Some divorcing spouses are completely in the dark about marital assets and debts, or about how much money their spouse makes. Is it possible to achieve a truly fair financial divorce settlement for a financially naïve client?
By Lyle Solomon, Family Lawyer
As a family lawyer or divorce financial professional, one of the biggest challenges we face is the client who knows little or nothing at all about their family’s financial situation. Since they never handled the household’s finances, the financially naïve spouse may be completely in the dark about marital assets and debts, or how much money/bonuses their spouse makes.
This gives the financially sophisticated spouse an immediate advantage when it comes to finding, characterizing, and distributing property; setting a term and duration for spousal support; and possibly even deciding how much of their trust income they are going to declare for child support purposes. Is it possible to achieve a truly fair financial divorce settlement for a financially naïve client?
Tips to Help Ensure a Financially Fair Divorce Settlement
1. Do Not Allow Your Client to Become a Financial Victim
Ideally, as soon as a spouse learns about the other spouse’s plans to file for a divorce, they should gather as much information as possible. They should make copies of all relevant financial documents, including account statements and other data pertinent to their marital lifestyle.
You should advise your client that in case they have any reason to believe that their spouse is considering liquidating or retitling the marital assets without asking them first. They should notify the asset holders in writing, and in addition, they should consider getting a restraining order from the court.
They should also look out for the cash value of the life insurance policies, and the cash kept in checking and brokerage accounts that are held jointly. Your client may require the services of a forensic accounting expert if their spouse moves or uses assets without their knowledge.
2. The Divorce Process: Litigation, Mediation, or Collaborative?
If you practice mediation or collaborative law in addition to litigation, you will probably have a fair idea of which process will work best for your client and spouse. Although alternative dispute resolution can save divorcing couples money and reduce emotional turmoil, it’s not right for everyone. Mediation is unlikely to succeed if one partner is unwilling to make concessions, or won’t come clean regarding their assets or income.
If there are enough red flags to make you suspect marital fraud, litigation may be your client’s best option.
3. The Tax Factor: Should Your Financially Naïve Client Sign Join Tax Returns?
You should advise your client to hire their own tax accountant or a divorce financial expert to review all joint returns before they are filed. Meeting all the conditions to qualify for Innocent Spouse Relief can be challenging, so your financially naïve client should have a professional double-check the returns and alert you if something smells fishy.
4. Evaluating Settlement Proposals: Is the Proposed Settlement Financially Fair?
If your client is trying to decide if the divorce settlement their spouse has recommended is reasonable and fair, you should remind them to consider how the settlement is going to affect their finances in the years to come. The factors that should be considered in this regard are as follows:
- Child support
- Living expenses
- Retirement funds
- Health insurance
- Medical bills
- Education of children
Let your clients know that divorce financial professionals can generate thorough projections of their post-divorce lifestyle if they accept Settlement A or B. Encourage them to work with a financial expert specializing in divorce to understand whether a financial settlement being proposed is right for them or not.
Remind your clients that after the divorce is finalized, they’ll have to pay taxes on some (or all) of the assets they receive through the settlement. Before they get too excited about the “bottom line”, tell your clients should only accept a deal after knowing how much the investments are worth after taxes.
Financially sophisticated clients are happy to give away taxable assets to their ex-spouse while keeping assets that won’t be taxed for themselves – which can make a huge difference to the actual bottom line. Experienced divorce financial professionals are familiar with such ploys, and can help to prevent your client from making a huge financial mistake.
5. Letting Go of Emotional Attachments to Specific Assets is Key to Financially Fair Divorce
Often, due to their emotional attachment to assets acquired during their marriage, your clients may make bad financial decisions. Someone with a strong emotional attachment to the family house may fail to recognize that they cannot afford to maintain it post-divorce. But despite this, they strive mightily to keep it, sometimes sacrificing their retirement in order to do so.
Homes tend to cost a lot with utilities, mortgage payments, repairs, and property taxes. You should advise your clients to let go of any attachments they may have with the house or any high-value items. Their primary concern throughout their divorce and settlement negotiations should always be how to maximize their finances by ensuring they’ll have enough money for living expenses both now and in retirement.
Remind your client that people have been forced to leave their homes and the hard-earned money they invested in them because of real estate and market crashes, so keeping the house is not an investment in financial stability.
6. Warn Your Client about “Too Good to be True” Settlement Offers
Spouses must compromise on their way of life after a divorce. Sometimes, the spouse who will be paying spousal and/or child support will offer a larger settlement than they can really afford to assuage feelings of guilt; sooner or later, however, they will default, and your client will be left without support. Encourage your clients to be fair, and insist that they double-check the figures to ensure the settlement is both financially fair and workable.
Also, talk to your client about insurance options to guarantee support payments will continue in the event of the payor’s death, disability, or job loss.
7. Taking Inflation into Account
Inflation can significantly impact future expenses, such as the price of a child’s college tuition or retirement. Ensure that the settlement negotiations include the inflation factor. That way, your client’s actual costs of future financial needs can be covered.
8. Divorce and Credit Card Debt
Dividing assets is a top issue, but dividing debt following a divorce is equally crucial because it can have long-term financial effects. If debt division during a divorce is successful, the complete disclosure of all financial details to both parties is required.
Debt on joint cards will likely be shared in the event of a divorce. However, if the debt is not paid off before the divorce is finalized, and the spouse assigned the debt defaults, the credit card company can come after your client – no matter what the divorce agreement states. Advise your clients to close all mutual credit and joint credit cards during the divorce.
Closing Thoughts about Financially Fair Divorce
One undeniable fact about divorce is that running two households is more expensive than running one. Your financially naïve client may not understand that their divorce settlement must last for an extended period, possibly for the rest of their lives. Maintaining the same standard of living post-divorce as pre-divorce is all but impossible unless your client finds an alternate source of income to fund the difference – like going back to work, or investing assets instead of spending them.
By prioritizing financial objectives, creating reasonable expectations, and creating sound plans for allocating and distributing financial resources, divorce financial planning can assist clients transitioning from a married to a single lifestyle.
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. A member of the California State Bar since 2003, he currently works for the Oak View Law Group as a principal attorney. www.ovlg.com
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