Brian Walters interviews Certified Divorce Financial Analyst (CDFA) Sarah Cuddy to discuss how a CDFA can support and guide individuals navigating the financial intricacies of different family law matters, such as asset division, child, or spousal support.
Your hosts have earned a reputation as fierce and effective advocates inside and outside of the courtroom. Both partners are experienced trial attorneys who have been board-certified in family law by the Texas Board of Legal Specialization.
Brian Walters:Thanks for tuning into Better or Worse or Divorce, our podcast where we provide you with tips and insight on how to navigate divorce and child custody situations. I’m Brian Walters. Today, I am joined by Sarah Cuddy, financial advisor and certified divorce financial analyst with Baird. Thank you for joining us, Sarah.
Sarah Cuddy: Hey, thanks for having me on the podcast. I’m happy to be here.
Brian Walters: My pleasure. Well, let’s start by telling us a little bit about yourself. Start with something interesting like where you were born and grew up or something out of the ordinary other than just our work lives.
Sarah Cuddy:My goodness, so many interesting things. I was born and raised right here in Houston, Texas. I suppose the most interesting thing I can tell you about myself is that I did not grow up wanting to be in finance or even in a technical field. I actually grew up wanting to be in the fine arts and pursue a career as an opera singer for a period of time. It’s not a great way to make a living, so I switched gears, went back to school and landed here in finance. I’m very glad that I made that life choice.
Brian Walters: Very good. Our office is not far from the Houston Opera, actually. I drive by it every day on my way to work. Let’s talk a little bit about your professional career, where you went to school, licensures, and what you do.
Sarah Cuddy: All that fun stuff. Well, I won’t list every license because frankly there’s far too many, but I’ll hit the highlights. My undergraduate degree, which of course was in music, was over at Sam Houston State University. Go Bearcats! When I decided to move into a technical field, I went to the University of Texas at Austin to get my master of business from the Red McCombs School of Business. And of course, once you enter this kind of career your education doesn’t end there. Naturally, I’ve got all of the normal licenses you would have as a financial advisor. But what makes me uniquely set up to be a really good advocate and financial expert in the context of a divorce is that I have these certified divorce financial analyst designation, and I’m also a certified financial planner. And that’s a very powerful combination because it means that I am well acquainted with financial aspects of divorce, but I’ve also got all of the other training that comes with being a CFP. Which you can kind of think of as a mini masters in financial planning. It’s a very powerful combination. Of course, I’ve got 13 years of industry experience and my divorce practice has been ongoing for six years now.
Brian Walters: Very good. Well, tell us what a certified divorce financial analyst does. Maybe in a little more detail because that certainly would be of interest on this podcast.
Sarah Cuddy: Absolutely. I don’t want to bore you with any of the financial planning or investing stuff. A divorce financial analyst, and this is the way I typically will couch it to clients in the context of their cases. I’m often there just to do math and help them think through the financial implications of any given decision. Let me make it a little bit more concrete. There are a few different times when you’re going to want a CDFA on your team. One of those times is in a collaborative case or a cooperative case where you as a couple have decided, “Hey, let’s not fight about this. Let’s sit down together, perhaps with the supervision of our attorneys, and try to figure out how to divide this estate in a way that benefits us as much as possible so that we don’t have any deficiencies.” Having a financial expert at the table can first of all help you come up with some creative and novel ways to do division. It can also help you think through some of those questions that inevitably come up that, frankly, your typical family law attorney isn’t necessarily equipped to handle. Family law attorneys are legal experts. And as a side note, I don’t give legal advice because I’m not a legal expert. Similarly, if you’ve got financial questions, you want to have a financial expert.
Another time when a CDFA might be useful is if you are in a litigated or a contested case. You’re maybe a party in the relationship who doesn’t have a lot of information about the finances and maybe you’ve got just a ton of basic questions. So having an expert working with you to help you understand, first of all, what do you own as a family? How is it characterized? How is it treated? What piece of this do I potentially want to ask for? Maybe what piece of it do I potentially not want to take under any circumstances? That’s a really useful time.
Then of course, if you’ve already come to a settlement agreement and now you are having to implement that agreement. Perhaps administer a really meaningful settlement on your own for the first time, having a certified divorce financial analyst at your disposal can be incredibly helpful in making that first kind of suite of decisions. Maybe not on an ongoing basis, maybe on an ongoing basis. That’s really a client by client decision.
