Financial Planning and Divorce

finding a new advisor may also help the ex-spouse feel that their information is kept private.

Tip: when interviewing financial advisors, try and keep emotions out of the interview (it does not help you to have an advisor who is quick to criticize your ex-spouse, no matter how valid the criticism) and focus on competency and fit. What you need is someone who has the expertise to provide leadership for you in the area of financial planning and sometimes, that means tough love: telling you when your investment expectations are unreasonable or being honest with you if your spending is in excess of your means. Honesty and expertise will serve you much better than empathy when it comes to financial planning; and with some luck, you should be able to find someone who can provide you both.

There are few events in life as disruptive and painful as divorce.

It is in tumultuous times like a divorce, that a good financial planner can make a world of difference. A successful post-divorce financial plan benefits not just the immediate client, but their children, their parents, parents-in-law, ex-spouse and others.1 A thorough plan also brings peace of mind that comes from reducing stress around not knowing what one can afford.

All financial plans change over time – because we change over time. When there are big changes like divorce, your financial plan needs to change as well.

One of the things that can also change in a divorce is who is doing your financial planning. Often the spouse who is less close with the existing financial advisor will want to have his or her own advisor to avoid any apparent or real conflict of interest that could occur from the existing financial advisor serving both ex-spouses. Despite regulations to safeguard data privacy,

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1 Although wishing your ex-spouse well financially may not be at the top of your list after emerging from a bruising divorce, few things will be worse for your happiness and financial well-being than an ex-spouse who has not figured out how to live in a financially sustainable way.

The first area we work on with clients is their Lifestyle – understanding what they are spending and what they can afford to spend going forward in order to meet their lifestyle goals and retirement goals. This is just as true for married couples as it is for newly divorced clients.

Since there are so many moving parts, including spousal support, child support, college tuition, and other cash inflow and outflow items that change over time, we create a model that captures each inflow and outflow to help our client figure out their bottom line over time. In essence, we help simplify the wealth management and financial planning process by taking the complexity out of the picture and focusing on the big decisions and the bottom line for the client.

When getting a divorce, it is also important to review beneficiaries and signatories on all important estate documents, such as powers of attorney, beneficiaries on your life insurance policies, investments, investment accounts (such as IRAs and 401-Ks) and wills et cetera.

With this in mind, if you feel your marriage may be heading towards divorce, you would be well advised to spend some time getting your documents in order or at least getting a personal copy of all relevant documents so that your attorney and financial advisor can review them.

For clients that have the funds to give to their children or other loved ones beyond what they will need for their own Lifestyle, we work together on what we call the Legacy piece of their financial planning. This is an area that can require substantial insight and dialogue if the divorcing couple had previously set up vehicles such as trusts and family LLCs. Since Legacy planning issues are not always the primary focus of divorce

attorneys during the divorce, it is often helpful to have a financial advisor on your team that can help raise important questions that need to be addressed during the divorce settlement discussions and negotiations.

FINANCIAL PLANNING AND DIVORCE

Lifestyle

Legacy

Philanthropy

Four Frequent Landmines: Taxes, Liquidity, Risk and Unrealistic Expectations

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Similar issues can arise with respect to your Giving accounts, whether they are donor advised funds that you set up as a couple or perhaps even a family foundation. The good news is that with diligence and the right team behind you, you’ll have the insight you need to navigate these discussions with your divorce attorney and your soon to be ex-spouse. Either way, an important component of financial planning for those clients with children relates to your values around money. Philanthropy is often a gateway to these types of family discussions. What values around money do you want your children to have? What experiences can we together create around saving, planning and investment to help your children appreciate these specific values? Perhaps not your immediate focus during the chaos of the actual divorce, but having some clarity around your vision in this area will both help you look forward and help inform your choices during the process.

There are four key areas in the divorce financial planning process that can easily get neglected when negotiating important things like custody of the children and the division of assets. A brief overview of each issue will serve as a reminder why you want your financial advisory team helping you look at each of these issues.

Taxes are best handled proactively instead of once they are due – at which point they almost always induce sticker shock. Divorce adds more complexity because some payments made to the ex-spouse may be deductible and others may not be, but a good team can help you sort this out and estimate your tax liability so that you can make estimated payments along the way and avoid a large surprise tax bill in April. Likewise, when dividing up retirement accounts like IRAs and 401-Ks, strict procedures need to be followed to avoid needlessly triggering taxes.

Taxes are important to estimate in your cash flow analysis when evaluating Lifestyle but you might be surprised how often this is not explicitly taken into account.

When negotiating your divorce settlement, although it is easy to focus on how much you get when dividing assets, it is equally important to consider your liquidity needs and take that into account. It would not serve you well if you got the amount of assets you wanted but insufficient liquidity to deal with potential emergencies or needs that arise in life.

A good rule of thumb is to make sure you have enough cash to cover anywhere from 6 to 12 months of your total living expenses depending on your circumstances.

