In gray divorces there has been more time to accumulate assets—which is helpful to the parties as there are more resources to divide …but on the other hand, the financial disclosure process can be much more laborious than with younger couples. Financial advisors should be aware of how the process works and, together with attorneys, help clients navigate the disclosure phase and avoid some all-too-common disaster scenarios.
In a gray divorce, children are typically at the age of majority, therefore the central focus of the proceeding becomes how to achieve an equitable division of debts and assets and whether a maintenance order is appropriate.
The process of dividing debts and assets will first require the completion of a comprehensive financial disclosure statement by both parties. The process can be daunting for many people because it requires gathering statements for absolutely every asset and every debt and accounting for all income from whatever source derived.
This involves understanding how everything is owned and what is owed. It also requires understanding the character of every asset: is everything marital property, meaning each party has a 50% ownership interest, or is there individual property such as an inheritance or gifts that potentially belong to only one spouse?
Here are several issues we see crop up in the financial disclosure process:
- Concern over whether a party is hiding assets.
- Lack of understanding by an individual who did not engage in the family finances and may not know the inflows and outflows of the family income and debt—and therefore the assets that need to be considered.
- Complication—and expense—in valuing business interests. Business appraisals are often required to accomplish this and can be incredibly expensive and time consuming.
- A question about whether all earnings were declared on tax filings. If a couple did not have an accurately represented income on their tax forms, this may come back to haunt them during the court proceeding.
- Whether there may be hard-to-value assets that require expert analysis. This could be business interests, collectibles, stock options, military pensions, etc
- Cryptocurrency holdings. This is a newer challenge, as couples who have invested in this speculative currency may find the volatility makes it incredibly difficult to value and divide.
Following are areas where advisors can often assist their clients—first, in common asset types, and then in less-common ones.
Personal valuables and real estate
People often wonder about the value of their personal valuables and real estate. Real estate tends to be relatively easy to value through comparable property sales and the help of a real estate agent. For the contents of a home, there is a tendency to overvalue the things we really love. Parties to a divorce could hire an appraiser for the home contents; however, unless there are unique assets such as artwork or rare collectibles, this is seldom necessary or recommended as the value of personal property can be reasonably estimated.
Financial assets such as retirement accounts need particularly close attention. Divorce is such an emotionally draining process, parties will sometimes want to get through it quickly and then don’t make informed decisions about the division of those assets. It is important that parties consider the present and expected future values of retirement accounts, as well as the potential tax consequences they may experience a result of the division and their financial needs post-divorce.
A good attorney and financial advisor can help protect a client by reviewing the options with them to avoid a hasty decision relative to the division of qualified retirement assets. Having a financial plan can help a party understand the reality of the situation and what their financial landscape will look like depending on the divorce settlement. To divide qualified assets, a Qualified Domestic Relations Order (QDRO) is often necessary. This special court order will divide the assets according to the final divorce judgment and potentially retitle them.
In most states, the law provides for an equal distribution of the marital estate, and the longer the marriage, the more likely the court will enforce that. With long-term marriages and higher income parties, we often see situations where one spouse did not work outside of the home, cared for the children, maintained the home, and provided support to the spouse who was employed externally. This support helped the other spouse focus on professional endeavors. Equity in the law provides that the family income including retirement accounts, pensions, savings, and real estate were gained by the efforts of both parties in their respective roles and, as such, the financial rewards acquired during the marriage should be divided equally. There are, however, circumstances where the court would allow a deviation from full equality.
Business owners and executives
Business ownership can be especially tricky. Although third-party business valuations are expensive, they are incredibly important in the divorce process. Without an objective review, it’s all too easy for the parties to either over or underestimate the value of the business asset.
A common and especially tricky situation is a business that’s tied in to one personality. If that person is going to keep the business going, it may be appropriate for him or her to give up some other assets. Another common approach is for the business to be sold and the proceeds divided. A less common option for couples both working in a business they own is for the couple to continue working in the business even after the divorce under a newly formed partnership agreement. That can happen if they were both incredibly good at what they did and respected each other’s talents and contributions to the business.
For business leaders in the corporate world, particularly C-suite executives, compensation can be complex. Income, bonuses, and deferred compensation are usually easy to identify in a financial disclosure—whereas stock options and special perks are a different story. Stock-option valuations require careful attention by professionals. Company perks feed into what the court may equate to additional income. Such things as company cars, vacation property, insurance policies, frequent flyer miles and more can fall into that “other income” category and count toward the assessment of income and lifestyle. When a court is dividing assets, the ideal scenario is that the property division will allow the parties to maintain the lifestyle they were accustomed to while they were married. This is the goal, but often it’s not possible.
Financial disclosure & spousal maintenance awards
Spousal maintenance may be an important source of income—or expense—for an advisor’s client post-divorce. Financial disclosure documents are used by the attorneys and the court to understand the financial circumstances of the couple while married. Once those are completed, discussions about how assets and debt are divided and what maintenance may be requested as part of a final divorce settlement can begin.
It’s important to note there are two key parameters the courts consider when evaluating the award of maintenance: how much and how long?
When individuals are younger and/or are in shorter-term marriages, courts may find maintenance is not appropriate or may order limited term maintenance to allow a party time to get reestablished with employment or training to become financially self-sufficient.
For longer-term marriages, particularly where one spouse has not worked outside the home or who made significantly less income during the marriage, and who may be advanced in age or have poor health, longer-term or indefinite maintenance may be awarded to prevent that spouse from experiencing financial devastation post-divorce.
In situations where a spouse has marketable skills and has been making a living, albeit with a lower salary than the other party, it is unlikely that maintenance will be provided for an indefinite period. In those situations, we more commonly see a shorter period of maintenance to get the individual through the divorce and established independently in the new post-divorce reality.
Every circumstance can have nuances that impact the ultimate division of property and maintenance order. Divorce attorneys can often indicate what is likely to be awarded by a judge so that that maintenance and property division can potentially be negotiated between the parties, saving significant trial costs.
Helping clients avoid disaster scenarios
When a divorce is pending, people sometimes make poor decisions not realizing they still need to file joint taxes and have joint liability (such as for debts) until a court order officially dissolves the marriage. I once had a situation in which one person was a gambler and—contrary to what was disclosed on the initial financial disclosure, the party was winning significantly during the pendency of the divorce. When it came time pay taxes for that period there was a significant tax liability that was not anticipated by the parties and of course the winnings were nowhere to be found.
People do occasionally suspect a spouse is trying to hide assets. In that situation, it can be very helpful—though expensive—to bring in a forensic accountant. I’ve experienced a situation in which a divorcing spouse had significant property in another state under a previously unknown business name. This property was uncovered through this type of close study.
Estate-related plans are put on pause during divorce proceedings. Divorcing parties should be sure to redraft, at minimum, their powers of attorney for healthcare and finances during the proceedings. On the estate-planning front, I’d also stress—in fact I can’t stress enough—the importance of updating beneficiary designations post-divorce. There are all too many horror stories about people who neglected to do this and their ex-spouse remains the recipient of life insurance proceeds.
I recommend that people review their estate plan at least every five years to make sure it says and does what the individual wants—and that’s for all people, whether happily married or not.
Kelly Mould is a Senior Vice President, Wealth Sales Team Lead at Johnson Financial Group.