What is no fault divorce and how does it affect my financial settlement?

No Fault Divorce means that you are not required to provide proof your spouse was “at fault” or did something wrong, such as committing adultery, or being abusive to be granted a divorce. Every state in the US has adopted some form “no-fault” divorce laws. California was the first to do so in 1969 under then Governor Ronald Reagan. New York was the last to do so in 2010. The application of the no fault divorce terminology is not uniform from state to state since each state independently passed laws to enact it. Some states allow but do not require the proof of fault in a divorce filing while others don’t even allow a petitioner to claim any grounds for fault in a filing. Check with an attorney in your state to verify your state laws.

How can no-fault laws affect your financial settlement?

They don’t necessarily. You may still be permitted to show facts related to one parties actions as part of your case. Some states are known as “equitable distribution” states and allow a judge to take the conduct of parties during the marriage into account in dividing assets. Equitable does not mean equal. This means the court can divide assets based up on what it believes is FAIR and effectively penalize a party financially for their actions during marriage. Dissipation is one of the most common fault actions affecting an asset division in divorce. Dissipation, in loose terms, refers to the misappropriation of marital assets. Usually these allegations stem from drug use, pornography, gambling or expenses related to acts of infidelity.

If you believe dissipation to be an issue in your divorce we suggest you seek guidance of a certified divorce financial analyst at Wellspring Divorce Advisors to help you understand the cost/ benefit of making such an argument. These types of claims typically require significant forensic accounting to prove the flow of funds and who was in control of it and it may not be worth it to pursue the claim in light of the cost associated with doing so.

What is “vesting” and how does it affect my divorce?

Vesting gives an employee rights to employer-provided assets over time, which gives the employee an incentive to perform well and remain with the company. The vesting schedule set up by the company determines when the employee acquires full ownership of the asset. Generally, non-forfeitable rights accrue based on how long the employee has worked there.

Read more: Vesting Definition | Investopedia https://www.investopedia.com/terms/v/vesting.asp#ixzz3kbDViTje
If an employee is vested it means that at least some of the retirement plan or stock options belongs to the employee and not the employer. This is the amount an employee is entitled to take when the employee leaves their employer. The portion that is vested comes from two sources:

  • Employee contributions vest immediately. When an employee leaves his employer, he or she is entitled to 100% of his or her contributions plus any earning on those contributions.
  • Employer contributions vest over a period of time. There are multiple types of vesting structures that can be adopted by a retirement or stock option plan. Graded vesting schedules allow for a portion of the funds to vest each year over a set number of years. Cliff vesting schedules provide a vesting of 100% of benefits after a set period of time.

How does vesting affect my asset division in divorce?

A benefit does not have to be vested to be considered an asset subject to division in your divorce but it does mean the funds may not be immediately available for you to spend. Wellspring Divorce Advisors will review your assets and make recommendations as to the true value of unvested assets and suggestions as to how to divide them. Unvested assets such as stock options, restricted stock units, pensions and other executive compensation must be handled carefully in legal agreements and long after the divorce is final. The agreements typically require the deferred division of these unvested assets meaning the employee spouse must maintain the benefits for their former spouse and the former spouse must be diligent in watching for vestings long after the divorce is finalized. Make sure you post-divorce financial advisor is competent in managing this ongoing entanglement with your former spouse

Are pension and other retirement plans considered marital assets and subject to division in divorce?

Yes, retirement plans are marital assets subject to division to the extent they were earned during the marriage. State laws differ on how to determine exactly what “earned during marriage” means so be sure to check with a local expert. In California the presumption is that any pension plans, 401K balances and other retirement accounts are community property and subject to division unless/until proven otherwise. If the retirement plan benefit was earned during marriage it will be divided.

In order to earn pension benefits a worker must be employed and participating in the plan.

In order to participate in a 401K plan the worker must make contributions to the plan by deferring wages from his or her regular paycheck.

Since both examples would require the participant to earn their benefit in one form or another, either time in the pension plan or contributions to the 401K, these earnings are considered community property or martial assets and will typically be divided 50/50 unless their are other extenuating circumstances or the parties agree otherwise.

Be careful though to make sure you are dividing apples with apples as retirement plans are pre-tax money where as other assets may have already been taxed. The difference in value between $100,000 pre-tax and $100,000 after tax could be $20,000 or even $50,000.

10 Questions to Ask a Potential Financial Advisor After Divorce

financial advisor

What do you do now? Your divorce is finalized and the financial settlement is clear(ish). How do you take control of your new found financial independence? The first item on our Post Divorce Financial Checklist is  “Interview and retain the services of a financial planner.” You may have never done so in your married life so here are the most important questions to ask when looking for a new financial advisor after divorce.