Getting a larger stake in your ex-spouse’s company may be appealing to you, but it may be wise to accept a slightly smaller stake and more cash, depending on your situation, to ensure that you have sufficient cash reserves going forward. This is especially true when the main source of wealth for divorcing couples is privately held non-traded stock or company interests. While this may be a source of great value over time, you

On a similar note, an expert and thorough review of your balance sheet should include a direct and informed conversation around the risk of the different assets you own – risks both to the upside and the downside, along with issues such as liquidity which we discussed above.

For many people, it is natural to assume that the value assigned to assets today will be the same tomorrow, but an honest investment discussion requires pointing out that asset values can also go down. Therefore, diversification of risk and other risk mitigation techniques need to be an explicit part of the planning and investment management process. That is especially true when the family assets have essentially been divided in two and total expenses have increased.

It is particularly important to consider risk when there is a large concentration of wealth in one type of asset (real estate for example) or all in one specific investment (a large stake in a privately held company that one or both spouses built up over their marriage). In these cases, it is vital to take this into account when negotiating your divorce settlement. A number of strategies can be employed to try and mitigate your risk both in the settlement and after.

Sometimes, it may be smart to accept more of a relatively secure asset and a little less of a highly appreciating asset in order to reduce the risk of your post-divorce estate. If the private company continues to rapidly appreciate, then yes, your upside participation will be reduced, but likewise, should that asset fall in value, you will sure be glad that you diversified.

Similarly, in a divorce settlement, you may win or

FINANCIAL PLANNING AND DIVORCE

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need to be able to provide for your needs over time and have the liquidity to deal with unexpected needs that can arise.

Taxes

Liquidity

Risk

be able to win what seems like a valuable obligation by your soon to be ex-spouse to pay you a set amount of money every month going forward for some period of time. However, it is risky to assume, depending on the amount of the payment, that the ex-spouse will always be able to pay that amount. There are too many examples of individuals whose fortunes turned for the worse and could not continue making those payments to completely ignore this risk.

Therefore, it may be smart on a risk-adjusted basis to consider asking for a bigger upfront payment or share of relatively liquid assets in exchange for a lower payout over time – and to then reinvest those funds under the supervision and direction of your financial advisor in order to reduce your future dependence on your ex-spouse – which is always a good thing!

The math of divorce is not pretty: family assets get divided up between the spouses and expenses increase since two households need to be supported now instead of one. Sudden reductions in wealth can cause people to have or seek out unrealistic (investment) return expectations due to the discomfort of loss or perceived levels of need.

In turn, this can unconsciously lead to risky behavior, such as chasing higher returns downplaying risk, investing in asset classes in which one has no direct experience (inexperienced investors investing in venture capital hoping to earn outsized returns) and becoming overly sensitive to short term market fluctuations leading to over-trading, higher expenses and ultimately trading losses – all in pursuit of that extra bit of return.

Stepping back, there are two parts to the equation – what you spend and what you earn. Although it may be frustrating to cut back on Lifestyle

expenses, it may be a wise first step, at least temporarily, until you can find new sources of income and cash flow. Likewise, be careful about seeking high returns. All too often, high returns come with a price, that price being risk and the possibility that you may lose a significant amount of your principal, which, if you felt under financial pressure to begin with is the last thing you can afford to have occur.

Keep in mind the old Aesop’s Fable about the tortoise and the hare and remember that sometimes, slow and steady wins the race. If modest returns are insufficient to fund your goals, then either you need to lower your expenses, change your goals or find new sources of income. This point is especially important because there will always be some new shiny object in the form of a new hot fund that someone somewhere is trying to sell you – and if you’re feeling the pang of loss, hockey stick return projections look mighty tempting, but all too often, they fail to live up to their promise.

FINANCIAL PLANNING AND DIVORCE

Conclusion

Unrealistic Expectations

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Financial planning is an ongoing process that informs our daily choices and also our investment strategy. While financial planning is important for everyone, it is particularly important for people going through big life changes such as divorce.

Financial planning, done right, can help you protect what you have, be more strategic in your divorce negotiations, and look to the future – and move forward with your life.

That said, a divorce is an emotional time, and it is easy to push off financial planning until the future, when you’ll presumably be feeling better and up to the task. However, a good planner will make the process easy for you while encouraging you to immediately take the reigns of your financial life so that you can move forward. Likewise, a good planner will help you guard against some of the

classic mistakes which one can be tempted to make in the divorce process.

Last but not least, if you are contemplating a divorce, it is ideal if you can start working with your financial planner a year in advance. Perhaps one benefit of formally creating a simulated post-divorce plan might be the inspiration to circle back and see what else might be done to save the marriage. Divorce is a last resort solution – but if you are going to divorce, it is wise to do it the best you can and having a strong financial planner on your team is a best practice that should pay you dividends for years to come.

FINANCIAL PLANNING AND DIVORCE

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