Case Study: Division of Client Estate

How a CDFA Analyzes Assets for an Equitable Separation

 

When going through a divorce, it is normal to look at your assets and just say, “you get this half. I get this half.” And, when a divorce is less than amicable, drawing out the situation any further than that can sound nearly impossible to go through.

 

But with a Certified Divorce Financial Analyst, the process is far less painful than you may think. Let’s look at an example of a client situation that was settled in the past.

 

Background:

John and Jane Doe were married for 20 years. John maintained an extra-marital relationship for a number of years with a woman, Mary, with whom he has a deeply committed relationship as well as a four-year-old son.

John has provided gifts to Mary over the past five years, as well as providing basic child support for their son.

He is a W-2 employee. Jane has a masters degree in engineering and operates a photography business from which she reported only $19,000 of income on her 2019 tax return.

 

Assets:

The Doe couple owns a home valued at $485,000 with a remaining balance of $264,000, giving them $221,000 in equity. In addition, they own 401(k)/IRA accounts collectively worth approximately $53,000.

At the age of 65, John will begin to receive a pension that will distribute $1,349.36 per month. There is also roughly $30,000 in 529 College Savings Plan accounts for their children.

 

Liabilities:

The couple has no major debt outside of the $264,000 mortgage balance.

 

Proposal

 

Division of Marital Assets:

All marital assets will be divided in half. Jane mentioned wanting to keep the house, so John’s share of the equity will be offset dollar-for-dollar with other marital assets. The marital estate excluding the home and 529 plans is worth $753,000. Half of this is $376,500. Each party’s share in the home equity is worth $110,500. If Jane is to retain the house, she must credit John $110,500 from the division of other marital assets.

Jane walks away with the home and $266,000 in other marital assets.

 

Support:

With Jane’s level of education and current business, we feel confident that she will be able to earn a substantial income in the near future. Until the time that Jane is able to secure a comparable income, John will be responsible for paying alimony, child support, and other expenses for the children at an adequate amount to cover living expenses for Jane and their children.

Based on current lifestyle, cost of living, and fair market value of services, we determined an alimony of $3,000 per month, child support payments of $1,200 per month, and an additional $1,913 per month to cover expenses for the children including health care (mental health and dental/orthodontic care included), camps, sports, memberships, and allowances.

This leaves John with $5,000 of monthly income to cover his own expenses.

 

Growth and Future Income Potential of Assets:

If the $266,000 that Jane received from the division of assets was invested at a conservative rate of 5% from now until the normal retirement age of 67, it would grow to $858,000. If converted into a guaranteed lifetime income stream at that time, it would generate approximately $51,500 per year.

 

Social Security:

Even if Jane does not collect Social Security based on her own record, she will be entitled to half of John’s. Based on the value of today’s dollar, John’s monthly Social Security retirement benefit is $3,251, and $7,217 based on the future value of a dollar.

John and Jane will each be receiving $1,625.50 or $3,608.50 per month respectively based on the present and future values.

 

Pension:

Beginning February 1, 2040, John will receive $1,349.36 per month paid as a single life annuity. Half of this benefit, $674.68, will be paid to Jane.

 

 

 

This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.

 

Gann Partnership, LLC and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.