Brian Walters: Yeah, it makes sense. My experience is that typically in a marriage that one of the two parties typically does most of the financial work. They may or may not be the earner or high earner and the other spouse sometimes has remarkably little information. Sometimes, that’s by design. Sometimes, they kind of keep their finances separate even though that’s not what the laws would say is the legal situation with it. Other times, they’re just not that interested, they’ve got better things to do, they’re busy with the kids or whatever it is.
I’ll have both folks walk in. I’ll have the ones that know what’s going on, the experienced ones. They’ll have a spreadsheet and they’ll say, “Here would be the fair way to divide it.” And if I happen to be representing the other spouse, they’ll walk in and I’ll say, “Well, how much do you guys have?” “I don’t know.” “Do you have any retirement assets?” “What’s a retirement asset?” That kind of stuff. Obviously the second example is probably someone who’s much more in need of assistance and help with it. But sometimes, even the other ones are. Sometimes even the ones that are running the finances, are not realistic about the value of things, how they might be able to be used in the future or how they’re going to be divided. I’ve rarely seen additional knowledge be a problem. It’s usually helpful, in my experience, at least.
Sarah Cuddy: You bring up a really good point and that’s how to value assets. A lot of times we can just pull an account statement and it’ll tell us what something is worth, but take the house for example. There’s a few different ways you can skin that cat. You can go to Zillow, which I don’t necessarily recommend. You can look at your tax appraisal, which I also don’t recommend. You can get a comparative market analysis. You can pay somebody for an appraisal. How you end up valuing just that particular asset really kind of depends on the dynamics of the case. I typically err on the side of what we can agree to. Because if we can agree to something, we don’t necessarily need to spend family resources on hiring yet another professional, and I think you’ll agree with this. There’s a balance to be struck between do we want to bring on any and every type of expert that we possibly can so that we have no unanswered questions? Or do we want to try and be really picky about how many different types of experts we engage?
Another thing we sometimes run into are pension benefits and those are becoming really, really rare. But if you have a pension benefit in play, the question is always, “Well, how do I pop this into the spreadsheet?” That’s another time when having someone who’s got some experience on board can really be helpful. Or their expert might’ve come up with valuation and you may be looking at that and going, “I don’t know. This doesn’t smell right.” Then having your own expert come in and say, “Yes, this is normal. I see this valuation and the methodology was valid.” Or “I see this valuation and here are some things about the methodology that kind of get my attention.” So that gets us maybe into a little bit more granular detail than you wanted, but those are the types of things that I find really interesting about the work.
Brian Walters: You’re right about the pensions, although we still have some big employers here. Typically it’s the oil companies that still have the old-fashioned pensions, although they’re extremely complicated. There is usually over a 100-page guide to them, so that’s a whole nother subset of questions.
I know I’ve talked a lot about tips or suggestions about going through a divorce with Jake and others on this podcast. I think it’s one of the most common questions I get asked either through this podcast, during consults or just running into people. Do you have any suggestions or tips for people that might be either going through or about to go through a divorce, or considering starting a divorce?
Sarah Cuddy: Yeah, so many that I’ll try to be succinct and I want to answer your question more by giving people a framework to think about their divorce. We often think of divorce as strictly a legal process and so obviously, an attorney is the first thing people think of. But let’s take two steps back and realize a few things. There are three key elements to any divorce case. There’s going to be your emotional element. You didn’t marry this person just because you thought it was a good business decision. You married them because you loved them. You thought that you had a romance. You fell in love and so at the end of that relationship, whether it’s been over for a long time now or this is new and fresh to you, you’re going to have feelings. Those feelings are probably going to be really big ones and if you’re not finding a way to deal with the emotions that are coming up with this process, it’s probably going to cloud your ability to make good sound decisions.
I really strongly encourage people to attend to the emotional element of their divorce and that can mean a lot of different things. That might mean engaging a good therapist, even if it’s just for the period of time that your divorce is going on. It could mean joining a divorce support group. There’s all kinds of support groups out there online and in person. Or it might just mean hitting the gym on a regular basis. Whatever it means to you. Finding a way to deal with the emotions that are coming up is going to help you get through the process, I don’t want to say easier, but with a little bit less pain and distress.
Obviously, the second element is financial. If your case is very, very simple, you don’t necessarily need an expert, but if you’re finding that the finances are really causing you to feel apprehension or if you just have lots of questions that you’re not getting answers to, that’s a time to really think about finding an expert. The expert that you hire is going to depend on the needs that you have. So you may not need a CDFA. You might need a tax accountant. You might need a CPA. You might need a forensic accountant. There’s lots of different types of professionals that help out with divorces. Really interrogate the nature of the questions that you have and try to hone in on that expert who’s going to serve you best.
