During COVID-19, it’s crucial for divorce lawyers & financial advisors to work closely to secure the best outcome for their clients. Here’s why.
By Brian Weiner, Lawyer and Financial Expert
Negotiating and structuring divorce settlements, especially for wealthy families with extensive and complex assets, can take a couple of years to work out even in so-called “normal” times. But like so much else, the COVID-19 pandemic has made it more cumbersome for divorcing couples, including those seeking an amicable process and outcome, to finalize divorce settlements that will be sustainable for both parties over the long term.
With the current pandemic-related backlog in the courts, there is a good chance that even a non-contentious divorce filed today may not be settled until some time in 2022. And on top of that, the economic distress caused by COVID-19 may dilute the value of assets used to structure a divorce settlement, particularly businesses and real estate investments. Defaults on commercial real estate loans were running at record highs in 2020, and this trend hasn’t slowed in 2021, with restaurants, hotels, and retailers in many markets continuing to close.
4 Reasons Why Divorce Lawyers & Financial Advisors Must Work Together During the Pandemic
1. Asset Values & Household Income Continue to Change
Record-breaking layoffs and furloughs during the pandemic present another problem for divorcing couples: if the family breadwinner loses a high-paying job, or is forced to take a cut in salary, they might not be able to pay as much in spousal or child support as they could have prior to the pandemic. And if the other spouse doesn’t work or hasn’t worked outside the home since their children were born, then they will likely need to find a job if the breadwinner loses theirs, or is earning less than before.
For divorcing couples whose income and wealth derive from businesses devastated by the pandemic, it is vital that their attorneys work to determine that each party will have sufficient income to set up individual households, and continue their current lifestyle. This requires taking a deep dive into income flow and the value of joint assets. Some assets may have been hit pretty hard, but not everything in the same asset class may have been affected as deeply.
For example, in real estate, the value of an office building in New York City where tenants have been unable to work for close to a year may have dropped precipitously; however, an individual property anchored by an Amazon warehouse or a thriving Fortune 100 company may have actually increased in value. Analyzing a client’s debt obligations, such as personal guarantees on loans, is also crucial because, if the client lives in a community property state, they are subject to half of the asset value as well as half of the liability exposure.
2. CPAs & Financial Advisors Can Calculate How Much a Divorcing Couple’s Situation has Changed
This is why divorce lawyers need to work closely with their clients’ CPAs and financial advisors. To best serve divorcing clients, lawyers need to scrutinize their portfolios to fully understand what assets their clients have, and what their real liabilities may be, today or tomorrow. On paper, it might look like a client is worth $50 million, and that their spouse and children will be okay financially after the divorce.
But in today’s reality, that may not necessarily be the case. Input from the client’s CPA or financial advisor can help the divorce lawyer understand the nuances of the client’s investments, or their real value. Just getting a figure from the client isn’t enough; without analysis from the client’s CPA or advisor, the lawyer may not realize what the figure really means.
For example, going back to the hypothetical client with a $50 million net worth, a loan on a building or a business of which the client’s divorce lawyer is unaware could have serious ramifications. What if the loan defaults, or the business goes under, due to COVID-related circumstances? And if there are tax payments that need to be sent out later in the year, the client’s CPA or financial advisor can work with the divorce attorney to make sure the money is available. Otherwise, the client will have to work out a payment plan with the government.
Furthermore, attorneys whose clients are relying on the finances of a company to pay for the divorce, and to separate out those assets and the income stream that comes from the business, must now reflect thoughtfully on their options. Communicating closely with clients’ CPAs and advisors can help family lawyers understand the exact nature of the cash drains and cash needs of their clients, and how these may change due to the pandemic.
3. An Emerging COVID-Inspired Trend: Reopening Divorce Settlements
The economic distress caused by the pandemic has also prevented many divorcees from paying the previously agreed-upon spousal or child support under the terms of their divorce settlements. Many people in a variety of industries are no longer in the same financial position they were in prior to the beginning of the pandemic.
Even some of my wealthiest clients are struggling because, as business owners, their free dollars have to be allocated toward paying their rent and employee salaries – and keeping their businesses afloat until the eventual post-pandemic recovery. This means that not as many of their free dollars can cover their agreed-upon spousal or child support.
Meanwhile, I know of talent agents and other high-paid employees in the Los Angeles area, who have been laid off or forced to take pay cuts, and are struggling to afford private school fees for their children from former marriages – or have remarried and have children with their current spouses, and must now find ways to cover obligations to both of their families.
4. Divorce Lawyers Must Proactively Confront Urgent Financial Situations
In the State of California and elsewhere around the country, failure to pay alimony or child support can lead to garnishment of wages and a slew of other ramifications, including the possibility of prison. It is therefore incumbent upon divorce lawyers to petition the court as soon as possible in order to reopen their clients’ divorce cases if they are unable to make previously agreed-upon payments. Adding to the urgency is that in too many cases, divorced spouses may not communicate regularly (or at all).
Going forward, it will be interesting to see how quickly already inundated courts will reopen divorce settlements where these circumstances apply, and what test the courts will apply. Clients’ CPAs and financial advisors can be of great assistance in helping family lawyers understand how long the clients might be paying a reduced sum in spousal or child support – and what that amount would be – until they can get back on their feet. (Divorce lawyers, for their part, will also have to manage the tactful, delicate communication with clients’ exes on this matter.)
Nearly one year on, the COVID-19 pandemic is still with us, and it continues to alter many aspects of our daily lives. The process of finalizing divorces is yet another area that has had to adapt to the “new normal.” At a time when many divorcing – and already divorced – clients are feeling the economic pain of the pandemic, family lawyers can obtain the best financial outcomes for clients and their families by working closely with their CPAs and financial advisors.
Brian Weiner, JD, is a widely respected global financial expert often called upon by divorce attorneys and forensic accountants to consult on matters relating to complex marital estates. He is Co-Founder and Managing Partner of Audent Family Wealth Advisors, where he leads the firm’s global family office services program, Outsourced Chief Investment Officer (OCIO) platform, and next-generation education program. www.audentfwa.com
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