Advisors name the most overlooked financial issues during divorce proceedings
Michelle Smith, Matt Kilgroe, and Harry Grand.
Clients going through a divorce rely heavily on their financial advisors at a time when their emotions are at their most heightened.
Sad as it may be, divorce remains a fact of life for many families. It’s also a circumstance when clients are most reliant on their financial advisors at a time when their emotions are at their most heightened.
And that’s why financial advisors better not let anything slip through the cracks when helping those clients navigate the divorce process.
Michelle Smith, CEO of Source Financial Advisors and one of the nation’s most sought-after Certified Divorce Financial Analysts, says one of the most overlooked items that financial advisors need to attend to when dealing with a couple going through a divorce is credit – both maintaining it and establishing it when necessary.
“It’s essential to pull credit reports for both parties to ensure good credit standing,” said Smith. “If the non-monied spouse does not have credit in their own name, a credit card should be immediately established using their social security number.”
She adds that an additional card on someone else’s primary account does not build credit in that person’s name.
“This is particularly crucial as women often find themselves at a severe disadvantage post-divorce if they lack their own credit history,” said Smith.
Meanwhile, Matt Kilgroe, president of Cyndeo Wealth Partners, says one particularly overlooked issue is the handling of the marital home if there is a mortgage. Often the non-breadwinner spouse retains the home and the breadwinner wants their name off the mortgage.
“Banks are notoriously difficult to deal with on this as they want the retaining spouse to qualify for the mortgage on their own,” said Kilgroe. “In today’s interest rate environment nearly all refinancings are going to be at significantly higher rates if the retaining spouse can even qualify. It is definitely a topic that needs to be addressed before the Marital Settlement Agreement is finalized.”
Robert Schein, chief investment officer at Blanke Schein Wealth Management, warns advisors to remember life insurance when guiding clients through divorce proceedings. No matter how heated the negotiations may get, he says one of the spouses, or both, need to control the premiums so they don’t lapse.
“And when you perform the beneficiary review, make sure that the beneficiary can’t be revised five years down the road,” said Schein.
Craig Robson, founding principal & managing director at Regent Peak Wealth Advisors, says one of the most commonly overlooked aspects that financial advisors need to address when dealing with a couple going through a divorce is the tax treatment and implications associated with various financial components of their situation.
For instance, when it comes to retirement plans, special tax provisions such as the Qualified Domestic Relations Order (QDRO) must be considered to avoid unnecessary tax penalties. Additionally, Robson says the tax implications of child and spousal support can be quite different.
“For divorces finalized before 2019, alimony payments were tax-deductible for the payer and taxable for the recipient, whereas child support payments were not tax-deductible nor taxable,” Robson points out.
The marital home also presents potential tax issues, according to Robson, particularly regarding capital gains implications when selling the property. Each party needs to understand how the sale will affect their tax situation.
Furthermore, equity compensation, such as stock options, can be particularly complex. Not comprehending the tax implications when dividing these options can lead to significant financial consequences.
“Deferred tax consequences must also be accounted for when dividing other investments and assets. Overlooking these deferred taxes can result in unexpected liabilities down the road,” said Robson.
Finally, Harry Grand, partner & head of New York office at Angeles Wealth Management, says one of the most overlooked aspects by a financial advisor handling a divorce is the emotional and psychological impact of the divorce on their clients. Divorce can be a highly stressful and emotional experience, and clients may be dealing with feelings of sadness, anger, guilt, or uncertainty. It is important for the financial advisor to have “their client’s back” during the transition, according to Grand.
“It’s not just about investing, but they need to also provide emotional support and empathy to their clients during this difficult time in addition to offering practical financial advice,” said Grand. “Ignoring or downplaying the emotional aspect of divorce can hinder the client’s ability to make sound financial decisions and move forward effectively.”
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