3 Steps to a Secure Financial Future for Your Divorcing Clients
Anyone who has ever been through, or witnessed, a divorce knows that the pain of separating isn’t just emotional—it’s also financial. CPA financial planners may often feel at a loss as to what advice or guidance to offer distraught clients.
Let’s say your client Kate, age 50, calls in tears to tell you that her husband of 25 years, a high-level executive, wants a divorce.
“He wants to avoid using attorneys,” she says. “He made me an offer yesterday: He keeps all his retirement savings and I keep mine. I get the ski lodge; he gets the apartment in the city. We split cash and investments. I really don’t want to make him angry, but my own retirement will be so small. Is his offer enough?”
We all want what’s best for our clients and answering this complicated question will take some research. However, the most important factor is to avoid any conflict of interest. If you were advising the couple before the split, you may need a disclosure, a waiver or even a new engagement letter.
Divorce is like a three-legged stool comprised of legal, emotional and financial issues. It’s no wonder that CPAs often cringe at the thought of unraveling this messy bundle. The best way to approach it is one step at a time.
Step 1: Address Legal Issues
Kate’s husband does not want to use an attorney, and she’s afraid of making him angry. In my experience, pro se divorces, or representing himself or herself in court without the help of a lawyer, are a fine choice for individuals who do not own property or do not have large retirement accounts to worry about. Kate’s estate is complex, and she would be taking a significant risk by failing to investigate the legal aspects of the divorce. The ultimate decision is hers, but my recommendation would be to share with her the pros and cons of retaining an attorney.
Step 2: Address Emotional Issues
Divorce is one of the most stressful events an individual can experience over a lifetime. If your client is struggling, consider connecting him or her with counseling resources that can help.
Step 3: Address Financial Issues
This is where your technical background can truly shine and make a difference for your client’s outcome. Depending on the complexity of the case and the willingness of the sides to collaborate, you may be able to accomplish a lot of this on your own. In situations in which one of the parties won’t share the information or is being deceitful, you may have to work with a forensic specialist or a private investigator. Either way, plan to address these areas:
- Identify all assets. This includes cash and investment accounts, real property and retirement accounts.
- Map out living expenses. Begin with a one- to three-year history, then project the numbers into the future. Consider whether your client would be moving his or her residence, buying a new car or funding education expenses to prepare for a new career. Divorce often results in a change to healthcare coverage, so investigate any possible increases in premiums. The size of the emergency fund must be reassessed, as well.
- Map out property division scenarios. Create a projection of each scenario over the lifetime of your client. Consider inflation and healthcare premium increases, as well as the tax consequences of the property division.
Ultimately, the specific decisions of asset division are up to the client. However, CPAs can do a great deal to inform and guide clients so all decisions are grounded in facts and thoughtful analysis, not fear and emotional confusion.
Tracy B. Stewart, CPA/PFS, CFF. Tracy has advised divorcing couples and their attorneys on the financial aspects of divorce for more than 15 years. Tracy has been a member of the AICPA National Financial Literacy Commission and currently serves as a member of the PFP Executive Committee; a trustee for the Collaborative Law Institute of Texas, Inc.; and contributes articles, as well as frequent presentations, on collaborative divorce. Contact her at firstname.lastname@example.org.
Divorce courtesy of Shutterstock.