Editor’s note: This is part four of an ongoing series throughout this year focused on helping older adults navigate the financial difficulties of gray divorce. See below for links to the other articles in the series.
In a recent article in this series on gray divorce, I discussed the importance of preparing a budget as a key component of financial planning in divorce. This month, I'd like to kick it up a notch and focus on what’s known as a lifestyle analysis, or what some in the divorce community call “a budget on steroids.
What is a lifestyle analysis?
A lifestyle analysis is typically used in high-net-worth divorce cases where one party is arguing for spousal support based on the marital lifestyle enjoyed up to the point of divorce or separation.
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Lifestyle analysis looks at the living expenses incurred during the marriage and the spending habits of both parties. An analysis of marital spending can be used to determine the dollar amount one spouse may need to maintain a similar lifestyle post-divorce.
Importantly, a lifestyle analysis may help confirm or refute income claims made by a spouse. Sometimes a spouse may declare income that is well below the cost of the lifestyle he or she is leading. The analysis may point to the need to investigate undisclosed sources of income and require a deeper forensic analysis.
With gray divorcees, the issue can get complicated as the primary income earner approaches retirement, anticipating a reduction in income, making spousal support awards more complicated with the possibility of future modification.
You'll need professional help
Producing a lifestyle analysis is beyond the scope of the divorcing client. Likewise, most family law attorneys would rather focus on the legal aspects of the case than get into the minutia of credit card and bank statements. Attorneys and their clients will often hire a financial professional such as a Certified Divorce Financial Analyst (CDFA) to produce a lifestyle analysis. These cases typically involve tens of thousands of transactions, requiring attention to detail and time to sift through numbers. In my lifestyle analysis work and in my conversations with other divorce financial professionals, it is also clear that specialized software and a good database to organize and analyze data are essential.
A clear and concise final report is a necessary component of the lifestyle analysis. This final report requires an analytical approach and a willingness to ask questions before it is written and delivered to the client and their attorney.
What a lifestyle analysis covers
A few years ago, an attorney asked me to do a lifestyle analysis for his client. Let's call her Mary. The attorney told me that the purpose of the lifestyle analysis was to answer the question, “What will Mary cost?” We established that the scope of my engagement would be to perform a lifestyle analysis for Mary and to budget how much money she would need to maintain the lifestyle to which she had grown accustomed. A post-divorce budget would assist in projecting an appropriate amount of spousal support from her husband.
It was understood that I would produce a report summarizing my findings (including detailed footnotes) and testify at trial if necessary. We also discussed how the numbers would be presented and the time period to be covered in the report. We agreed to review the last two and a half years of marital expenses, sufficient to provide enough historical data to reliably predict future income and expenses.
Typically, at least two years of expenses are needed to provide a reliable gauge of marital lifestyle, although it is common to analyze three to five years of data. To limit the cost and scope of the work, financial experts will sometimes reduce the time period to limit costs to the client. Less than two years is typically not enough time to establish a solid history and pattern of spending.
I have found in my lifestyle analysis work that it is crucially important to get bank and credit card statements up front from my clients. Attorneys work to deadlines. The last thing a financial professional wants to do is track down missing statements a few days before a court deadline.
As the transactions are compiled, the financial expert can potentially add value by uncovering previously unidentified accounts or detecting expenses that may be paid by somebody else or are run through a business. A case for waste of assets might also be bolstered if wasteful expenses such as gambling, extramarital affairs or fraudulent conveyance to a third party are identified.
Expenses which might be excluded from the analysis may include expenses for the extended family, excessive or unreasonable spending, nonmarital expenditures and extraordinary, non-recurring expenditures.
Not every state will use a lifestyle analysis
Whether you or your attorney deems a lifestyle analysis to be a useful tool in your case may ultimately depend on where you live. Not all jurisdictions care about marital standard of living.
Your attorney should know how your state's statutes treat marital standard of living. In some states, such as Texas, a lifestyle analysis isn’t relevant because marital standard of living is not afforded under the state statute. California, on the other hand, does consider marital standard of living. Some consider California one of the worst places to get divorced for the principal breadwinner if there is a large imbalance in income between the two parties.
Divorcing couples and their attorneys need to be mindful that state statutes on divorce change all the time, so they need to keep up to date.
Advice on how to prepare for a lifestyle analysis
Provide your divorce financial professional all the information he/she needs, such as statements from bank and credit card accounts. And do it in a timely manner. As mentioned above, attorneys work on a deadline, and financial professionals need time to analyze all the data.
Don’t overstate your budget. Your divorce team is best served when you provide them with accurate records. False information will likely be seized upon by opposing counsel, and if the case goes to trial, the judge will not be impressed. Honesty is the best policy.
Expect sacrifices. The income that supported one household unit will now support two. A good lifestyle analysis can help your attorney negotiate a decent spousal support number, but don’t expect life to be exactly the same as before.
Another thing: A lifestyle analysis isn’t cheap. My experience is that a lifestyle analysis might start at about $10,000 but could run into six figures in higher-net-worth divorces.
That’s a budget on steroids.
Other Articles in This Series
- Introduction: Happy New Year: Let’s Get a Divorce
- Part one: How Does a Gray Divorce Affect Social Security Benefits?
- Part two: In Gray Divorce, Two Financial Planning Yardsticks Are Key
- Part three: Don’t Forget to Update Beneficiaries After a Gray Divorce
Related Content
- What Older Adults Should Know about Getting Divorced and (Maybe) Remarried
- 'Gray Divorces' Can Upend Your Retirement Plans
- Four Steps to Prepare Your Finances for Divorce
- Beware of These Three Hidden Costs of Divorce
- You’re Divorcing or Lost Your Spouse: What Do You Do Financially?
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