Questions about CDFAs™, followed by Questions about Divorce Settlements

Q.  What is a Certified Divorce Financial Analyst (CDFA™)?
A.  A CDFA™ is a financial expert thoroughly trained through the Institute of Divorce Financial     
     Analysts to analyze the specific financial issues of divorce.

Q.  Why do I need a CDFA™?  I thought my lawyer handled the financial issues in divorce.
A.  Finances are often the most important aspect of a divorce, and they can be very complex.  Contested  
     or not, all divorces have potential financial issues.  Attorneys are trained to advise and protect
     people’s legal rights.  They must know the law in depth in all areas of the law in which they practice in
     order to represent their clients adequately.  While attorneys serve a crucial role as individual legal
     advocates and are strong in negotiation skills, they cannot be expected to have expertise in complex
     financial issues including income taxes, or to empower their clients with the knowledge they need to
     make smart financial choices.  A financial specialist with knowledge of taxes, pension distributions,
     and financial planning is often better able to address all of your concerns about how you will be able
     to live after the divorce.  Using a financial professional independently or in conjunction with an
     attorney can be the most effective and efficient way to protect your future.

Q.  What exactly does a CDFA™ do? 
A.  CDFA’s™ examine, analyze, and explain all the financial aspects of divorce to help empower their
      clients to make educated decisions throughout the divorce process.  This prevents long term regret
      and increases the likelihood of achieving an equitable settlement which addresses long-term    
      financial needs.   They accomplish this by examining retirement assets, investment accounts, debts,
      and current and future earning capacity.  They help calculate child support and maintenance.  They
      consider how taxes affect the settlement.  Through the use of divorce planning software, they are
      able to illustrate the short and long-term financial effects of various settlement proposals and also
      project cash flow and net worth many years into the future so their clients have a long term plan.

Q.  How might my final settlement differ if I use a CDFA™?
A.  Rather than taking a “cookie cutter” approach to resolve financial issues in divorce, a CDFA™ is
      trained to think outside the box and use a creative approach to finding equitable solutions for each
      case. Instead of focusing on how the finances are traditionally dealt with in the legal system, a
      CDFA™ produces long-term financial projections, graphs, and alternatives which show clients and
      attorneys the financial results of various settlement agreements. This includes critical aspects of the
      settlement such as child support, maintenance, retirement and pensions plans, and the disposition of
      the family home.   
      The combination of this creativity and financial expertise along with the attorney’s knowledge of the
      legal ramifications of a settlement many times shortens the negotiation process and provides a more
      suitable settlement for both spouses. It most certainly can give the spouse that employs this strategy
      the upper hand.

      A CDFA™ who is also trained as a mediator can help divorcing spouses and their attorneys in two
      other venues. They can serve as a Financial Neutral in collaborative case or, facilitate financial
      discussions and assist in attorney-assisted mediations.

Q.  Should a person hire a CDFA™ instead of an attorney?
A.  Definitely not.  It is highly recommend that any person getting a divorce seek legal counsel whether
      they divorce using litigation, collaboration, or mediation. The CDFA™’s role is to assist the attorney
      and the client with the financial issues, not replace the attorney.

Q.  Won’t it cost more to hire a CDFA™ as well as an attorney?
A.  That’s a good question, and often the first question people ask.  While hiring a CDFA™ adds another
      professional to the team, it’s common for the overall cost of your divorce to actually be lower if you
      use a CDFA™.   A CDFA’s™ hourly rate is generally much less than an attorney’s hourly rate.  Because
      a CDFA™ has the education, training and experience in budgeting, tax analysis and preparing
      financial projections, he/she can often streamline the process.  Thus, you end up being charged a
      lower hourly rate and often incur a lessor number of hours when you use a CDFA™.  
      In addition, a CDFA™ can often identify savings which exceed the cost of the CDFA’s™ services.   For
      instance, it may be possible to save you money by structuring your settlement in more tax-efficient
      ways, or by coming up with creative settlement solutions which provide you with maximum benefit. 
      A CDFA™ can also help ensure that the agreement to split any pension plans is worded properly so
      that you do indeed get what you think you’re getting.  While it isn’t always possible to quantify these
      savings, it usually is possible to quantify the tax savings.  It’s very common that the tax savings a
      CDFA™ identifies exceed the cost of their services many times over.   In complex divorces, it can cost
      more overall to hire a CDFA™, but the stakes are generally much higher, and the extra cost is
      justified to preserve your assets and ensure you receive an equitable settlement. 

