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Divorce Planning for Clients: A Guide for Financial Advisors
By: Atty Bruggemann
Despite a slight decline in recent years, divorce rates still hover around 40% in the U.S., with over 670,000 divorces or annulments recorded across the country in 2022 alone. That means financial advisors are extremely likely to encounter clients contemplating or beginning a divorce. As such, they are in an ideal position to guide them through a turbulent and life-altering process.
Preparing the finances of a divorce requires a team of professionals, one in which the financial planner plays a crucial role.
As a divorce attorney, I recently represented a woman contemplating a divorce from her husband of almost two decades. She had consulted with a financial planner and arrived at our offices for our first meeting with detailed spreadsheets outlining her budget and with records of bills, credit cards, bank statements and retirement benefits.
Thanks to her discussions with her advisor, she knew how long she could afford to remain in the marital residence, which allowed her the option of staying in her home until her children were older and more capable of handling change. This solid foundation of knowledge instilled confidence during subsequent negotiations and helped to save both time and money by fostering realistic expectations.
Drilling down for a detailed picture
There can be a sinister connotation around the term "divorce planning." This is misguided.
Divorce planning is much like planning for a hurricane. The warning signs may come far in advance of a storm making landfall — and there is the possibility that the storm may never come. But if it does, the more prepared the client is, the better they feel about the actual event. Early preparation minimizes financial losses and maximizes assets. The more financially organized a client is at the start of a divorce, the more effectively the attorney can negotiate for the client.
The financial planner should begin by compiling a complete and detailed overview of a client's current financial picture. This includes identifying assets and determining whether they are marital or separate property. Discover whether the client's spouse has any separate property; the source of money used to support real property assets; and the client's and their spouse's income, employment benefits, bonus schedules and other forms of compensation.
Additionally, the existence of retirement accounts, ownership of businesses and the details of those businesses, including how they are titled and operated, need to be examined.
Furthermore, understanding the couple's debts, liabilities and monthly budget is essential. This involves assessing whether they are living within their means and how this is likely to change once they are ultimately separated. All these details must be thoroughly understood before moving forward.
Zooming out for an accurate financial snapshot
After the granular financial picture is understood, the next step is to examine the current financial snapshot of the client.
Understanding their individual current expenses and standard of living is crucial. The client's bank statements, credit cards and debts will give a financial planner an understanding of what the couple's spending was like during the marriage and how this could change once they are ultimately separated. This exercise is important for the divorce process, as it gives the attorney the ability to negotiate with real numbers.
The financial planner's collaboration with the client's divorce attorney works to project a future financial picture, considering all aspects of the settlement such as spousal support, child support, the division of assets and, potentially, debt.
For example, a client might need to decide whether to stay in the marital home or sell it, as mentioned before. If there are children, questions about who will pay for their expenses and education arise and must be addressed. Additionally, the division of retirement assets should be carefully planned, as it impacts the client's long-term financial health. If the parties have a prenuptial agreement, it must be reviewed with the divorce attorney to determine its impact on any settlement.
Moving forward
It is important to note that divorce planning happens independently of the other spouse and is part of the strategy used by divorce lawyers to move the client's case forward successfully. Effective communication between financial planners and divorce lawyers is essential to provide a comprehensive financial picture for the shared client.
Empowering clients begins with trust. Fostering open communication and encouraging realistic expectations is crucial. Being upfront about the financial challenges a client may face as a result of their divorce — and planning around those challenges — will help them feel secure as they move through the process.
Divorce planning can also serve as an important aspect of a financial planner's business model, as it may ultimately lead to lasting relationships post-divorce.
By empowering clients with a comprehensive knowledge of their finances, financial planners offer invaluable support to those facing considerable uncertainty. This proactive approach not only instills a sense of stability, but also offers clients a measure of control amid the turbulence.
Atty Bruggemann, Esq. is a partner at Dimopoulos Bruggemann P.C., a matrimonial and family law firm based in Westchester County, N.Y. that specializes in high-net-worth divorces. For more information, visit www.dimolaw.com.
This article was originally published in Financial Planning and can be viewed here.
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