Following a disciplined process of review and analysis, a financial advisor can become a valuable member of the professional team and help clients become comfortable with their lifestyle post-divorce.
By Hugh Breslin and Phil Allen, Financial Advisors
Over the last few years, two of our large clients entered into divorce mediation. This experience drove us to want to become educated on the issues and best practices for financial advisors working with divorcing spouses of high-net-worth families. We then spent a good part of the last year interviewing family law attorneys, estate attorneys, CPAs, valuation experts, and a lifestyle analyst on their views of how to help spouses and their professional advisors achieve the best possible outcomes in a divorce.
This article is a compilation of observations and lessons learned from our own experience and our conversations with divorce professionals. We interviewed twenty family law attorneys, five estate attorneys, three CPAs, one divorce asset evaluation expert, and one divorce lifestyle analyst. By no means is this an exhaustive study, as this is a complex and personal experience for each individual. Rather, this a summary intended to address the issues consistently raised by the professionals we spoke with, and it can serve as a guide for effective relationships between financial advisors, the clients, and family law attorneys.
Divorce is an extremely emotional process. More than one family law attorney told us they feel they have earned an advanced degree in psychology as a result of their work. Understanding this aspect of divorce is one of the key ingredients of success for all professionals working with the spouses involved.
Often financial advisors are uncooperative during a divorce process. Many attorneys tell us that this makes working with advisors difficult. Advisors are reluctant to provide, for example, portfolio or cash flow analysis because it may be used against the other client. Advisors in this situation tend then to be unresponsive, and eventually irrelevant, to both their clients and their attorneys.
We have come to believe that rather than being irrelevant, financial advisors can add significant value to both their clients and their clients’ attorneys. The following “best practices” can result in a better outcome for the clients, the attorneys, and the financial advisor:
- Education: Before a divorce is even contemplated, advisors should endeavor to include both spouses in meetings and presentations, creating an equal playing field of knowledge and trust.
- Communication: Once a divorce begins, a financial advisor should have open and honest communication with both spouses and their attorneys to determine “Rules of the Road” for things like money transfers and report generation, and to confirm any changes to account titling and authorizations on the accounts.
- Discovery: Working closely with the client’s professional advisors during discovery, an advisor can help the client collect and organize investment statements, tax returns and other documents — saving their clients considerable time compiling the information for a financial goal analysis.
- Lifestyle Analysis: In potential maintenance cases, a financial advisor can either work closely with a lifestyle analyst professional to obtain and organize spending data or in simple cases, educate the spouse on the advantage of using technology and financial software programs for their personal use. This will help them track and categorize their income and spending, creating budgets in real time. The data can then be used in an analysis of their financial condition.
- Goal Meeting: Financial advisors should meet specifically to determine each client’s goals and aspirations in light of the current situation, drawing up a complete list of issues and relationships. The point of this exercise is to determine how the divorce may change how the client wants to live and work going forward, and how this will affect their finances.
- Financial Goal Analysis: Based on the spouse’s goals and their attorney’s projected asset settlement, a financial advisor can develop an asset allocation and cash-flow analysis that can help the spouse assess their ability to maintain their lifestyle. Financial advisors can then prioritize goals with the client, running multiple scenarios to help them become comfortable with their post-divorce resources.
- Advanced Planning: In conjunction with the other professionals advising the client, a financial advisor can help the spouse review all wills, trusts, powers of attorney, healthcare policies, insurance policies, and tax implications of proposed property settlement. The spouse can then work with their attorney and tax advisors to change documents where needed, and plan for changes post settlement. If a client is uncomfortable working with any of their past advisors, an advisor can use their professional network to help introduce them to other qualified professionals.
Financial advisors often find they have a “dominant” spouse in their client relationships. This is the spouse who has the most interaction on the issues concerned with investment management and advanced planning. As a result, one spouse may have little knowledge of the structures or professionals working on the family’s behalf. If the couple decides at some point to divorce, the non-dominant spouse may feel that their advisors are not focused on their best interest, and are “buddies” of the other spouse. This can lead to mistrust, poor communication and eventual loss of the client. Consistent advice from the family law and estate attorneys we interviewed was to get both spouses involved in the portfolio and planning process early on in the relationship. If a divorce eventually occurs, you will then have two competent people who appreciate and trust your advice.