Q.  Do you work with me alone, or with me and my spouse?
A.  We work either way, depending on the circumstances.  In an adversarial situation, we work for the
      spouse who hired us.   However, if both spouses are able to cooperate, we believe you can save time
      and money if we work with both spouses.   We call this financial mediation. We meet with both of
      you and work together to determine what type of an asset split and support payments would be
      acceptable as a starting point for our financial proposals. We then utilize our divorce planning
      software to show you in black and white how various settlement options affect your short and long
      term financial future.  Each of you should be consulting with your attorney throughout the process in
      order to make informed decisions.

Q.  How do I know if I need to use a CDFA™?
A.  If you have any of the following questions, a CDFA™ can help provide answers and reduce

  • I’ve never managed the family finances before.  What should I do first?
  • What should we do about the house?
  • My spouse owns a small business.  How does this affect me?
  • Do I get 50% of my spouse’s pension, or do we each just keep our own retirement accounts?
  • Who will pay for the kids’ college?
  • Who gets to take the child dependency exemption?
  • Who has to pay the debts?
  • How can we structure a settlement to save taxes?
  • How can I be sure my settlement is fair both in the short run and the long run?
  • Will I have enough after the divorce to pay my bills?
  • What are my options for health insurance?

Q.  I am currently working with an attorney. Is it too late to work with a CDFA™?
A.   Not at all. If you have a proposal on the table, a CDFA™ can use divorce planning software to analyze 0000the proposal.  You and your attorney will then be able to determine whether or not the proposal is
0000acceptable to you. If not, or if you don't yet have any proposals, a CDFA™ can create initial or 0000alternative proposals. Our role is to assist your attorney and you.

Q.  We want to mediate our divorce. Can we still use a CDFA™?
A. 0Yes, it is common to have a CDFA™ take a role in facilitative mediation and collaborative law.
0000However, CDFA™’s are not attorneys and cannot give out legal advice.   What we can do is work
0000with you and your spouse to come up with creative solutions which are equitable for both spouses.   
0000We use our divorce planning software to produce graphs and reports showing you the potential
0000short-term and long-term ramifications of each proposal.  We use our tax expertise to ensure you
0000take advantage of applicable tax laws.  In doing so, you can end up with not only an equitable
0000settlement, but also with a long term financial plan as you begin your new life as a single person. 

Most Frequently Asked Questions about Divorce Settlements

Q.  Can I (should I) keep the house?
A.   The marital home is often the one item of marital property where emotions cloud the ability to
      make sound financial decisions.  We often feel overwhelmed at the thought of moving.  We want to
      retain the home to provide stability for our children. However, keeping your home in today’s
      economic environment is not necessarily an advantage.  Refinancing is difficult and home values are
      unstable.   Upside down mortgages with the potential for foreclosure or short sales make the
      analysis more difficult.    Retaining the marital home after divorce should be a sound financial
      decision.  Do you know what it costs to maintain your home?  Do you need to refinance the    
      mortgage and if so, would you qualify?  Are you prepared for the workload that comes with
      maintaining a home on your own?  It's important to pinpoint exactly what it will cost to maintain the
      home, factoring in taxes and inflation and the expense of upkeep.  An analysis must be performed to
      determine if there is enough money to stay comfortable in the home and pay all the bills without
      being overextended.  Once that has been determined, the advisability of retaining the home must be
      compared to that of giving up other assets (such as liquid accounts, retirement plans, etc.) in return
      for the equity in the home.  If you do keep a home which has appreciated in value, you should make
      sure to preserve both you and your ex- spouse’s capital gains deductions.   CDFA’s™ are trained to
      help people answer this question before they commit to a settlement which cannot be changed.

Q. How do I know which assets are the best ones to keep?
A. Not all assets are created equal.  Some assets will benefit you in the future more than others.  Assets   
      such as businesses and retirement accounts continue to grow, while other assets may require money
      for their upkeep, such as a home or an automobile, and those costs must be considered in the overall
      settlement.      In addition, income taxes can reduce the value of some property you receive, but not
      others.  For instance, if you receive appreciated stock in the settlement while your spouse receives
      an equal amount of cash from a bank account, you will have to pay income tax when you sell the
      stock while your spouse pays no tax on the cash he/she receives.   If you get the house and your
      spouse gets the retirement account, you won’t have an income producing asset to fund your
      retirement years while your spouse will.   CDFA’s™ are experienced in assessing these situations.

