Divorcing clients require a great deal of financial and emotional support. In order to provide the best assistance to clients in a time of need, it’s important to have a handle on the resources and latest knowledge available to you in the area of divorce financial planning.
Divorcing clients require a great deal of financial and emotional support during a very trying period in their lives. In order to provide the best assistance to clients in a time of need, it’s important to have a handle on the resources and latest knowledge available to you in the area of divorce financial planning.
On average, 45 to 50 percent of first marriages end in divorce, and the rate for subsequent marriages is even higher. Even the most seemingly stable marriages can implode, wrecking the most carefully crafted of financial and investment management plans. So it’s essential to be prepared, says Roberta Stanley, a divorce attorney with Brinkley Morgan in Ft Lauderdale, Fla.
In fact, wealth managers should have awareness of divorce laws and their implications when onboarding clients, she adds. That’s because many issues involved in wealth management have long-lasting implications for the future for clients, whether clients stay married or end up going their separate ways.
In addition, state laws are so variable from state to state and are subject to revision that it’s incumbent upon wealth managers to keep up on the latest developments and forge close relationships with knowledgeable family law attorneys to stay up-to-date. With that in mind, here are seven issues to consider when dealing with clients about divorce and divorce financial planning:
1. Asset titling: When on-boarding clients, most wealth managers automatically title all assets in both names. This could have drastic implications on equitable division of assets in a divorce depending on what state a divorce occurs in, says Stanley. “If you put all the assets in both names when some of the assets were non-marital assets before the marriage, in Florida, that’s an automatic gift,” she says. “That means that half of that non-marital asset is being gifted to the other spouse and it can’t be undone in a divorce.”
2. Attorney referrals: Knowing competent and experienced attorneys for potential referrals is a valuable tool, says Linda Stirling, a senior vice president and financial advisor with RBC in La Jolla, Calif. “Oftentimes we don’t hear it right away because there is a certain amount of embarrassment around it, but when we do find out about it, we have the chance to offer references to attorneys and to play a role in helping the couple figure out their financial life post-divorce,” she says.
Stanley agrees, noting that it’s important to match divorcing clients carefully with family law attorneys based on their personalities. “If a spouse has been overshadowed by a dominating spouse, you don’t want to refer them to a lawyer that has that same style, because the divorcing spouse needs to find her voice,” she adds.
3. Disability and life insurance: If there’s alimony and/or child support involved, the payor should have life insurance and disability insurance payable to the payee, so that the payee will continue to receive alimony and/or child support in the event the payor dies or is disabled, says Tim Spiess, partner in charge of the wealth management group at EisnerAmper Wealth Planning LLC in New York, NY.
“If there’s a death or disability, life insurance and a long-term disability insurance can protect the recipient spouse and the children from the marriage,” he continues.
4. Realistic expectations: A wealth manager’s most important job in a divorce is to provide both spouses with realistic expectations, says Stanley. “What are their lifestyles? What are the needs of the family? How can I guide this person or both spouses giving them realistic expectations of what they are looking at financially at the end of the divorce?” she cites as questions wealth managers need to be prepared to answer.
“In some cases, I get clients that come in who think they are going to keep most of the money if they’ve been the main breadwinner,” she says. “They haven’t worked through, what about the other side. A wealth manager can help both parties understand that there are two people, two lifestyles, two houses to maintain on what maintained one household previously.”
5. Educational expenses: Whether it’s private elementary or secondary school or a college education, some provision should be made for paying the educational expenses of the children, says Spiess. There’s also the issue of how any educational funds built during the marriage will be administered and spent, he adds.
“Are expenses going to be split? Is one spouse going to pay more than the other? When the child is away at school, will the payor spouse be given a child support credit, is support is still being paid?” he asks. Depending on the state where the divorce takes place, educational expenses may have to be part of the divorce agreement if state law doesn’t provide for post-secondary expenses.
6. Cost of living adjustments: Even if official inflation is low, the cost of day-to-day items like gasoline and food are more expensive, so the spouse who is receiving alimony and child support should seek some type of cost of living adjustment based on a recognized inflation index, says Spiess.
7. Reallocation of investment assets: Following a divorce, both spouse’s investment portfolios will likely need to be reallocated given their changed situations, notes Spiess. “Both spouses, following a divorce, will need a review of their investment portfolios and a new plan to figure out how to best allocate those investments so they can fund themselves through their individual life expectancies,” he continues.
“If there was a dual income household and now there’s only one income on each side, risk tolerance may need to be reconsidered, each household expenses will need to be recomputed and how retirement plan assets will be accumulated and spent down,” he adds.”