Wednesday, July 28, 2021

Don’t Let Clients Go Broke Covering Their Divorce Expenses

In any divorce, the “B” word — budget — should be used early and often. 

Kathy Costas
Kathy Costas

As the world opens up and people are out spending more money, make sure your divorcing client isn’t out spending all of their assets on legal fees or racking up a lot of debt to cover their divorce expenses

In any divorce, the “B” word — budget, that is — should be used early and often. You wouldn’t hire someone to remodel your kitchen without knowing what you could afford to spend and what part of the project was most important to you. Make sure your client doesn’t hire an attorney to remodel his/her life without having some idea what it might cost and what the priorities are.

The most expensive part of the divorce is almost always the cost for legal representation. A recent article in “The Divorce Roundup”, the monthly e-newsletter from the Institute for Divorce Financial Analysts®, provided some very eye-opening data regarding the average total of legal fees and court costs for divorce around the U.S. Here are some highlights from that article:

  • The average cost of a divorce in the U.S. is $19,458 per couple
  • Children increase the cost of divorce by an average of 36.7% nationally, making the total average cost of divorce $26,930 for parents.
The most expensive states for a divorce are per couple:
  • California – $28,870 with no children and $39,278 with children
  • New York – $27,670 with no children and $37,706 with children
  • Texas – $25,584 with no children and $34,912 with children
The least expensive states are per couple:
  • Montana – $12,340 with no children and $16,800 with children
  • New Mexico – $13,274 with no children and $18,106 with children
  • North Dakota – $16,160 with no children and $22,106 with children

Being aware of these costs will help you set expectations with your client and help them understand that the cost can be larger than a year of college and possibly one of the biggest single expenses they have experienced to date. It will also help you reinforce the importance of using your financial planning skills to help them, just as you would if they were facing any other large, unexpected expense.

So how can you help?

There are a few different ways you can advise and guide your client through this process. Here are some tips and tools to help your client keep more of their money for their future.

Choosing an Attorney or Mediator
Choosing an attorney or mediator is the first step and it’s critical.
  • Your client should make sure that the attorney selection process includes an honest discussion about expected costs. And just like working with a contractor, these conversations should continue at each step of the process as decisions are being made about strategy for the case.
  • It is always a good idea to ask about an overall game plan and expected “sticking points’ in the case that could drive the costs up.
  • Keep in mind, a higher hourly rate for an attorney does not necessarily equal a higher settlement or support number. It likely just means your client will end up with a higher bill. Family law and asset divisions, especially in community property states like California, can be relatively straight forward. It’s much more important to work with an attorney your client trusts and can communicate with and one who will put the client’s best interests ahead of theirs rather than the most expensive one in town.
Gathering Information
  • Ask about different ways for you and your client to get the financial information the attorney or mediator needs for your case. If you can do the leg work with your client instead of using the attorney or their staff at high hourly rates, your client can likely save hundreds of dollars or more.
  • As an advisor, you are also very qualified to help your client complete any required financial disclosure forms which will also save time and money with the attorney.
  • As the process continues and information is exchanged, it is very likely that you are more experienced and skilled at analyzing and reviewing financial statements and tax returns than the attorney. This expertise could save your client not only in hourly fees but also assets in the settlement negotiation.
Managing the Process as it Unfolds
  • As an advisor, you can be instrumental in helping your client determine what they can afford to spend and more importantly what is worth fighting for and spending for. Some assets will be worth spending more time and money to keep from a financial planning point of view, but others will just have emotional value. Make sure your client uses your expert advice, not their anger, to decide what they want to keep and what they can let go of.
  • Now is the time to get personal spending under control as well. There is a misconception that by spending more, your client will get more in spousal support due to the “marital standard of living” calculation. This calculation comes from an analysis often done by a forensic accountant that determines how much the couple spent and saved while living as a married couple. It is most often used to cap spousal support should the primary wage earner go on to significantly increase their income after the divorce. The reality is, support is determined primarily by the income earned, not what is spent. In most cases, the income that supported one household now must support two. Remind your client that divorce is a division problem, not a multiplication problem. Spending more now just means there will be less to divide in the future.
  • If things get ugly and your client is forced to spend more than they planned, there are companies that will loan money for divorce costs under certain circumstances. This may be a last resort but it does exist. Otherwise it’s a good time to ask family for help if they are able to. Your client should do everything they can to maintain the good credit score they had prior to the divorce. They may need to rely on that rating even more once they are single.
Expensive Add-Ons
  • Requesting full hearings, taking depositions and hiring forensic accountants are usually the most expensive “add ons” to the divorce process.
a. A hearing on financial matters will cost thousands of dollars in attorney fees just on the day alone and the end result is likely to be a compromise of some sort anyway.
b. Depositions are a very expensive way to get answers to questions as they require several professionals to complete. There may be other less expensive ways to get those answers.
c. In the Los Angeles area, most forensic accountant bills start at about $30,000 and go up from there. These experts are necessary to complete business valuations and do asset traces, but for other financial questions, there may be other ways to arrive at the answers or answers that are good enough.
  • Make sure these added services are necessary to find the information your client needs to reach an agreement. That is the goal, reaching an acceptable agreement. These services and their related costs should definitely not be used to “punish” the other spouse or to seek revenge or just to prove that your client is the “good” spouse.
  • With your financial expertise, it is likely that many of the financial questions can be answered. You can also help direct the search for additional information so that it is more effective and cost efficient. Sometimes these items will be necessary and that possibility should be built into the budget. But there are many times that the end result will be the same without these additional costs. You can help your client stay focussed on that end result during the entire process.
Final Thoughts

A divorce settlement is ultimately a compromise; that is why it is referred to as a settlement agreement. Neither side is likely to feel that they got everything they wanted. And given the high cost of divorce, your role as a financial advisor is not only a very important one but also potentially a very valuable one. You can help save your client money during the process and also help them make the best decisions in the settlement negotiation so they can get most of what they ultimately want and need in the final asset division.

It is very unlikely that your client can view this process with the cool logic of a business deal as they are often told to do. You, however, can do exactly that and help keep them both on budget and on target for their best financial outcome.

Kathy Costas, a vice president, investment advisor and Certified Divorce Financial Analyst® (CDFA®) at EP Wealth Advisors in Westlake Village, Calif., specializes in working with men and women going through a divorce. She was appointed by the Institute for Divorce Financial Analysts as the chair of the Southern California chapter of the Divorce Alliance, a group for divorce professionals. Kathy is also the leader of the Conejo Divorce Resources Professionals group. She can be reached at kcostas@epwealth.com or 424-323-3852.

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