Q.  What's considered marital?
A.   In general, everything earned or accumulated during your marriage is considered marital, regardless
      of whose name it is in, how it is titled, or who earned it.  This includes items such as earned income,
      business income, marital investment income and capital appreciation, deferred compensation,
      retirement benefits, lottery winnings, gifts which are commingled with marital assets, worker’s
      compensation, and appreciation of separate assets attributable to marital effort.  Gifts and
      inheritances can be an exception to this rule.  In some cases property purchased in contemplation of
      a marriage or during premarital cohabitation is considered.  Determination of asset type can be
      complicated, and should be discussed with an attorney.

Q.  How much and what do I get to keep?
A.   Illinois is an equitable distribution state.  This means settlements are meant to be fair, not
      necessarily 50/50.  That said, as a rule of thumb, negotiations often start out with each spouse
      receiving 50% of the property, with adjustments to follow when other factors are considered.   In
      general, you’re entitled to half of everything that was earned or accumulated during your marriage,
      as well as any appreciation of marital assets or separate assets due to marital effort or expense.  This
      would include earned income, investment income, non- wage compensation, retirement
      benefits, partnership and small business income, real estate appreciation, insurance, and annuities
      among other things.  Some states even consider property purchased in contemplation of marriage
      and property purchased during premarital cohabitation.  Which assets you keep should be based on
      factors such as tax impact, liquidity, and appreciation potential.  Judges generally have discretion to
      consider many factors when considering what you will be awarded such as, length of marriage,
      health issues, your contribution to your spouse’s career endeavors, future employability, and the
      amount of separate assets you own.  You should consult with an attorney before making any final

Q.  What if I already owned a home before I was married that was titled in my name only,
and I added my spouse's name to the deed during our marriage? 
A.  In this case, the whole house could be considered marital property. You might have made a       
      “presumptive gift" to the marriage.   You should consult your attorney to discuss your options. 

Q.  What about my retirement accounts?
A.  All retirement benefits earned while you were married are marital assets.  Complex formulas are
      used to determine the marital portion of your retirement accounts.  The marital portion of a pension
      is calculated using a formula which compares the number of years of your marriage to the total years
      of service.  Dividing unvested stock options and other deferred compensation is even more complex
      and therefore, it’s recommended that you work with a financial professional.

Q.  Is my IRA considered marital property if it's in my name only?
A.  As explained above, generally everything acquired during the marriage, no matter whose name it's
      in, is considered marital property.  As a side note, when negotiating to keep IRAs as part of the assets 
      you retain post-divorce, remember the funds in an IRA generally cannot be withdrawn before age
      59 1/2 without paying a 10% penalty for early withdrawal.  Therefore, if you are looking for assets     
      which can be converted to cash, an IRA is generally not your best choice. 

Q.  Will I lose my pension? 
A.  To the extent earned during the marriage, pensions are marital assets.  However, it is possible to
      keep 100% of your pension and have it offset with other assets which your spouse receives in
      exchange for giving up his/her portion of your pension.  

Q.  What is a QDRO and why do I need one?
A.   A Qualified Domestic Relations Order (QDRO) is the legal document that divides up qualified
      retirement accounts (including pension plans, 401(k)s and profit-sharing plans) pursuant to a divorce. 
      No matter what your Judgment of Divorce says about how the retirement plans will be shared, they
      cannot be divided unless your attorney has filed a QDRO.  We recommend that QDROs be drafted
      and approved by the Plan Administrators prior to signing the final settlement agreement. There are
      many nuances that go into QDROs, and therefore, we recommend they be drawn up by an
      experienced attorney or QDRO specialist.  Pension plans in particular, are often one of the most
      complicated areas of marital property division, and care should be taken before making the decision
      about including a portion of this asset in your division settlement.

Q.   After my spouse and I divorce and split our assets, I will have very little cash, but I have a large 000sum in my 401(k).   Can I withdraw funds from my 401(k) without paying a penalty?
A.  We generally do not advocate for taking early withdrawals from retirement plans.  However,
      sometimes your financial situation is such that taking an early withdrawal is the best option.  There is
      a provision in the tax law which allows the non-employee spouse (but not the employee spouse) to
      be paid their share of a retirement account without incurring the 10% early withdrawal penalty.  The
      funds will still be taxable, and the plan sponsor will withhold 20% of the distribution to pay taxes, but
      the 10% penalty will not apply.  You also have the option to receive a partial distribution of your
      share of the retirement account and have the rest of your distribution transferred directly to an IRA. 
      The portion transferred to the IRA will not be taxable.   The employee spouse is not eligible to take
      an early withdrawal without incurring a 10% penalty.   However, with proper planning, it is possible
      to help the employee spouse have access to the funds in his/her retirement account without penalty.  
      It’s very important to follow the rules carefully when withdrawing funds from a retirement account
      pursuant to divorce, and therefore, we strongly recommend you work with an attorney and/or a

