL PLANNER IN THE PRE-DIVORCE PROCESS
Although most financial planners have the relevant tax and financial
knowledge to act as traditional “outside experts,” their best
contributions come from a more intimate involvement in the divorce process.
The broad educational background of the financial planner is ideally suited
to this type of work. Because planners have traditionally helped individuals
achieve long-term financial goals, eg, saving for college or retirement,
they have specialized training and skills that enable them to analyze
financial issues in their long-term economic contexts. During the divorce
process, this often sets a more positive and productive tone for discussion,
provides reality checks, empowers individuals to make wise and workable
decisions and hard, but often necessary, lifestyle adjustments. It also
enables them to address insecurities about financial consequences, power
imbalances and emotional agendas that often impede the decision-making
process. The parties frequently feel more comfortable and secure with
the choices they are considering, find workable solutions more quickly
(often at less cost) and become more aware of post-divorce changes in
standard of living, ultimately making them less likely to
need to revisit support issues in the future.
WHEN SHOULD THE FINANCIAL PLANNER ENTER THE DIVORCE PROCESS?
The earlier the financial planner becomes involved in the process, the
more likely the situation will not escalate out of control, and the more
likely good financial decisions will be made. The financial planner can
help stabilize the situation, including helping determine shortterm support
needs or paying abilities, closing or re-registering accounts, changing
beneficiaries on insurance policies, notifying credit card companies or
One of the most important steps in the pre-divorce financial planning
process is rigorous discovery — the collection of accurate, complete
and reliable financial data. The earlier the discovery process is initiated,
and the more scrupulously it is done, the better off the client will ultimately
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