Creating a Financial Affidavit for Divorce Negotiations

One out of four people who experience divorce in the United States is age 50 or older, and nearly one out of ten is age 65 or older. These later in life separations are commonly referred to as gray divorce, and with it often comes complex financial situations. By properly creating a thorough financial affidavit during the divorce process, you can significantly increase your confidence in your financial independence post-separation.

Hello everyone, and welcome back to another episode of the Retired-ish podcast. I'm your host, Cameron Valadez, certified financial planner, and I wanted to dedicate this episode to those who need help navigating the beginning stages of a divorce. With stress levels likely to be at all-time highs, fear, and anxiety over finances and family, I want to provide some guidance on where to start with the finances in order to alleviate some of those stressors and worries for you or maybe a close friend.

Over just the past year or so in my own personal life, I have known several couples who have unfortunately decided to end their marriages and will soon have to go through some of the processes that I will be discussing in today's episode. Although these processes will apply to the majority of those going through a split at any age, this process is particularly important and valuable for those divorcing in the second half of life.

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As you may have heard me mention before, this is often referred to as gray divorce, which is essentially divorce after age 50. I think this has become a coined phrase these days due to the fact that divorce later on in life is becoming more and more common nowadays, for whatever reason, and the fact that it typically looks much different than couples in their thirties and forties that decide to split. This is due to the fact that these marriages have typically lasted much longer than those that are in their thirties or forties, and therefore, these couples have had more time to accumulate assets and establish larger family roots with multiple generations in the picture.

The key issues in gray divorce typically have to do with things like dividing retirement assets, dividing the value of maybe the primary residence or other rental or real property, and providing adequate income for both to live on without having to drain their net worth over time. All of these things can sometimes be very significant amounts of money, and any mistakes made in the divorce negotiation process may cause significant financial harm to either party. This is especially true since these couples are closer to retirement age or already in retirement and, therefore, aren't usually at a point in their life where they are earning an increasing income in the workplace. They will instead rely heavily on a sufficient retirement income stream that can help them maintain their independence and desired lifestyle.

Usually, in these cases, the divorce isn't focused on things like child support or custody arrangements, as is commonly the case in divorces earlier in life. And when I say dividing, that doesn't mean that post-divorce, everything will always be split 50/50 or “fairly.” That may be the intention, but rarely does that actually happen unless sufficient planning had been done before the divorce was finalized, which is the crux of what we are going to go over today.

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Every state has its own laws when it comes to divorce. Just because you heard about how your friend's divorce might have played out, who maybe lives across the country, doesn't mean yours will work out the same. While there are guidelines and laws that aim to make divorce in certain states as equitable as possible, a lot of it comes down to what you can negotiate and what each party and their potential legal team can agree upon. I also want to mention that there are different ways to proceed with the divorce process. Some examples might be a mediated divorce process, a collaborative divorce process, or, of course, going into a full-blown court battle, which is what you really want to avoid unless absolutely necessary.

Many people assume that this is what you have to do when getting a divorce, and that is definitely not always the case. But in any case, you'll want to enter the process prepared so that you and possibly your legal counsel can attempt to negotiate the best possible outcome for you and your financial future. One of the most important parts of that process is preparing what is commonly referred to as a financial affidavit. A financial affidavit is essentially a document used to collect various pieces of financial data, which includes all of your income, your expenses, and your various assets and liabilities or debts. Sometimes, financial affidavits go by different names in different states, such as a case information statement, a statement of net worth, or an affidavit of financial standing.

But throughout the rest of the episode, I will just refer to it as a financial affidavit. Whatever name your state has for it, this document is essential to any divorce negotiation process or settlement. When creating or building out this financial affidavit, you want to try to be as accurate as possible and very thorough. Oftentimes, however, I find that this actually ends up being quite difficult since, in many marriages, each spouse has access to different pieces of important information. For instance, your spouse might be the only one with online access to their company 401(k) plan and the statements.

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In addition, they may also pay some of the household monthly bills from their personal bank account that maybe you also don't have access to. And we will dive into this potential issue a little bit later. But when preparing this information, you also need to know that it's important to disclose everything, not hide any assets or income streams from your spouse, because doing so will likely make the divorce process much worse. It's also not legal. It's also important to note that the affidavit you create can and should change quite frequently because as you go through this process, you will likely discover more and more information over time.
Now, this process and the document itself sounds fairly simple, but I can tell you from personal experience working with many divorcees how many do not fully understand the household finances and aren't very well prepared to gather all of this information because divorces can be sudden, unexpected, or even revengeful. Unfortunately, many times, I see that people are so emotionally overwhelmed by what they are going through that they are simply paralyzed and don't even know where to start. The simple thought of having to do this “homework,” for lack of a better term, is a daunting task, especially if you have not done any detailed budgeting in the past and now realize that you will have to thumb through every little thing that you spend money on. In these cases, they may rely on an attorney, if they choose to hire one, to do this for them. Unfortunately, this is not typically the case.

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Oftentimes, the attorney will provide you with a packet or a checklist of some sort, asking you to get all of this together for them, so you essentially end up in the same place. The attorney's core job is to guide you through the legal process and attempt to get you an outcome that aligns with your state's laws. They will rely on you to provide them with the information that's necessary to do so. Many attorneys also bill hourly, so the more you ask them to do and the more time it takes, your costs can increase, sometimes much higher. Therefore, you'll want to try to be as prepared as possible for this step of the process, either on your own or you might consider consulting and adding a competent financial planner to your team of advisors who can do a lot of the heavy lifting when it comes to the finances.