Then obviously, an attorney. This is where I’m going to climb up on my soapbox just a little bit. The choice of attorney has such a huge impact on your case, and it’s not just about good attorneys versus bad attorneys. That’s not what I’m getting at, but the type of attorney you choose has to fit the type of case that you have. If you want to mediate or possibly even settle around the kitchen table and you hire a bulldog litigator, that’s not a great fit. That bulldog litigator is not going to be interested in helping you negotiate a settlement outside the courtroom. Whereas if you know you’re headed for litigation, but you hire someone who only does collaborative cases, they’re not going to be ready to charge into a courtroom and do what they need to do to get you the result you need.
So yes, you absolutely must have an attorney. Folks come to me and say, “Yeah, we’re just going to use some forms online.” That makes my skin crawl because divorce laws are unique state to state, as you well know and as your audience well knows. And you’ve got to have a legal expert, but you’ve got to have the right kind of legal expert.
Know the three elements of divorce and a way to service all of them. Then the last bit of advice that I’ll leave folks with, and this is advice that I got from my own mother when I was going through my own divorce that she got during her divorce was never get too hungry, too tired, or too lonely.
Brian Walters: Yeah, that’s good. Probably not only in a divorce, but just in life in general, as parenting or any of those kinds of things. It’s very true. I think there’s some questions that I often get from clients and potential clients that you might be able to talk about. I get a lot of tax questions. You mentioned a little bit earlier about a tax CPA. So when do we need to have an expert on that versus just kind of the run-of-the-mill like, “Hey, this is taxable in retirement accounts and this one is not.” Do you have some kind of a rule or a dividing line between those things?
Sarah Cuddy: That is such a good question. It really comes down to whether we’re trying to do forward-looking projections. Oftentimes I start getting questions like “Who gets to take the child tax credit and how does that interact with maybe a joint custody agreement?” So if we’re trying to figure out filing into the future, I oftentimes will want to tap a CPA for that. But if the questions are simply, “Hey, how is this thing taxed and can you estimate what the tax impact of maybe dividing it or selling it might be?” That’s solidly within the purview of a CDFA. I will take a little side trip and say if someone has just their certified divorce financial analyst and no other credentialing, I would be very, very cautious about having them do anything on your case having to do with tax. It’s because the CDFA course curricula does not address taxes in a deep and meaningful way. It gives you the very, very, very basics. The only reason that I’m willing to weigh in is because I’ve also got that certified financial planner designation, but even that has its limits. Once you get into super complex questions of exactly the mechanics of a tax credit or claiming dependence, that’s when you really need to start talking to a CPA.
Brian Walters: Yeah, I agree. Fortunately, this is not that common of a problem. I’ve had situations recently where an unknown tax liability popped up five years after the taxes were due. The IRS sent them a letter post-divorce saying, “By the way, you owe many hundreds of thousands of dollars to us.” That was a very unpleasant surprise for everybody. Not only had the divorce been expensive and a hassle, but then suddenly, this thing dropped out of the sky that was, “Hey, by the way, you owe us a bunch more money.” Just trying to uncork that and figure that out, it’s quite the thing. Luckily, that’s very rare.
I think the big problem was the way their decree was drafted when they got divorced, which I didn’t do. I didn’t address that. Normally we would address it and just say, “If $250,000 drops out of the sky, you get a tax refund or whatever, you’re going to split it” Whatever you’re going to do or vice versa. If you have to suddenly pay some unknown amount of money unsuspectingly, you’re going to have to split it. But they didn’t do that. And so we had not only that unpleasant surprise, but then a fight over who was going to pay for it. It was quite the thing, but that’s pretty rare, like I said.
Another question I get is typically about retirement accounts, both social security and otherwise. I think I can address social security, which is that it’s not divisible. You’re going to get what you get from the government and the state of Texas can’t do anything about it, which can be really kind of unfair if you think about it. If somebody earned, paid into it, then they’re going to get more on the other end. That’s probably something to consider what we call a gray divorce, an older divorce. That is something to consider and I think courts will take that into consideration.
