Sharon Klein, a Family Wealth Strategist and Trusts & Estates Attorney, and Mark Bank, Family Lawyer, discuss top tips for negotiating divorce settlement agreements with Dan Couvrette, CEO of Family Lawyer Magazine and Divorce Marketing Group.
Sharon, what services do you offer and how do you work with family lawyers?
Sharon: Wilmington Trust provides the full spectrum of wealth management services and through the matrimonial advisory practice group that I lead, we work with family law attorneys like Mark to provide a comprehensive suite of services for clients who have recently been divorced or in the process of getting divorced. And that could be everything from investing the settlement proceeds to acting as a neutral, impartial trustee to reviewing business valuations, to reviewing insurance, to providing family office services and also private banking services. And in particular, in the pre-divorce context, we have very sophisticated proprietary analytical tools where we can run comprehensive financial projections that take into account all assets.
That could include private assets like a business as well as showing detailed cash flows, which take into account tax impact and also changes on the investment horizon. So, we could stress test the portfolio depending on what’s happening in the investment landscape. And that typically gives attorneys wonderful information to take to the negotiating table in order to best position themselves and their clients at that table. And then post-divorce, we could use those same analytical tools to craft an investment strategy that’s designed to ensure that a portfolio will sustain a certain lifestyle and give peace of mind to a client as to their financial future.
And Mark, what is the focus of your family law practice?
Mark: My firm handles complex divorce cases, not only in Michigan but nationwide. The complexities that we handle, they’re really two-fold. One focus would be on the financial end, and the complexities might involve business valuation, differentiating income from cash flow, understanding the tax consequences of a certain transaction, or understanding certain parts of an executive compensation package. The other part of the complexity would involve children and working out custody arrangements, parenting time arrangements with the understanding that there’s no one size fits all when it comes to divorce.
That’s great. So Mark, how would you work together and when would you recommend this approach of collaboration?
Mark: I think when it comes to divorce lawyers, in working with financial advisors, one of the most underutilized synergies in my particular industry, there are really two different aspects that would come up with this. The first would be while the case is going on. As a divorce lawyer, what I’m looking at is building a statement of net worth, understanding the cash flow for the client, and understanding that client’s expenses. And working with someone in Sharon’s industry, that person would be able to help me understand what passive income can be generated from the assets in this particular estate. And then also working with her and the client to understand what are the client’s expenses going forward, what budgeting we need to do as part of the case so that at the end of the case, the income meets the expenses, and not only looking at it for a particular year but trying to take it out for the rest of the client’s life if possible and making sure that the client’s financial needs are satisfied long term.
Sharon, can you describe how Wilmington Trust approaches the analytical analysis that Mark has referred to?
Sharon: Well, I think Mark’s given a great summary of how colleagues could work together to best support clients. And I think that any analysis has to be grounded in realistic expectations. Typically in the divorce arena, it’s very important that a pool of assets generates a specific level of income and that level of income can sustain a lifestyle for a period of time or the client’s life.
And that leads to the question: how is it possible to sustain a portfolio given a particular set of cash inflows, which can be alimony, can be child support, can be a salary, and other particulars like living expenses, taxes, educational expenses. So, the analytical tools that I’ve been describing, they project the cash flow on a year by year basis as my access. Or you could plan out way into the future and have a year by year breakdown of what to expect. And as I mentioned, this typically provides an attorney negotiating a divorce settlement agreement with wonderful information to leverage to best advantage for their client.
So that sounds very necessary and very thorough to me.
Sharon: Absolutely. Because at the end of the day, it’s all about the data. It’s all about making a case for what your client needs, and if you could show the data, which is sophisticated data, not an Excel spreadsheet, but data that is impacted by different market environments and by different needs and expectations of clients, you could really have a dynamic presentation that adds a lot of value to those discussions.
So Mark, can you describe to me what the second part is?
Mark: Well, the first part I mentioned was working with someone in Sharon’s industry while the case is going on to plan for the future. But the biggest mistake people in my industry make is at the end of the case is they just hand the client a check and say, have a nice life. And that’s not where it should end. That should be the halfway point. We put together a plan and now we need to make sure that there’s somebody out there who can implement it. So, it’s important to take that plan and sit down with someone in the financial services industry and say, how do we make this plan come to life? And that takes the transition from the divorce lawyer to the financial service industry and making sure that the cash flow that I was projecting is there for the client, they understand the budgeting, and that there’s somebody there in the long term to implement the plan and look over the plan and make sure the client’s taken care of. And this is something that a lot of divorce lawyers, in my opinion, don’t think about. And they just get to the end of the case and say to the client, here’s your money and have a nice life, and it really can’t be that way. I personally think that’s irresponsible and really the best practice would be to work with someone in Sharon’s industry while the case is going on to do the planning and then at the end of the case to implement the plan.