You and the financial planner can work together to develop a thorough affidavit and present it to your legal team for review and action. There are many financial planners out there who specialize in divorce planning and may charge flat planning rates or other ways as opposed to hourly. So this may be helpful when trying to be cost-conscious in the beginning and in the long run post-divorce. And remember, the costs of your divorce will not only include the initial upfront costs, but also the costs that may come up in the future by making significant planning mistakes when you are agreeing upon your settlement.

When I see someone initially who has maybe done their own affidavit, I often find many things that have not been accounted for, either because they were simply overlooked by a mistake or because we are able to identify that there is more to the finances than they initially thought, such as an account that is marital property or is a marital asset but maybe it is only titled in the other spouse's name.

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And as I mentioned before, maybe you don't have access to or have never seen any correspondence about that asset or income source. Many people end up taking a lot of shortcuts by doing a lot of guesswork and just trying to get through it and get it over to an attorney quickly. But remember, the attorney and or their team of paralegals aren't necessarily going to take the time to double-check and question every little thing you provide them unless it is something that stands out significantly or looks off by a marginal amount compared to others in similar situations. When you take shortcuts or lack accuracy in the finances you provide, things such as your future spousal support or portions of various assets you're awarded can end up being less than ideal because they are based primarily on the accuracy of your financial affidavit.

That being said, make sure to account for those random expenses that maybe don't occur so frequently, like on a monthly basis. These can be things like annual premiums for various insurance coverages, like your auto insurance, homeowners insurance, you name it, or any other annual subscription costs for that matter, snow removal services, pest control services, annual DMV fees for vehicles, costs for getting your taxes done each year, so on and so forth.

These are just some examples that can add up significantly and have a meaningful impact when you're trying to negotiate the potential support payments that you will rely on post-divorce. If you were to just go over the last two to three months of expenses on your bank statements or your credit card statements, you could miss a lot of these necessary living expenses. So it would behoove you to do a more in-depth analysis of your income and expenses over a much longer period of time, preferably a few years.

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In addition, you don't want to simply include your current actual expenses. You should also include any newly anticipated expenses that will arise after the split. A good rule of thumb when it comes to expenses is that if you don't ask for a particular expense to be covered or you don't include it, it probably won't be included for you by anyone else. Another key concept to understand when creating this affidavit is that expenses don't always stay the same. Some are variable, some are fixed, but even some of those would be fixed expenses typically go up over time, so think utilities, for example, or property taxes maybe. Know that these changes over time in your expenses can also be included in your negotiations, but they need to be fairly reasonable.

For example, you may know that your soon-to-be ex's term life insurance coverage will end in four years, so you may ask that they apply for an additional policy and that they, or even you, be awarded an amount allocated to pay those premiums. After all, that could be what protects your spousal support should they pass away prematurely. Your ex may want to buy his or her own home but may need a couple of years of support payments before he or she can actually qualify for a loan and make that purchase. The point is that looking at only your current expenses in a silo can make for a strained cash flow situation in the long run.

And lastly, when creating this document, you might consider examining how the various sources of income and expenses will affect your long-term net worth, which is essentially what you own minus what you owe or your debts. You may be able to show that based on a given settlement proposal by you and your legal counsel, or maybe your ex and their legal counsel, you may have to significantly dip into your half of the available assets, such as home equity or retirement accounts for your necessary living expenses, and therefore your net worth would very likely decline rather than have a chance to increase over time. In severe cases, this could result in you outliving your money down the road. This is super duper important in long-term marriages and makes negotiations easier when a proposed settlement shows that one spouse will clearly have far more net worth at retirement than the other. Remember that those of you going through a gray divorce likely have been in long-term marriages and are approaching your retirement years.

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In that case, you simply cannot afford to make these types of financial blunders in your divorce. Now, these, of course, are just some examples, and some of the things that you try and negotiate may not fly, especially if you're going through a full fledged court process and a judge will be overseeing everything. However, if you were to go another route, such as mediation, for example, you may find yourself with a little more leeway.

In summary, when going through the process of developing your financial affidavit, you'll want to think ahead, not just the here and now. Your main goals throughout the process should be to collect your financial and expense data now and in the future when you're on your own, identify your personal yet reasonable goals, create a cash flow budget that accounts for the timing of different income sources that you will have and how your expenses will change over time, create retirement-specific objectives for yourself, and while not discussed in this episode, you'll also want to determine how much risk you will be required to take when investing the various assets you come out with. Remember, as I always say, there's no such thing as no risk. There's only what risks to take and when to take them.

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That does it for today's episode. If you find yourself in this situation and you think that you may need someone on your team to help you craft an efficient financial picture in order to help you plan for life after divorce, feel free to reach out. Our firm, Planable Wealth, has experience navigating the financial aspects of divorce and working alongside family law and matrimonial attorneys. You can find us at planablewealth.com or via the podcast website at retiredishpodcast.com, which is accessible in the episode show notes.

Remember, it's 2024. That being said, we have a new 2024 tax cheat sheet as a free gift for download when you join our Retired-ish newsletter. This will provide you with the important tax numbers and thresholds for your personal tax and financial planning throughout 2024.

In addition, if you check out our website at retiredishpodcast.com, we are offering a free download for my firm's retirement planning quick guides, which includes multiple flowcharts and resources to help you make decisions and implement some of the things we discuss on the podcast, so be sure to check that out.
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