The benefits that financial advisers provide to a client going through a divorce start when that client first informs you of the wedding plans. Nobody gets married planning to get divorced, but the fact is, marriages do end.
There are several steps informed advisers can take that will help their clients, should the marriage dissolve. But before we get to them, let's discuss some ground rules.
First, establish to whom you have a fiduciary responsibility.
For example, is the relationship with both spouses, or do you handle the accounts only of one spouse, as is the case in many second marriages? If you have a fiduciary responsibility to both spouses, it is important that you not provide an unfair advantage to one.
Your role is also going to depend on the divorce process that the client chooses to pursue — litigation or collaboration.
In a collaborative divorce, couples and their attorneys agree in advance not to litigate.
A financial professional specifically trained in mediation and in the collaborative process will be part of the team that helps the client work through the financial issues. Advisers who have this training can assist the collaborative professionals as well as the attorneys in the negotiations.
The litigation route is much more adversarial, and if your fiduciary responsibility is to both clients, you need to limit your role to addressing financial planning issues.
For example, you would help with post-divorce financial matters, answering for clients such questions as, “Will I have enough cash flow to meet my living expenses?” and, “Will I be able to retire at some point?” If you answer these concerns for one spouse, the same information should be given to the other spouse.
Under no circumstances should you give an opinion as to whether a settlement offer is sufficient.
What you do and the advice that you give when things are good can pay big dividends if things turn bad.
For example, let's say your client gets engaged. You should take note of the wedding date and assemble a net-worth statement in time for the wedding that is complete with account statements as of that date.
What should you not recommend to your client?
It shouldn't be an automatic decision to add the spouse as a joint owner to all individual accounts. The reason for this is a concept known as “separate property.”
This is all property owned prior to the marriage or received during the marriage by way of individual gift or inheritance. To remain separate, property cannot be comingled with marital assets.
You don't have to tell both clients that you have done a net-worth statement for the first client (if the new spouse becomes your client and you therefore have a fiduciary responsibility to both spouses, you need to be careful how to provide this information during the divorce process). In the case of adding the spouse to individual accounts or channeling gifts or inheritances to individually owned accounts, there are other reasons besides divorce to have separate accounts, one of which is estate planning.
Forensic accountants are often retained by counsel either to build a case for separate property or to discredit a claim for it. This process can be difficult and costly if the client hasn't retained adequate documentation throughout the years.
A case can still be made for separate property, even when it has been comingled with marital assets, depending on whether there is sufficient documentation to support it.
If a client uses his or her separate property as part of the down payment for a residence, we can prove separate property as long as we have the statements supporting the asset trail.
During the negotiation process, it is very important for your clients to have an accurate analysis of their cost basis, not on an average basis but rather specifically identified by lot. Basis will follow the assets given or received as part of the settlement; it is therefore crucial to know the tax ramifications of the agreement.
I am called on during the negotiation process to provide a tax analysis of the settlement in order to ensure that there are no hidden tax booby traps.
There are, of course, many more issues, including tracing hidden assets, determination of fair value for business assets, analysis of executive compensation plans, and the percentage of assets that may be considered marital. This is why many advisers call in experts to make the process as objective, productive and painless as possible — at least from a financial perspective.
John E. Johansen is an accountant and financial planner specializing in all aspects of divorce.
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