Because of the financial complexity of high-net-worth divorce, lawyers sometimes make mistakes when advising clients on their finances. Here are six financial mistakes to avoid during a client’s divorce process.
By Vincent Fiorentino and Alexandra Mililli, Financial Advisors
The divorce process can be long and grueling for matrimonial lawyers and their clients. Because of the length of time, the degree of complexity, and the number of legal participants involved in complicated or high-net-worth divorces, it is no wonder that divorce attorneys sometimes make mistakes when advising clients on their finances.
Here are Six Financial Advice Mistakes to Avoid when Advising Clients.
1. Providing Inaccurate Post-Judgment Instructions.
We had a case recently in which a client’s matrimonial attorney specified the “opening of an IRA account” into which the client’s spouse was to wire funds per the divorce decree. Upon examination, we discovered that the funds would be coming from a beneficiary IRA originally established by the ex-spouse’s parent. This type of IRA has different tax implications than a regular IRA. We averted a potential IRS headache – as well as future litigation against the lawyer – by catching the error prior to opening the account.
2. Ignoring the Tax Consequences of Low-Cost-Basis Securities.
Advising a client to retain a greater proportion of low-cost basis stock than their ex-spouse is one of the most common financial mistakes lawyers make when separating assets due to divorce – despite the fact that it’s relatively easy to spot. Because the client may owe future taxes on unrealized gains, an attorney should seek advice from a financial expert when apportioning stocks.
3. Failing to Create a Budget for the New Home.
After achieving a quality outcome for your client, why let them buy a more expensive home than they can afford? Providing a budget analysis prior to divorce is key to helping your client make intelligent financial decisions. Lacking a financial plan during the “how much house I can afford” discussion is a common oversight. A client may be forced to downsize, sometimes within just a few years after divorce, if not adequately advised on budget constraints.
4. Liquidating then Repurchasing Portfolios.
It may be costly to liquidate and later repurchase a proportionately smaller portfolio of common stocks and bonds. Early in the negotiations, ask an experienced financial advisor how to equitably divide a portfolio in one step vs. two; this could avoid unnecessary expenses later on. Ask: “How can marital securities be equitably split so my client ends up with a properly balanced portfolio after divorce?”
5. Overlooking the Six-Year Rule.
Property transferred to an ex-spouse more than six years after divorce may be subject to tax. Realizing the future value of restricted stock options, difficult-to-sell alternative investments, or illiquid securities may require creative strategies. Have you or your paralegal effectively communicated the importance of monitoring time limits and following your instructions? These are important questions to ask when assets are to be transferred incident to the dissolution of a marriage long after you are gone from the case.
6. Not Obtaining Financial Advice for Complex Financial Issues.
“That’s a complicated issue. Let me consult with our financial expert and get back to you,” allows an attorney to provide informed advice while avoiding costly mistakes. As one successful divorce attorney recently explained: “I have a high-quality team of (outside) advisors who are better qualified to advise my clients than me regarding investment matters, because they do it every day.” Sounds like great advice from an experienced family law attorney.
Vincent Fiorentino and Alexandra Mililli are financial advisors with The Fiorentino Group at UBS Financial Services in Stamford, CT. Vincent is also the founding member of the Greenwich Chapter of the National Association of Divorce Professionals. Alex focuses on helping women in transition, specializing in financial issues. www.financialservicesinc.ubs.com/team/fiorentino
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