Divorce is an emotionally draining experience for many married men and women. Likewise, it can be a financially troubling time as well.
And that is where a good advisor can make a big difference.
More than 813,000 Americans get divorced every year, according to the National Center for Health Statistics. The average cost of getting divorced — including
lawyers, mediators and court costs — is prohibitive enough at $20,000. But the real financial pain comes from the ensuing years after divorce, especially for the spouse who pays out alimony and child support.
“A cost most spouses do not see is the total financial burden over a lifetime,” noted the website divorcesupport.com in an online tutorial. “This includes child support until the age of 18 or the age of majority is reached and spousal support up to the age of retirement.
“For example, let’s say you were married at age 20 and divorced at age 31,” the report stated. “You are now considered a long-term marriage (more than 10 years). Let’s also say your spouse does not remarry. This means you could be faced with paying support for another 34 years. If the support amount were $1,000 per month, your overall payment would be $408,000.”
That’s a ton of cash on the table. Advisors are on the front lines in protecting clients, as best they can, from the high costs of divorce. Make no mistake, that responsibility starts from day one, and smart advisors will know which divorce action items to prioritize first.
“The first step a financial advisor should take after learning a client is divorcing is to refer the client to a divorce attorney,” said Angela McIlveen, partner attorney at McIlveen Family Law Firm in Gastonia, N.C.
‘The Best Advice’
It’s important that clients receive legal advice prior to making financial decisions that could impact the outcome of their case.
“It’s preferable that the client talks with an attorney before moving out or even telling the spouse that divorce is imminent,” McIlveen said. “The attorney and the financial advisor working together can give the client the best advice about how to move forward financially and legally.”
Establishing some broad guidelines is also on the table for advisors and divorcing clients.
“This issue has come up more than a few times for me,” said Karen Lee, a financial planner and founder of Karen Lee and Associates in Atlanta. “The first thing I do when one member of a couple announces to me that they are divorcing is to set up some new rules. Primarily those rules are around confidentiality.”
After first hearing of a client divorce, an advisor can no longer divulge client information to the client’s spouse.
“To clarify, on accounts in an individual’s name, I am supposed to talk only to that person, so this mainly applies to jointly held accounts and personal information,” Lee said. “However, those lines tend to get fuzzy in a solid marriage, so I need to be clear that I must now keep things separate.”
The next step is to focus on the settlement and how each person is now going to be living on their own and having to support themselves.
“It’s crucial to consider how a non-working spouse will be able to survive after a divorce, and I highly encourage life insurance as a means to make sure the agreed-upon support will continue in the event of a death,” Lee said.
Another critical step — advisors should draw up a checklist to track and complete upon news of an impending divorce.
“Gather all your financial information. Create lists of all assets and debts in your name, and calculate your net worth,” said Fred Schebesta, chief executive officer at New York City-based Finder.com. “Be completely honest and transparent, as trying to hide anything will only draw the process out further (at great cost) and hurt you in future negotiations.”
Freeze the Spending
In the early stages of a divorce scenario, advisors should encourage clients to hold off on making any financial decisions.
“Divorce proceedings are not the time to be making any money decisions,” said Schebesta, who is divorced. “It creates complexities that will only confuse the situation.”
It’s also good for divorcing clients to establish their own financial identities.
“If you only had joint accounts, open an account that is solely in your name,” he added. “That’s because you can pay for everyday expenses while joint assets, including savings accounts, are being divided.”
Next, advisors should urge clients to keep diligent records, including the all-important “date of separation.”
“Some states require you to be separated for six months or more before you can pursue a divorce, so you want to ensure you track how long it has been,” Schebesta said.
Finally, divorcing clients should determine a budget and set financial goals.
“Going from two to one may sound more affordable, but a divorce can bring with it a host of unexpected costs, particularly if you have children,” he said. “Write down your complete financial obligations, including rent, utility bills, credit card and loan repayments, bank account balances, investments, retirement accounts, insurance policies and tax records and set out a budget for managing your new single life.”
Note that these are only critical first steps after clients inform their advisor they are getting divorced, and there’s much more work to do for both parties. But if you get the first steps right, those later steps become much easier to execute.