Sharon: Right. And I’ve actually seen Mark in action in that regard. So, it’s not just advice that he’s giving that he doesn’t fully embrace. And it was wonderful to see Mark in action taking the client through the whole phase of pre-divorced, divorced, and afterward to show that he really cared about her and helped her move on with it. So, I’m a big proponent of Mark’s advice and, as I say, I’ve seen him in practice, and it worked out really well for him and his client.
It sounds like that’s the way to do it.
Mark: Well, in most instances, you’re working with someone who has no experience in managing their finances, managing their money, doing their financial plan. And not only don’t they have that experience but when they’re coming to see me, they’re scared to death about what their future’s going to look like. So it’s my job to be able to say there is a future after divorce and to be able to take the resources that they bring to the table, whether in terms of their net worth or in terms of their cash flow and be able to have it make sense to them and be able to show them what it’s going to look like going forward. So, you can see somebody take a deep breath. When you start doing that, they come into your office and they’re just scared of what’s going to come. And to the extent that you can put together this plan or talk to them about how you’re going to put together the plan, you can see somewhere to go. And they know there’s somebody out there that understands what their problems are and then how to solve them.
Sharon: And let me just add on to that because I totally agree with you. And oftentimes in my seat, I see people come to me and they’ve not been handling the financial side of a marriage. A spouse has been handling that, so they feel overwhelmed, they feel alone, they feel like they’re not able to handle it. So, you have to take the time to educate people and to describe the process against the backdrop of what they’re going through, and you have to be sensitive to where they are in their lives. But oftentimes when you do that, you actually see a transformation into a poised self-confident person who, although they’re going through a very sad phase in their lives, they’re actually glad that they had a chance to show that they can do it, that they’ve proven it to themselves. And it’s very rewarding to see that transformation for someone who, even though they’re going through a very sad time, was able to view the future with some optimism.
Mark: But to be able to do this right, this synergy between the two industries is most important. There are divorce lawyers out there who just get started, but they don’t understand anything about finance, so they can’t say anything intelligent to the client to take the edge off. On the other hand, there are financial planners out there. Clients say, tell me what I need for the future. And they start putting together a financial plan without talking to the divorce lawyer and have any clue what the assets are, what the income is, and what the expenses are. And this really needs to be done together to put together the best long term plan for the client.
Sharon: So, collaboration is the key. Well, just really to add on to Mark’s comment, which is in sort of phase two post-divorce, there is so much that needs to be done in order to help clients move on with the rest of their lives. So, for example, all of their estate planning documents need to be reviewed because typically they all need to be updated to reflect new beneficiaries.
Insurance needs to be reviewed, and oftentimes, as I was mentioning, one spouse hasn’t been involved with the financial side of the marriage, and they may not even be used to writing checks. So, oftentimes we find that clients really want family office services. They want bill pay, they want advice about taxes and tax preparation. So, we help bring it all together so that they feel comfortable and so that they have all the advice they need to move on to the next chapter. This is critical.
Sounds essential to me as well. Sharon, let’s talk about trusts for a minute. Do you have any tips for dealing with a trust created during the marriage when negotiating a divorce settlement agreement?
Sharon: Yes, absolutely, and there has actually very recently been a very significant change in the law regarding the taxation of trust income after divorce. Individuals can create trusts and transfer assets to those trusts, and those assets will be out of their estates for estate tax purposes if structured properly, but they can continue to own the trust for income tax purposes.
And that’s a so-called grantor trust. And you might ask, why would anybody want to give away assets and remain on the hook? And the answer is that’s perfect estate planning because the individual who creates the trust pays the tax liability of the trust and relieves the beneficiaries of the trust from that tax burden.
