By: Kathy Kristoff
Monday, June 2, 2014
That was 25 years ago. Vasileff, who had been working in corporate finance for a big company, enrolled in a financial planning program. Her goal was to become a fee-only financial planner specializing in helping women negotiate the often befuddling economic choices that are made in the heat of a marital split. Fee-only planning was rare at the time. Divorce planning wasn’t even on the radar.
“People thought I had three heads,” she says. “I was one of, maybe, three people in the country doing this in 1992. There are now 3,500 of us and we are getting calls from overseas asking how to get started.”
Financial planning in the throes of divorce is both similar and vastly different from planning during any other time. As with other planners, the divorce planner needs a detailed picture of the client’s assets, debts and spending. An understanding of the client’s tax situation is also a must. But divorce planning dives deeper because onetime financial decisions have to be made and there’s no going back.
“You get one bite at the apple,” Vasileff says. “You had better get it right.”
An ordinary financial planner, for instance, generally isn’t concerned about the value of a client’s frequent-flier miles or corporate perks. Yet those issues play into a couple’s lifestyle when married, and are likely to be lost to one spouse when divorced. A fair split will find a way to compensate for that loss.
And the tax repercussions of splitting assets can have a vast impact on the wealth of both parties. For instance: A married couple gets a $500,000 tax exclusion on the profit from the sale of a personal residence. But if the property is transferred to one spouse and sold later, the value of the exclusion drops to $250,000. For homeowners with a substantial gain, that’s at least a $37,500 tax mistake — if the $250,000 profit is taxed only at a 15% capital gains rate. It’s a much bigger mistake if the homeowner is in a high tax bracket or lives in a state that assesses tax on capital gains, as most do.
If the property is to be sold and it’s an amicable parting, this couple could save a small fortune by selling while they are still married (or within three years of the split); then both can claim it as a personal residence.
Then, too, if the couple has $1 million in assets — with $500,000 in retirement accounts and $500,000 in taxable accounts — it might seem fair to let one spouse take the retirement plan and give the other the taxable account. But when money comes out of that retirement account, 100% of it will be taxed at ordinary income tax rates. In the taxable account, only the profits get hit — and then at preferential capital gains rates.
Considering those tax implications, this equal-value split no longer looks so even. But unfortunately, says Vasileff, that’s not something your divorce attorney is likely to tell you.
“The tax and financial planning implications of divorce are really beyond the scope of most divorce attorneys,” she says. “But when you are divorcing, you have to make all of these onetime economic decisions that you can’t undo.”
Divorce planning also differs from traditional fee-only planning because there are few assets to manage. Vasileff’s firm has about $25 million in assets under management, most of which came from clients who are not divorcing. If a client wants Vasileff to manage their assets following a divorce, she typically asks them to think about it for a while — and re-interview their existing financial professionals — before making the decision.
There are two reasons for that, she says. One is that she doesn’t want her advice to be tainted by the possibility that she might eventually get the client’s assets to manage. (That could give her an incentive to encourage the client to keep cash and investments, rather than a home, for instance.) But also, she points out, divorce is an incredibly emotional process. Many clients benefit from stepping back to get their bearings.
The vast majority of Vasileff’s revenue — roughly 80% — comes from hourly fees, she says. Like an attorney, she requires an upfront retainer that reflects her best guess of how many hours she’ll spend working on the client’s project. And like the attorneys she works with, her expertise doesn’t come cheap. Her hourly rate ranges between $350 and $550, depending on whether she’s working on a client’s plan or (for the higher rates) testifying in court.
A simple, uncontested divorce might take 10 to 20 hours, she says, but an adversarial one can require much more: forensic accounting, analysis of years of financial data, even investigations into offshore accounts.
One common gambit is what Vasileff jokingly calls “RAIDS” — recently acquired income deficiency syndrome. “There are people who premeditate their financial situation so that by the time they file for divorce, it’s the perfect storm,” she says. “They have gone through their savings; the business is in trouble; they have no income.”
If there’s shared suffering at the time of the divorce, it’s up to the planner to ensure that both parties benefit from any future recovery, she says. “If you’re experiencing a downside now, you keep the door open for the client to share in the upside.”
The toughest problems emerge when one spouse is dishonest, she says. In one case, her client discovered that her spouse had forged her name on two mortgages — including one on a commercial property she didn’t know about.
It was fraud, of course. But if the wife turned her soon-to-be ex-spouse in, they’d likely both suffer devastating consequences.
“If you expose certain things, there are criminal and legal repercussions — it’s a catch-22,” Vasileff says. But you also don’t ignore it: “It becomes fodder for how you negotiate.”
Though her clients are transitory — most finish the process and don’t seek her counsel again — Vasileff says she’s never had trouble finding clients. She gives a lot of speeches; she also gets called in by attorneys who know her and know what she can bring to the process.
Another advantage, she says, is that people going through a divorce have an intuitive understanding about how she can help. “No matter where I go, if I do my elevator speech about what I do, every person I talk to says, \’Where were you when I went through my divorce?’ ”
Still, Vasileff notes that it’s the attorney, not the planner, who walks the client across the finish line. And there are some things she can’t fix.
“I can’t guarantee that you’ll be happy or that you’ll get X amount of Y,” she says. “My role is to help you make good decisions — educated decisions — so that you have no regrets about things being overlooked and can go forward with a game plan for your life.”
Kathy Kristof, a Financial Planning contributing writer in Los Angeles, contributes to Kiplinger’s and CBS MoneyWatch.com. Follow her on Twitter at @kathykristof.