In regular meetings with clients and families, some form of this question is always asked: Has anything related to your financial or personal situation, risk tolerance, cash flow needs or objectives changed since we last spoke?
If “We’re about to go through a divorce” is part of the response, three things should happen.
One, your advisor should become an empathetic listener. To state the obvious, going through a divorce takes a massive emotional toll on the parties involved, and there needs to be an even-keeled and pragmatic advisor on the other side of the table.
Two, divorces can be emotionally draining, but then you tack on financial costs, tax implications, complexities that can arise when substantial assets are involved and all the rest. The process can get really messy and really stressful quickly. As financial advisors, it’s our job to introduce confidence and clarity to the process and help our clients rebuild financial stability. Or, said another way: It’s our job to make a plan.
Finally, you should feel confident that your financial advisor is your advocate, working alongside attorneys and tax professionals during pre-planning and throughout the duration of the divorce to safeguard client interests and ensure a smooth transition.
With this framework in mind—and knowing that clients going through a divorce may need a little time to process—the planning can begin.
The first step is to ‘get everything back on the table,’ which means gathering the latest documents and statements related to the current assets and liabilities. For existing clients, much of this information may already be known. But it is still worthwhile to perform another comprehensive review to ensure nothing is missed, to gain a clear understanding of how assets and income may be divided and determine what it all means for a client’s net worth and tax obligations.
Engaging with professional financial advisors and accountants during this phase is not just beneficial—it’s essential.
Advisors can then start to map out a client’s financial situation post-divorce, which typically means adjusting financial goals in both the short- and long-term.
Shifting goals can take a variety of forms. A client may need to push retirement back a few years or perhaps delay the purchase of a second home. Or, on the other end of the spectrum, maybe the asset split creates a new need for trusts to facilitate generational or charitable giving. The bottom line is that financial goals almost always change post-divorce, which means financial plans must change, too.
Which brings up the next key item advisors must address: cash flow.
For ultra-high-net-worth individuals, spending a lot of time creating a detailed budget may not be necessary. But it is important to establish monthly and annual income needs and stress-test this amount—adjusted for inflation over time—against a client’s liquid net worth and expected rate of return. This exercise will not only establish what is feasible but will also provide key insights into how assets should be invested and allocated.
For some, going through these steps may create some reality checks, like the need to pare down spending in certain areas or sell off non-liquid and non-essential assets. There may even be conversations about ways to supplement income through investments, initiating business ventures or even part-time or full-time work. Diversifying income sources can enhance financial security and buffer against unforeseen financial strains.
Early on in the process, we also think it’s important to establish or re-establish a robust emergency fund, generally about one-year’s worth of income needs set aside in an interest-bearing, low risk or risk-free account. Making regular contributions to this high-interest savings account, and/or implementing an automated saving plan on top of it, will only expand and solidify a client’s financial base.
Re-evaluating investment and retirement accounts comes next. A recent article in The Wall Street Journal was titled: “His Ex is Getting His $1 Million Retirement Account: They Broke Up in 1989.” As readers might imagine, the story is about a man who set his girlfriend—not even his wife at the time—as the beneficiary on a 401(k) account early in his career. When he passed away some 35 years later, she was still listed as beneficiary—even though they split up in 1989.
The account owner’s estate has taken the issue to the courts, but early rulings have established that the assets legally belong to the ex-girlfriend.
This story and others like it reinforce the importance of regularly reviewing retirement plans and all investment accounts to ensure the asset allocation, investment choices and beneficiary designations all reflect a client’s most up-to-date and detailed circumstances. A constructive and forward-looking approach may also involve re-establishing contributions and positioning for growth over the long term.
A final area to address is estate planning. As assets are split and potentially re-titled, wills, trusts and estate plans must also be updated to ensure that the intended inheritance structures and plans are maintained. Again, advisors should work alongside estate planning attorneys to align assets and documentation with a client’s new financial goals and family dynamics.
The financial and emotional implications of divorce are big, particularly for those with substantial assets. But by engaging with the right professionals, taking a proactive and structured approach and mapping out a clear plan that addresses each area of a financial plan, individuals can emerge from divorce not only financially sound but also well-prepared for a prosperous future.
IMPORTANT DISCLOSURES
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
This presentation includes forward-looking statements and opinions, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and opinions are inherently uncertain, and actual events or results may differ materially from those reflected in the forward-looking statements. In addition, all expressions of opinion are subject to change without notice in reaction to shifting market conditions. Therefore, undue reliance should not be placed on such forward-looking statements and opinions.
The tax and estate planning information offered by Newport Capital Group is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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