Rules of the Road
Once a couple decides to divorce, it is critical for the financial advisor to formally establish clear and open lines of communication with both spouses and their attorneys. This is obviously a very emotional time for the spouses, and it is easy for the relationships to deteriorate quickly into fear and anxiety. One attorney we spoke to suggested establishing the “Rules of the Road” to establish transparent communication with both clients and their attorneys. As most couples’ accounts are typically held in some joint structure, there needs to be agreement on who has the authority to direct investments, and more importantly. transfer cash and securities out of the accounts during the divorce process. Should both spouses have to verbally agree to any changes or transfers, or is it sufficient to simply notify the other spouse and their attorney? Failing to come to an agreement on process early can cause paranoia including “cash grabs” on accounts as spouses scramble to get their “fair share” of the assets. Of course in this digital age, any asset transfers are easily tracked and accounted for during discovery. That doesn’t mean that without an agreed-upon process that there isn’t the risk of clients quickly becoming suspicious of their financial advisor’s loyalties and motives.
Beyond the rules for asset transfers, it is important to establish the process for supplying data and reports for attorneys. What reports and analysis can be supplied to clients during a divorce that won’t pose a conflict? These are difficult and nuanced situations, and it is best to establish guidelines immediately. Financial advisors also need to keep in mind that if the divorce goes to trial, all communication and reports provided by a financial advisor to his clients are discoverable and admissible as evidence. For this reason alone, it is important to be conscientious of content of emails and reports sent during this time.
Discovery and Lifestyle Analysis
Discovery is a process in which a financial advisor can be of significant help to the clients and their attorneys. In the beginning of the divorce process, spouses typically receive a blank Financial Affidavit form from their attorney. This form asks for a detailed statement of income, monthly deductions, monthly living expenses, dependent child care expenses, detailed asset and liability statement, insurance, benefit plans, home and collectible holdings. As you can imagine, this is a daunting task for someone who is emotionally distraught and may not even know where to get all of this information. Many high net worth families have multiple accounts at multiple institutions, multiple homes, and complex assets in complex structures. A financial advisor who can assist the client, in coordination with their other financial advisers, in the retrieval of historical account and tax statements can save both their clients and their attorneys’ valuable time and effort. Beyond statements, competent financial advisors are also intimately familiar with their clients other assets such as restricted stock, options, benefit plans, airplanes, homes, art and other hard assets. Being able to coordinate this data and to communicate with other institutions can be extremely helpful to all involved. While liquid assets are typically easy to value, most high net worth families have complex and illiquid assets that are much more difficult. While financial advisors might be able to help value some illiquid assets, attorneys often obtain the services of a professional valuation expert who specializes in valuing things like private businesses and art. These third party specialists have significant experience and expertise, and are invaluable to establishing clear valuation metrics.
Because the Financial Affidavit asks for detailed spending information, it is important for a spouse to have someone available who can provide a lifestyle analysis. A lifestyle analysis is an exercise to collect and categorize historical spending in order to get a handle on the amount of assets or maintenance that would be required to maintain a spouse’s lifestyle and child support post-divorce. While many spouses tend to guess at this information, it is critical to get an accurate portrayal of actual expenses, because their attorney will rely on this information and it will be used to negotiate the asset division and support payments. If a case may involve maintenance or child support, attorneys typically ask clients to pull together and categorize as much as three years of spending. If a client doesn’t currently use a financial software package to consolidate their accounts, this is the perfect time to help them set this up. Since most divorces take a year or more to settle, helping your clients immediately will provide current data from now until settlement. This will also help you client get a feel for their spending habits in real time, which will be critical for providing advice on budgeting with post-divorce assets. In more complex cases, many attorneys will hire a third party Lifestyle Analyst. These professionals have the advantage of an experienced staff to input significant amounts of data into financial software programs for easy analysis and reporting.