So, in essence, the trust is allowed to grow tax-free, and of all the estate planning techniques that we have in our arsenal, tax-free growth is the best of them all. And in actuality, the grantor or the creator of the trust is making a gift to the beneficiaries of the trust in paying those taxes. But the IRS does not consider it a gift. And that’s why I say it’s perfect estate planning. Now, the way it impacts the matrimonial situation is if spouses created a trust while they’re married, one spouse creates a trust and the other spouse can potentially receive income from that trust. By its nature, that will be a grantor trust. The problem becomes when the spouses get divorced because grantor trust status is determined at the time the trust is created and it doesn’t take into account the fact that parties get divorced.
So, if parties get divorced and grantor trust status remains, it means that the person who created the trust will continue to be liable to pay the taxes on distributions received by a beloved ex-spouse forever. And that’s a horrendous result, and obviously not a result that the creator of the trust would have anticipated.
Until December of 2018, there was a section of the Internal Revenue Code, Section 682, which saved the day. And section 682 said in that scenario, if people get divorced and a distribution is made to an ex-spouse, the ex-spouse picks up that distribution in her income and it is not attributable to the creator of the trust. Unfortunately, as I said, the protection of that section has ended, so if people get divorced beginning in 2019, every trust that was created during the course of the marriage needs to be looked at by the matrimonial attorney to see what are the tax consequences of that trust. And note that the triggering date is divorce beginning in 2019.
It applies to a trust created at any time during the course of the marriage. So a trust could be five years old, 10 years old, and you could have this terrible tax result. So, it’s something, and this is a great place for matrimonial attorneys and estate planning attorneys and investment advisors to collaborate because there are some potential fixes to this situation. But you really need collaboration across disciplines. One thing that’s possible, and you have to be very mindful not to trigger adverse tax consequences, is terminating the trust on divorce and equalizing with other assets or perhaps modifying the trust and again, equalizing with other assets. Or perhaps including a reimbursement provision in a settlement agreement that reimburses the creator of the trust for the ongoing tax liability attributable to distributions to the ex-spouse.
The point is though that if matrimonial attorneys and family lawyers finish the divorce and then say, we’ll send you to your trust and estates and investment advisors to redo your planning, the opportunity to fix that skewed tax result will have been lost. This is something that needs to be addressed during the course of the negotiations, during the course of the divorce proceeding.
I know Mark wouldn’t make that mistake.
Mark: You’re exactly right in the comment that you made. I’m working more and more with trust lawyers every day while these cases are going on, part of my job is to look at the assets of the parties and decide what’s a marital asset, what’s not a marital asset, but separate from what are the assets of the parties. There may be something that somebody says, that’s not one of our assets anymore because it’s an irrevocable trust. And something that’s an irrevocable trust in most States is outside of the marital estate, and it’s not divisible by the court incident to a divorce. So, one of the things we’re looking at is if there are millions of dollars in the trust that may be outside of the estate, was there any element of control that was retained by either of the parties that may bring that asset back within the marital estate? And frankly, I was working on a case not too long ago, and I happened to read Sharon’s article on the change in the tax law, and that triggered something and I said, wait a second, the spouse having to pay the tax and perpetuity going forward, that’s an element of control that we need to look at. And I don’t know yet whether we’ll be successful in bringing that into the marital estate, but the idea wouldn’t have been there without working with Sharon on that particular issue. And because of that, I’ve been working more and more with trust lawyers every day.
That makes sense. Mark, do you have any other tips for practitioners when negotiating divorce settlement agreements?
Mark: Well, I could go on and on with that for days and talk about finances in particular provisions to include in the settlement agreement pricing. I think the single most important thing is managing expectations. And that’s what lawyers don’t do a good job of is telling clients what they need to know rather than what they want to hear. So often clients come into your office and say, I want this, I want that. And too often lawyers out there are saying, sure, no problem. I can get that for you. Rather than sitting back and managing the expectation from the beginning and say “let’s talk about what’s real and let’s talk about what you really need to know”. Because when the client, when the lawyers don’t manage the expectations, it gets a bad result for the client. Even if it looks good on paper, the client’s not going to appreciate it in relation to what otherwise would have been achieved. And the way I’m always looking at this, the analogy I use is going to the optometrist’s office. You walk into the office, and you think you see things clearly, and suddenly they start dropping these different lenses in front of you and they put one lens in and it looks a little different. They put another lens in, and it looks a little different and they put in the final lens, and suddenly you’re seeing a whole different picture. And when a client comes into the divorce lawyer’s office, it’s the lawyer’s job to say, this is what the law is in your state. This is what this judge in your case might likely do. In this particular case, this is what’s happened. In other cases, this is what happens with this particular lawyer on the other side of the case, and it really changes what the client’s expectations may be at the end. And to the extent that a lawyer can manage those expectations from the beginning and paint a real result for the client, they’re going to more satisfied clients at the end of the day.