Q.  What kind of support can I expect?
A.  Illinois has child support guidelines mandated by the state which are based on income.  However, the
      guidelines can be tricky when one or both spouses owns a business and can control their wages.  In
      this situation, it typically helps to bring in a tax or financial expert who can help determine the true
      potential income of the business-owner spouse.  Maintenance is based on numerous factors such as
      length of marriage, health issues, lifestyle during the marriage, and future employability of the
      receiving spouse.  In most situations, maintenance is considered "rehabilitative" not permanent.  
      Your spouse’s current and projected future income from all sources will be used to determine his/her
      ability to pay child support and/or maintenance.  Maintenance, like child support, is modifiable.  If
      you chose to waive maintenance in return for a higher cash settlement however, you may lose your
      right to any future maintenance should your circumstances change.  You should consult with an
      attorney for legal details.

Q.  Is maintenance (formerly referred to as “alimony”) deductible?
A.  Generally, if all the IRS requirements are met, maintenance is tax deductible by the spouse paying it
      and taxable income to the spouse receiving it. However, there are rules regarding the acceleration
      and/or reduction of maintenance payments during the first three years after the settlement is final,
      which can cause a “recapture” of these payments.  There are also rules which may cause
      maintenance payments to be treated as child support if they relate to a “contingency”.  Your
      attorney should consider these rules when drafting your settlement agreement to ensure the
      maintenance payments will be tax deductible.

Q.  Is child support deductible?
A.  Child support is tax neutral; it is neither deductible by the person who pays it, nor includible as income
000to the recipient.

Q.  Who has to pay our debts?
A.   In general, in most states, all debt incurred while you were married is considered joint debt unless
      the debt did not benefit the marital estate.  All debt incurred after separation is non-marital debt
      unless proven to be necessary to maintain the marital estate.  Even if your spouse was ordered to
      pay the joint debt in your divorce settlement agreement, you are still legally responsible for joint
      debts to third parties.  For this reason, it’s important to take your name off joint credit cards and to
      refinance other debt as soon as possible.   Issues relating to debt can be complex legal issues which
      you should discuss with your attorney.   If bankruptcy may become an issue, it’s particularly
      important to hire an experienced attorney.   While support payments cannot be discharged in
      bankruptcy, there may be issues with unsecured promissory notes which were part of your
      settlement agreement.

Q.  I have never worked. Will I be eligible for Social Security?
A.  If your ex-spouse is entitled to benefits, and you were married for 10 years or longer and are not 
      currently remarried, you are entitled to receive benefits.  The amount of your benefit is equal to one-
      half of your spouse's Social Security benefit amount, or 100% of your own benefit amount,
      whichever is greater.  This does not reduce the benefit your spouse receives.  He/she still retains
      100% of his/her Social Security benefits.  This is an automatic guarantee and therefore it is not a
      negotiation point in a divorce.    

Q.   Other than for purposes of negotiating a settlement, do I really need to have a budget?
A.   Yes.  It’s likely your income and expense situation will be changing dramatically.  Being aware of
      what your post-divorce living expenses are will help you avoid a common mistake – overspending
      early on, and being strapped with debt later.  If you create a budget and take a hard look at your
      expenses now, you can start making the downward adjustment in living standard which often
      accompanies divorce so that you avoid financial problems down the road.    

Q.  Is there any way to minimize the overall cost of my divorce?
A.   Yes.  The best way to minimize your cost is to negotiate an equitable settlement as quickly as
      possible.  You can do this by working together with your spouse and being forthcoming about divorce
      related issues.  For instance, you can avoid the costs associated with the discovery process by
      providing your spouse will all necessary documents pertaining to your income, debt, and assets.  In
      addition, you should hold off on making any extraordinary purchases right before or during the
      divorce process.  This can be considered dissipation of marital assets and may increase the cost of
      your divorce as well as reduce your settlement.   You and your spouse can minimize attorney’s fees if
      you each work with your respective attorneys to understand what an equitable settlement looks like
      and then make a fair settlement offer right from the beginning instead of making numerous
      settlement offers which wouldn’t be considered equitable under the law.

Disclaimer:  This is for informational purposes only and not meant to provide legal advice.  Only your legal representative is qualified to do so.

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