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512-963-6883
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You are here: Home / Blog / Top 3 Overlooked Financial Issues During Divorce (Part 1)

Top 3 Overlooked Financial Issues During Divorce (Part 1)

August 30, 2021 By Keith

Divorce is commonly seen as one of the most stressful experiences one will ever go through.  Along with all of that stress, you are also making financial decisions that will most likely affect the rest of your life and perhaps the lives of your children as well.  For that reason, it’s always a good idea to get the advice of a Certified Divorce Financial Analyst™ or some other financial professional during your divorce process.   Having another set of eyes on your situation is always a good idea.  Your attorney will give you advice on your legal rights during divorce, but your financial professional looks at asset division in a whole ‘nother way.

Here are the first 3 of 6 most commonly overlooked financial issues I’ve seen in divorce cases over the years:

1) Handling of the Term Life Insurance

In a 2018 Insurance Barometer Study, by Life Happens and LIMRA, ONLY 59% of Americans have some form of Life Insurance.  That’s a sad statistic considering everyone could benefit from some form of Life Insurance, even if it’s Term Insurance.    “Term Insurance” is the kind of insurance that only last for a certain ‘term’ or period of time.   10-year term and 20-year term are some of the common terms that I see.   In some cases, a couple going through a divorce might already have a term policy that they purchased when the kids were born.   Usually consisting of just enough insurance to get them through college if something were to happen to one of the parents, most likely the high-income earner.   Because term policies don’t have any cash value, I’ve seen them completely ignored during the divorce settlement and if they are addressed, the decree might say that the insured is ‘required’ to keep their spouse as the beneficiary.  However, a piece of paper that requires someone do something doesn’t actually keep them from doing it.   The high-income spouse might remarry down the road and five years from now find themselves in an insurance review with their new spouse where they find out the old spouse is still listed as the beneficiary.  Forgetting why that was the case, or that they are ‘required’ to leave it that way, they change the beneficiary, and nobody finds about it until policy holder passes away.

In a collaborative divorce, the spouses can request that the insurance company change the ownership of the policy to the beneficiary, thereby making the beneficiary the one in charge of who the beneficiary will actually be.  Something they will most likely never change.  The trick is that this request must be made while the parties are still married.

2) Forgetting the Tax Effect of 401k Money

Let’s say that a couple is getting divorced and they only have two assets.  A 401k worth $200,000 and house with $200,000 in equity.   In a Kitchen-Table style divorce, where a couple sits at their own kitchen table and figures out their own divorce, it might seem fair for one spouse to take the 401k, and one spouse to take the house.  After all, they are both worth $200,000, right?   Well, that is rarely the case.  Consider this.  If the spouse taking the 401k has not worked in many years, and I’ve often seen clients who have been out of the work-force for over 20 years, if they take the 401k, but it is known that they are going to have to live out of the 401k for a few years while they get themselves back to work, then they are going to have pay income tax on any money that they pull from the 401k.  Assuming they pull $50,000/year for expenses, they will pay over $8,000 in taxes each year.  Should they bear the burden of all of those taxes?  Probably not.  If this couple had used a financial advisor during their divorce, it would have become obvious that the two assets were not of equal value. 

Now assume for a second that the spouse who took the house was not planning on keeping the house.  If they were planning on selling it, they would end up paying a percentage to their agent and perhaps even more to get the house ready to sell.  Their net at the end of the day would not be $200,000, but something less. 

In a Collaborative Divorce, it’s customary to have a financial person on the team who can calculate the estimated net value of the 401k and the estimated net value of the house and come up with a division of the assets that is fair.

3) Valuing a Pension

While pensions are not that prevalent these days, they are still common for School Teachers and Government Employees.   Every participant who is enrolled in a pension gets a statement showing them what dollar amount they could access if they cashed in their pension.  This dollar value is NOT the value of the pension.   It’s simply their walk-away value.   A professional pension valuation would need to be done in order to calculate what the actual value, in today’s dollars, is.   To do this, we need a few bits of information.   The hire date, the marriage date, the separation date, and the last day of employment, if employment has been terminated.   That information will tell us how much, if any, is community property and how much, if any, is separate property.   We would also need to know when the employee is entitled to start receiving monthly payments and what would those monthly payments be and is there a cost of living adjustment.

Next, we would need to know what growth value we are going to use to calculate the present value.   In other words, we are calculating how much money one would need to have invested today, at the given growth percentage, to create a pool of money that would generate the same stream of payments at some point in the future.   The most commonly used return percentage would be the 20-year treasury.   Currently, that figure is 2.65%.  The smaller that number then the larger the valuation will come out to be, but it is usually significantly more than the figure on the employee’s statement.  Failure to accurately calculate the true value of the pension can have a significant effect on the asset settlement.  It’s always a good idea to have a financial professional involved in your divorce so that these issues are not overlooked.

Check out next month’s blog on 3 more commonly overlooked financial issues of divorce.

Keith Powell, Certified Financial Planner® and Divorce Analyst​​™​
www.austindivorceplanners.com     kpowell@austindivorceplanners.com     512-963-6883

Securities offered through SCF Securities, Inc. • Member FINRA/SIPC • 155 E. Shaw Ave., Suite 102, Fresno, CA 93710 • 800.955.2517 • 559.456.6109 FAX. Investment advisory services offered through SCF Investment Advisors Inc. SCF Securities, Inc. and Austin Divorce Planners are independently owned and operated.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine what is appropriate for you, consult a qualified professional. 

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Christy Morley
Christy Morley
2022-06-12
Keith Powell was easy to talk to and he explained things for me to understand easily.
Melissa Girtman
Melissa Girtman
2021-08-04
I found Keith Powell through my divorce attorney and Keith was an amazing resource for me during my settlement negotiations. Keith's role as a Certified Divorce Financial Planner, helped me to evaluate the financial arrangements my husband's attorney was proposing; and feel confident I would be able to support myself and pursue my new divorced life. I am a very visual person and the plan Keith presented enabled me to see how my retirement goals were protected and my budget planning contributed to my success. Highly recommend Keith!
ATX_HEX
ATX_HEX
2021-01-14
I found Keith through Google and his reviews were good, so it made sense to go through a divorce financial planner as a mediator instead of my now ex-wife and I both paying to hire lawyers. Keith was knowledgeable and helpful for the most part, but there were many things I had researched about asset allocations in a divorce he had never even heard of. Additionally Keith and his assistant sometimes took days to return phone calls or texts. The biggest issue I had was the lack of communication and organization. What should have been handled in 2 meetings ended up taking three because Keith failed to tell both my ex-wife and myself all documents needed for our second meeting, so we were forced to attend a third meeting to reach an agreement with our finances and my assets at his going rate of $195/hr. An unnecessary expense had Keith just told us what we needed to bring in the first place for our second meeting.
Josh Tollett
Josh Tollett
2019-08-27
Divorce is even harder if you don't have a good adviser to help you through the process. Highly recommend to help you with your needs.
Kimberly Chapman
Kimberly Chapman
2014-11-13
To Whom it May Concern: I have personally known Keith Powell for the last three years. I can vouch for Keith's honesty and integrity having had the personal benefit of Keith's help within the context of my dissolution in February 2013. In addition I can also vouch for Keith's knowledge of the law, and expertise when it comes to his ability to provide the services for which he is so retained, and the fiduciary responsibilities that he assumes on behalf of his client. I know without a doubt I would not have faired as well in my dissolution without the aid and expert advice of Keith Powell who I now call my friend. Kindest regards, Kimberly Ann Chapman

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