Sharon: I couldn’t agree more. And actually, I think this sort of plays back to the analytics and the importance of having data to put things in context and running different scenarios. So, when you’re running cash flow projections, you have to show a client several different scenarios to show what’s possible. And the expectations have to be grounded in reality. Cash flow projections might have to take into account the cost of living adjustments, may be an expense that’s going to be incurred somewhere down the line that you want to take into consideration there and then. You’ve got to make some assumptions about what the market is going to deliver. Some assets like retirement assets can grow. You also have to build in actuarial assumptions about taking required minimum distributions from certain assets once you reach the appropriate age. So, there’s a lot of different moving parts, but I think if you show people the data in different scenarios and what they might expect, I think those lenses become a little bit clearer.
Mark: And this goes back to what I was talking about at the beginning. A lot of times people come to me and they’ve already met with a financial planner who’s put something together with just no clue about what the reality is. And the client comes in and says, well, you know, based on this, I need $400,000 a month and $20 million in my bank account to start. I’m like, that’s nice, but you don’t have that kind of money. And to the extent that a lawyer’s working with the financial advisor or the financial advisor, if that’s where the client goes first, brings in the lawyer, and they can work together. They can really manage those expectations from the beginning to create a satisfactory result where the client at the end of the day is proud of what their team accomplished.
It certainly is abundantly clear to me that you combine knowledge of the law with passion and compassion for your client and that you’re truly looking out for their best interests. And so, I think that’s also why you think that you should bring professionals in throughout the process that can help, and not just try and handle it all on your own. You recognize it. You can use a professional like Sharon and need a professional like Sharon to truly do a great job for your clients. Is there anything else that you want to add to this conversation that we’ve missed?
Mark: I would just add this final thought. I was talking about how at the end of the divorce case, that’s only halfway through the process and it’s important then to work with a financial advisor to implement the plan, but that’s not necessarily the end of the divorce lawyer’s role. And I think it’s important that there be annual follow up meetings with the entire team to say is the plan working? Do we need to make any changes to the plan? In some cases, we go back to the court and we can modify child support. We can modify spousal support in order to get more money if need be in order to make the plan work. And sometimes there needs to be changes made to the estate plan and to the extent the whole team can get together on an annual basis. It serves the client’s best interest, I think in the long term.
Sharon: I couldn’t agree more. I think it’s so important for the whole team to get together periodically to review where the client is because a plan is dynamic. It has to change with family circumstances, with the investment landscape, with other things that are individual to each particular client and getting together with a team of professionals, each of which is a specialist in his or her own area of expertise really means that you’re bringing all the information necessary to best serve the client together. And oftentimes it’s a matrimonial lawyer, it’s a trusts & estates lawyer, it’s the investment professional, it could be an accounting professional, but I think everybody needs to be on the same side of the page in order to coordinate all those different moving pieces for our clients.
Well, you certainly have proven that to me here today. And, Sharon, I can’t imagine anybody that would do a better job than you would in taking care of a client and their financial concerns. You lost me in many parts of the conversation, and I’m not disappointed with that actually. I like to work with professionals who know more than I do. And you certainly fit into that category – both of you do. So thank you so much for your time today. It’s been a pleasure.
Sharon Klein is president of Family Wealth, Eastern U.S. Region for Wilmington Trust. She coordinates the delivery of all wealth management services by teams of professionals and heads Wilmington’s National Matrimonial Advisory Solutions Practice. Beginning her career as a trust and estates attorney, she is a fellow of the American College of Trust and Estate Counsel and chair of the Domestic Relations Committee of the Trust and Estates Magazine where she sits on the board. www.wilmingtontrust.com/divorce
Mark Bank is a founding partner of the law firm Bank Rifkin in Michigan, and focuses on complex divorce cases in Michigan and nationwide. He is a diplomat of the American College of Family Trial Lawyers and a Fellow of the American Academy of Matrimonial Lawyers. www.bankrifkinlaw.com
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