casemark/managing-divorce-financial-planning

Managing Divorce Financial Planning

Structures comprehensive divorce financial analysis covering marital estate valuation, asset/liability division, support calculations, tax consequences, and post-divorce financial projections for wealth management clients.

When To Use

• Client or their attorney requests financial analysis to inform divorce settlement negotiations
• Evaluating proposed settlement scenarios for long-term financial viability
• Projecting post-divorce cash flow, investment income, and lifestyle sustainability
• Analyzing tax impacts of different asset division approaches (e.g., keeping the house vs. liquidating and splitting proceeds)
• Coordinating with family law counsel on support calculation inputs
• Building a post-divorce financial plan including revised investment policy, insurance needs, and estate plan updates

Inputs To Gather

• Marital estate inventory: All assets (real property, investment accounts, retirement accounts, business interests, stock options/RSUs, collectibles, digital assets) with current valuations and acquisition dates
• Liabilities: Mortgages, HELOCs, credit card debt, student loans, tax obligations, contingent liabilities
• Income data: W-2s, K-1s, 1099s, business tax returns (3–5 years) for both spouses; deferred compensation schedules
• Expense profile: Current household budget, proposed separate household budgets
• Benefit/pension details: Defined benefit plan statements, Social Security estimates, stock option vesting schedules
• Pre/postnuptial agreements: Any existing contractual terms governing division
• State jurisdiction: Community property vs. equitable distribution state [VERIFY]
• Filing status and tax data: Most recent joint returns, estimated tax brackets post-divorce
• Insurance policies: Life, disability, long-term care — current coverage and beneficiary designations

Workflow

1. Compile the marital balance sheet

   • List every asset and liability with fair market value, tax basis, and title (joint, H, W)
   • Identify separate property claims (pre-marital assets, inheritances, gifts) and trace funding sources
   • Flag illiquid or hard-to-value assets (business interests, real estate, restricted stock) that require appraisal [VERIFY valuation methodology and date]

2. Classify and characterize assets

   • Distinguish pre-tax vs. after-tax assets — a $1M IRA is not equivalent to $1M in a brokerage account
   • Calculate after-tax equivalent values using projected liquidation tax rates [VERIFY applicable capital gains rates and state tax]
   • Note vesting schedules, lockup periods, and restrictions on any deferred compensation

3. Model asset division scenarios

   • Build at least two division scenarios (e.g., 50/50 net value, offsetting retirement vs. liquid assets, one spouse retaining the residence)
   • For each scenario, project: net worth at division, annual investment income, liquidity, and tax drag
   • Quantify the cost of keeping illiquid assets (e.g., carrying costs on real estate, concentration risk in a single stock)

4. Calculate support obligations

   • Input state-specific guidelines for child support [VERIFY state formula and income cap]
   • Model spousal support (alimony) scenarios: duration, amount, tax treatment (post-2018 TCJA: non-deductible/non-includable for federal; check state treatment [VERIFY])
   • Stress-test support adequacy against recipient spouse's projected expenses

5. Analyze tax consequences

   • QDRO transfers from retirement plans: rollover vs. direct distribution, early withdrawal penalties [VERIFY plan-specific QDRO rules]
   • Capital gains on asset sales triggered by division (especially concentrated stock positions or real property)
   • Filing status change impact: compare joint vs. single/head-of-household brackets
   • Dependency exemptions and child tax credits allocation

6. Build post-divorce financial projections

   • Project each spouse's cash flow for 5, 10, and 20 years post-divorce
   • Incorporate revised investment allocation appropriate for single-income household risk profile
   • Model lifestyle sustainability: can proposed budget be maintained given projected income, support, and portfolio withdrawals?
   • Identify gaps requiring adjustment (downsizing, return to work, modified spending)

7. Coordinate estate and insurance updates

   • Flag beneficiary designation changes needed (retirement accounts, life insurance, TOD/POD accounts)
   • Note estate plan revisions required (revocable trust, will, powers of attorney, healthcare directives)
   • Evaluate life insurance needs to secure support obligations (amount and term)

Output

• Marital Balance Sheet: Itemized asset/liability table with FMV, tax basis, after-tax equivalent, and title
• Division Scenario Comparison: Side-by-side analysis of 2–3 settlement scenarios showing net value, liquidity, income, and tax impact per spouse
• Support Analysis: Child and spousal support calculations with sensitivity ranges
• Tax Impact Summary: Estimated tax consequences of each division scenario
• Post-Divorce Financial Projection: Multi-year cash flow, net worth trajectory, and sustainability assessment for each spouse
• Action Items: Checklist of beneficiary changes, insurance adjustments, and estate plan updates needed

Quality Checks

• Confirm all assets are valued on a consistent date; flag any stale appraisals (>6 months)
• Verify after-tax adjustments use correct basis and applicable tax rates — do not equate pre-tax and after-tax dollars
• Ensure support calculations use current state guidelines and correct income definitions [VERIFY]
• Validate that post-divorce projections use reasonable return assumptions (align with client's IPS or firm's capital market assumptions)
• Cross-check that total marital estate allocated across scenarios equals the same aggregate value
• Confirm no double-counting of assets that appear in multiple accounts or registrations
• Flag any asset requiring independent appraisal (business interests, real property, collectibles) that lacks one
• Mark all jurisdiction-dependent calculations with [VERIFY] for advisor review before client presentation