Advising clients through major life changes is a key part of a financial adviser’s job. Here are some thoughts on advising clients going through a divorce and post-divorce.
If your client is a couple that has decided to get divorced, your role as their adviser is an important one. First it's important to determine if you will continue to work with them as a couple through the process, and if you will work with one or both of them individually once the divorce is finalized. If working with both of them through the divorce process isn’t a viable option, you and your clients need to determine which spouse you will work with.
Regardless, it's important to set some ground rules in your dealings with the couple during the process.
A good rule to follow is that you remain open and impartial in discussing financial planning matters with both spouses.
In helping the couple prepare a financial plan for the divorce process and beyond, it’s important work with the clients to prepare a number of items, including:
- A listing of expenses, including how those expenses might change for each spouse post-divorce.
- An inventory of all assets owned jointly or individually by the couple.
- A list of all debts and other liabilities owed by the couple.
- A review of any pre-nuptial agreement in place and how will this impact the division of assets in the divorce process?
- Information about any life, disability or long-term care policies currently in place.
In looking at the proposed divorce settlement, you can help each client understand the potential financial impact on them. For example if one spouse will keep the house and have primary custody of the couple’s minor children, will there be sufficient cash flow for that spouse after the divorce is finalized? What will their respective cash flows look like post-divorce? Are there any potential pre or post-divorce tax issues they should be aware of and are there any ways to plan around them?
One tax issue concerns any alimony to be paid. The tax rules for the spouse paying the alimony and for the spouse receiving it were changed in the last overhaul of the tax rules.
After the Divorce
Whether you are working with one or both of the spouses post-divorce, or whether you take on a newly divorced client with whom you did not work while they were married, there are some planning issues to address as soon as possible.
A key first step is to review the client’s ongoing cash flow to ensure that they have sufficient funds coming in to meet their expenses, such as rent or mortgage payments. You will want to review the divorce settlement with them to be sure that both you and your client understand any payments they are obligated to make and any money they are supposed to receive.
Beyond this, you should work with your client to formulate a financial plan for them as a single person. This will vary based on the client’s circumstances, including their age, whether or not they are working and a host of other factors including whether or not your client had experience dealing with personal financial issues during their marriage.
The need for financial planning support can be especially acute with some newly single women who are in their 50s and older. Women in this age range may not have been highly involved with their finances while married. These clients, being on their own financially, need your help and guidance in charting a new financial course and in gaining the confidence to take control of their financial future.
Financial planning issues for newly divorced clients include:
- Putting together a financial plan for them as single individuals, assuming one income and one person saving for retirement
- Reviewing their budget
- Tax planning issues
- Ensuring that their estate plan and any related documents reflect their new status
- Beneficiaries on retirement accounts and life insurance policies may need to be updated as well
Over time, your divorced clients may become involved in new relationships and remarry. This involves a whole new level of planning including ownership and titling of assets that are brought into the marriage, perhaps a prenup, estate planning with a blended family if applicable and a host of others.
Clients who are going through a divorce need your help and guidance to help ensure the financial settlement is a fair one for them. Post-divorce, they need your help planning for a new financial life as a single person.