Goals, Allocation and Cash Flow
At this point in the process, a best practice is for the financial advisor to sit down with both spouses separately and conduct a “goal meeting” to determine their post-divorce goals and aspirations. Do they want to live in their current home and/or keep a second home? Continue to work or retire? Are there children or extended family to support? Any charitable commitments or goals? The answers to these and other client-specific questions will be critical in putting together a forward-looking financial analysis and cash flow.
The output from the financial goal analysis is a detailed cash flow report that helps the client assess whether the post-divorce assets and maintenance can reasonably support their lifestyle goals. Even with high net worth clients, post-divorce assets may not be sufficient to maintain the exact lifestyle that existed pre-divorce. Decisions and trade-offs need to be discussed in order to prioritize goals and to help the spouse feel comfortable that the anticipated settlement will be adequate to fund their most important goals. Cash flow models are extremely helpful for clients see how their choices affect assets and eventual estate transfers to family members. More than one family attorney mentioned that helping their clients get comfortable with their new lifestyle choices is an important component in arriving at a timely and efficient settlement, avoiding the expensive alternative of fighting it out in court. It is one thing for an attorney to mention that certain choices may not be practical (i.e., maintaining two homes), and it is another if an advisor can validate that message with thoughtful analysis.
Advanced planning encompasses issues beyond asset management including asset protection with insurance, wealth transfer, tax planning strategies, and charitable giving. In addition to the financial aspects of divorce, a financial advisor has considerable opportunity to help their clients attend to advanced planning issues that are affected by the divorce. Working closely with a client’s estate attorney, CPA, and insurance professional, a financial advisor can help the client review all of their documents and consider any changes that need to be addressed with their tax and legal advisors immediately or post- settlement.
Some of the issues to address include:
- Health care and property powers of attorney, as typically a spouse does not want their current spouse to have control over these important decisions in the case of incapacity during or after divorce.
- Revocable trusts should also be reviewed, with a focus on trustees, power holders and beneficiaries. In some cases, changes can be made to these documents before a divorce is filed, and any contemplated changes need to be discussed with both the estate and family law attorney to make sure there are no issues related to the divorce agreement contemplated.
- Wills and their related trusts can rarely be changed until settlement, but it is a good idea to review future changes so that they can be made shortly after the divorce is final.
- Irrevocable trusts should be reviewed and fully understood.
- All insurance policies should be reviewed and fully understood.
- If it is contemplated that life or disability insurance will be used to secure maintenance or child support, policy owners and beneficiaries should be discussed and policies evaluated. If something happens to the primary breadwinner during the process, or is deemed uninsurable after settlement, it will obviously be too late to secure payments using insurance.
- If one of the spouses is not working, how long will the family be covered under existing health insurance (COBRA), how much will it cost, and does it make sense to explore alternate coverage to avoid any deterioration in insurability?
- Working closely with the clients tax professional, determine the tax implications of the proposed asset settlement, both now and when assets are sold or removed from a qualified plan.
- If the divorce occurs in the current year, the IRS will consider each spouse divorced for the entire year for tax purposes. A client’s CPA can help determine if this creates any tax issues, including the need to make estimated tax payments in the current year. Current year estimated tax payments already made will need to be split. Also, in the year the divorce is finalized, other items to review for split include: capital loss carryforwards, passive loss carryforward, at risk loss carryforward, and joint income from the beginning of the year.
In some cases, one of the spouses is simply not comfortable working with their current advisors. Usually, they feel the advisor is too close to the other spouse to have a comfortable working relationship. Most family attorneys advise their clients not to make any drastic changes to relationships during the divorce, as it takes a while for a new attorney or CPAs to get up to speed on your situation. Still, some spouses insist, and it is at this juncture that a financial advisor or a family law attorney can help facilitate introductions to other advisors in their professional network.
Working closely with clients and their attorneys throughout the divorce process requires empathy, communication, and diligence. Following a disciplined process of review and analysis, a financial advisor can become a valuable member of the professional team and help clients become comfortable with their lifestyle post-divorce.
With more than 45 years of combined experience, the team at Allen / Breslin Wealth Management Group employs a consultative process to identify and address their clients’ financial challenges and opportunities. They focus on advising individuals going through significant life-changing events –such as divorce – providing financial goal analysis, cash flow planning, insurance advice, and investment management. Allen/Breslin Wealth Management Group.
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