As far as retirement plans go, there are surprising differences. Roth IRAs, regular IRAs, there’s some stuff that the taxes have essentially already been paid except for the capital gain and otherwise. I have seen a lot of people do these property spreadsheets. It is basically an Excel spreadsheet of your assets and debts when you’re getting divorced. I’ve seen that pretty frequently where attorneys will just put whatever the statement says as the value on the account. Even though there might be a 40% tax hit coming versus an account that lets say a house, you still can do your one-time tax break on it or whatever. There’s essentially no taxes on it. That is something you can help on with understanding different types of retirement accounts. Also pensions, defined benefit versus defined contributions. Is that something that you can help on as well?
Sarah Cuddy: It is, and it’s something we see pretty often. In fact, you’ll almost always have at least one party at the table saying, “Well, what about the taxes?” So a few rules of thumb to keep in mind. If you’re going to tax impact one asset, you have to tax impact the entire estate and that can get into some really tricky territory. Let’s say that we have two folks, both of them in their fifties so they’re not quite retired yet, but they’re getting pretty gosh darn close. We have an estate where we have a home, we maybe have some investing accounts subject to capital gains taxation, and we have some retirement accounts which are taxed like ordinary income.
So for our novice listeners, ordinary income is the type of tax you pay on your labor, so when you get a paycheck. Ordinary income taxes tend to be less favorable than capital gains taxation, which is how houses and taxable investing accounts are taxed. You’ll have someone sitting at the table saying, “Well, look, this entire 401(k), this million dollar 401(k), it’s not worth a million dollars because when I take the money out I’m going to have to withhold 20% for taxes.” That’s an absolutely fair point.
Here’s where we run into a philosophical problem. I, as the financial expert at the table, having shepherded people to and through retirement, know that that account is going to remain tax deferred for as long as possible, and in fact, probably until that person’s age 72. So how can I accurately model all of that tax deferral and then model the tax hit from age 72 and beyond? It’s really kind of a thorny question. Typically, when I have someone at the table saying, “Hey, what about the tax,” I’ll go through that whole song and dance and often, I’ll say, “Look, I understand that there is a difference, so here’s how we allow for it. We allocate the taxable categories 50-50, so you get half of the retirement stuff, you get half of the capital gain taxation stuff. That is a way to kind of apportion the tax burden at least somewhat fairly.”
Brian Walters: Yeah, I agree. It is not an easy solution or answer in any way, but that’s why you need some professional help. I think I know a lot about it, although I’m not a tax person. I actually had my CPA wreck me on something this spring when we were getting ready to file our tax return. I was like, “Oh, okay, good to know that.” It was a good surprise, but still a surprise.
Sarah Cuddy: The table pointed out something like, “I understand what you want to do here, but what you want to do is far more complex and difficult than you realize.” I’m sure that you guys run into that with legal stuff all the time. Someone will say, “I want to put this thing in my decree.” And you’ll look at them and say, “Uh huh, and how are we going to enforce that.”
Brian Walters: That stops more agreements than anything is enforcing it. It’s sad because probably most people would follow things, but if they don’t, I don’t want to get the call saying, “Wait, I agreed to something and I can’t make it happen.” Not a good situation to be in.
Is there anything you want to add before we wrap up here?
Sarah Cuddy: Yeah, so I do have a little bit of a statement from our attorneys. They like it.
Brian Walters: Those attorneys, darn it.
Sarah Cuddy: They have asked me to remind you all that I am not an attorney and I don’t give legal advice. I’m a financial advisor employed by Robert W. Baird & Company, so all of my advice is around finance and taxes only. Legal advice should only come from your attorney.
Brian Walters: Very good. That makes sense. Okay, well, that’s all we have for today. If you like what you’ve heard, please do us a favor, write a review. We appreciate all your feedback, especially when it helps us better the podcast. If you’re interested in reaching out to Sarah directly, we’ll have her contact info below in our episode notes, or you can probably Google her and find her, either way. I can’t thank you enough, Sarah, for joining us today. If you have any follow-up questions to this episode or would like to talk to one of us directly about your family law situation, just reach out to us at podcast@waltersgilbreath.com or contact us directly through our website, waltersgilbreath.com, or call us or all the different ways you can get ahold of people these days. I’m Brian Walters and thanks for listening.
For information about the topics covered in today’s episode and more, you can visit our website at waltersgilreath.com. Thanks for tuning into today’s episode of For Better, Worse, or Divorce where we host new episodes every first and third Wednesday. Do you have a topic you want discussed or a question for our hosts? Email us at podcast@waltersgilbreath.com. Thanks for listening. Until next time.
Your hosts have earned a reputation as fierce and effective advocates inside and outside of the courtroom. Both partners are experienced trial attorneys who have been board-certified in family law by the Texas Board of Legal Specialization.
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