  1. What CREDENTIALS do you have? CFP (CERTIFIED FINANCIAL PLANNER), CPA (Certified Public Accountant), CFA (Chartered Financial Analyst) are the most rigorous to obtain but there are hundreds of alphabet soup credentials available in the financial advice world. Some represent specific specialties like the CDFA (Certified Divorce Financial Analyst) designation while some, such as the AIF (Accredited Investment Fiduciary) merely represent the advisors commitment to acting as a fiduciary in client relationships. Keep two things in mind,
    • simply having professional designations does not necessarily make a good advisor
    • licenses are not credentials, most all advisors will have Series 7, 24, 51, 63, 65, 66 and insurance licenses
  2. Are you a FIDUCIARY? Your advisor should act as a Fiduciary for clients meaning, in simple terms, they would never do something with your money they would not do with their own and they will always put your interests ahead of their own. Here is the Wikipedia definition of Fiduciary.
    • Do you have any disciplinary records? Check out the Securities Exchange Commission website to check up on them just in case.
    • How are my assets safeguarded?
  3. How often will we meet and what will we talk about? Your advisor should be proactive in communicating with you and scheduling meetings to review financial planning goals and investment performance. They should also have a structured process for providing their services. A typical financial planning relationship has the following steps at minimum. You will notice WellSpring Divorce Advisors follows this same process.
    • Establishing and defining the client planner relationship
    • Gathering client data
    • Analyzing and evaluating the client’s financial status
    • Developing and presenting the financial planning recommendations
    • Implementing the financial planning recommendations
    • Monitoring
  4. How long have you worked at the current firm? Where were you previously? Why did you leave? Advisors move from firm to firm on a pretty regular basis for a number of reasons. Some for altruistic reasons seeking to provide better client service, others move for a pay-day. An advisor who leaves Wells Fargo and moves to Merrill Lynch as an example could be paid millions of dollars for doing so. If you check the background of an advisor and they move every 5 to 10 years they are likely chasing the pay day each time. Be wary of them as they will probably do it again.
  5. HOW DO YOU GET PAID for investments you recommend and other services you provide? The financial advisory world is full of complicated compensation structures. An advisor could be paid commissions by their employer as well as outside entities such as insurance companies and mutual funds for selling you a product. In general you should avoid any advisor who accepts commissions for investment decisions. Look for an advisor who charges a percentage of the assets they manage for you. Industry standard these days is around 1%.
  6. What SERVICES do you offer outside of investment management? Do you provide financial planning services? If so, what does this include? Paying 1% a year from your portfolio for just investment advice is an old and antiquated service platform. Your advisor should offer Comprehensive Wealth Management services which include financial planning assistance with cash flow management, retirement planning, estate planning, tax planning and dependent care planning. if you need an investment advisor you also need financial planning. Most of our clients at Wellspring Divorce Advisors need a financial planner more than an investment advisor.
  7. Can I speak to a client of yours about their experience working with you? Speaking to a current client about the prospective advisor is absolutely mandatory. Feel free to ask them some of these questions as well.
  8. What happens to my account if something happens to you? Do you have a SUCCESSION PLAN? Advisors are notoriously bad at succession planning for their own businesses. A good succession plan takes proactive steps to protect clients and their money if an important decision maker and advisor becomes ill, dies or simply retires. Your advisor should be able to tell you what happens in the case of each event. It may be a current business partner would step in, a younger advisor is being mentored to step in, an entire new firm would take over or the worst case, they have no plan at all. Do not work with an advisor who has no succession plans as you leave your financial security up to chance if something should happen to them.
  9. Who is your IDEAL CLIENT? Most advisors will struggle to explain their ideal client outside of telling you the minimum assets they require to work with you. It is important to understadn this ideal client make up because it can inform you how likely the advisor is to be able to handle your individual needs. If you are a newly divorced woman who has never managed her own money; the advisor specializing in executives at tech companies is not your best bet. Wellspring Divorce Advisors recommends you find an advisor who specializes in working with individuals after divorce. You have very specific needs from a financial planning perspective and need an advisor who will educate you along the way.
  10. What is your INVESTMENT PHILOSOPHY, in simple terms? How frequently will my portfolio change and who makes decisions as to when and how to change it? You will be surprised how many advisors don’t actually manage the investment themselves. They outsource the responsibility to others. There is nothing wrong with this. Your advisors job is to work with you to meet your financial goals, manage your lifestyle and help you make financial decisions. Outsourcing investment management allows the advisor to concentrate on you the client. BUT, if they cant explain how the portfolio is managed, why it is managed that way and who is ultimately responsible for decision making they are doing more than outsourcing, they are abrogating their fiduciary responsibility to you. They still need to oversee the outside investment managers and make strategic decisions about risk profile.

Let us know if you need a referral to a competent and credentialed Advisor who specializes in working with individuals after divorce. We know all the best nationwide.


wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

What if spousal support is payable for 6 years, but one spouse dies?

Spousal support must cease upon the death of the recipient in order for it to be considered spousal support for tax purposes and tax deductible to the payor. Spousal support can be paid after the death of the payor, typically from their estate in some form, but most settlement agreements and divorce decrees state that it will stop upon the death of either spouse.

We suggest the payor spouse be required to carry a life insurance policy to cover the lost cash flow for the payee spouse in the event of premature death. If this isn’t required in your settlement you should ask for it to be added. In the event the agreement can not be modified you should consider buying the policy on your former spouse yourself. You will have to pay for it but the peace of mind is worth the cost.

In order to determine the death benefit amount needed you would do a present value calculation on the stream of cash flow from the spousal support payments.

A $5,000 per month spousal support payment payable for 10 years would have a present value of $471,540. Call us if you need help determining the right amount of life insurance.

No matter the route you take for insuring the payments make sure you, the support recipient, are both the owner and beneficiary of the life insurance policy. Losing the cash flow from spousal support can have devastating affects on your ability to maintain your lifestyle.