Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
While divorce isn’t easy for anyone, it can be particularly complex for wealthy families. Dividing more assets means couples face more legal complexities, and sometimes more heartaches. Ownership of family businesses, multiple properties, offshore assets, and the more frequent presence of marriage contracts, means lawyers and financial professionals will have more paperwork to comb through to ensure all parties—including future heirs—are treated fairly.
The detailed review required is expensive, especially when disagreements spur one or more parties to move matters to the courtroom. Many wealthy couples initially try the collaborative process, but oftentimes end up in litigation due to the number of assets involved and the complexity in determining their value.
It can take a long time to accumulate significant wealth (excepting inheritors, of course), which means most high-net-worth divorces take place later in life. These so-called grey divorces can come with a high degree of emotional stress for one or both partners; and while the couple will usually continue to be solvent, that doesn’t begin to deal with the emotions involved.
Financially, divorce often boils down to who owned what—and when. But it’s not the quantity of assets that causes problems; it’s the specifics surrounding how each asset was acquired. What the parties share when a marriage breaks down is the value of assets acquired during that marriage. Lawyers will look at what each party owned on the date of the marriage, and what they owned when they separated. Each asset is valued based on the date of separation—a date that can be tricky to establish if the parties don’t agree.
While no longer gender-specific, within most families one of the spouses will act as the household’s Chief Financial Officer. If divorce should occur, the other spouse can be left with an inadequate grasp of their finances and net worth—which is why a couple needs to ensure they both have a solid understanding of the family’s balance sheet.
Foremost among many couple’s assets is the matrimonial home, which can include not only the principal residence but cottages and even boats if it can be determined the family spent a significant amount of time each year on the water. Ownership of a cottage can make things trickier. Oftentimes, it is used as the family’s second home and both spouses want to keep it, or there are emotional ties because that’s where all the memories with the children are.
Further complications emerge from inheritances, and they are frequently gender-based. A woman in a marriage will often receive an inheritance
and she will use it to renovate the kitchen and pay down the mortgage. By contrast, a lot of male clients who receive an inheritance will invest the proceeds in a separate account.
The result being that one person has lost the inheritance because it went into shared property, while the other has retained the excluded property.
When a person receives an inheritance, they should obtain proper advice. It’s natural for someone to want to give something away or share it with their spouse, but an individual should know what will happen should they divorce.
Once in separation mode, it’s wise to redo the estate plan. Even if there is no property settlement established, it is important to make sure the soon-to-be-ex isn’t named as the estate trustee, or as the power of attorney for property or personal care. People involved in divorce proceedings should also consider changing the beneficiary designations on insurance policies, RRSPs, RRIFs and TFSAs, ensuring that any changes on beneficiary designations for estate planning are approved by the family law lawyer to ensure that they aren’t affecting assets that may be important to the property settlement. Once the property settlement is finalized and assets are confirmed, a more detailed plan can be established.
Sources of Wealth
The source of a family’s wealth also impacts the complexity of the divorce process and the advisor’s ability to provide a clear financial picture to the client. If a couple accumulated the wealth themselves it can make the process a bit easier. Trust funds on the other hand can be problematic. They are usually structured through complex agreements or there is a marriage contract that says, ‘Those particular assets came from my grandfather and they stay mine.’
Ownership of a family business will make things infinitely more complex. A spouse who has never worked in the business may end up with some level of ownership; which raises questions about whether they will now take an active role in the company, or if some other remuneration is feasible. Usually, such payouts come in the form of shares in the company, though they frequently come with shareholder agreements restricting what can be done with those shares.
If an individual is going to accept shares of the corporation as a property settlement, they will want to confirm what benefits those shares will provide. For example, will they carry sufficient votes to give the former spouse a voice on the Board of Directors? Will they provide priority to dividends? And what are they entitled to if the company is wound up?
It is also critical to obtain valuations of the business as of the date of marriage and the date of separation to determine how much wealth accumulated inside the company throughout the marriage.
Making the Money Last
Once the divorce has been finalized, individuals need to continue to protect and surround themselves with good advisors. They need to build up their own team of trusted professionals who will educate them on issues going forward; making sure things don’t slip through the cracks.
What falls through? Things like ensuring that the correct powers of attorney are in place, that the individual starts to look at the wealth as his or her own—and not the couple’s—and that he or she obtains the correct tax advice for this new phase of life.
When a client divorces, depending on whether they’re the spouse who owes money or the spouse receiving it, the cash flow changes. Income changes because they’re now a single-income earner. Each spouse will likely have their own home, and expenses increase. Advisors need to really understand how the risk and return objectives and income requirements on their portfolios have changed.
If a client tells you they’re getting divorced, or even considering it, it is important to meet with them immediately to begin working up strategic plans to ensure that person can continue to fund their lifestyle. At a minimum, a client will be moving from two household incomes to one, and in the case of grey divorce the spouse frequently has to determine how to make the proceeds from a lump-sum payment, and subsequent support payments, fund his or her remaining years.
In the case where a client receives a lump-sum settlement, it is important to break down what the client will be able to spend annually, and what rate of return is needed on the invested portion of that capital. Those numbers should be revisited quarterly and clients should be asked about their short-and long-term goals—everything from buying a larger home to doing something to benefit the children.
Having a strategic plan allows you to have less of an emotional conversation and more of a rational conversation. You’re able to say, ‘I’ve done some planning around the numbers. This is what it’s looking like.’ And you’re able to bring them to a place that makes sense. Being able to provide some of those financial scenarios really helps get control over a very uncontrollable situation.
The heartbreak scenario happens when someone waits too long to consult a competent professional. If a divorcee works with an advisor who doesn’t grasp the need for capital preservation and puts the funds from a lump-sum settlement into too risky a portfolio, a sharp market correction can obliterate a large percentage of that wealth, forcing the client to make lifestyle adjustments.
Psychologists liken the range of emotions experienced by those going through divorce to what happens after the death of a loved one. And, much like a death in the family, it can play havoc with the financial pictures of those involved. For women or men who don’t work and receive a lump sum divorce settlement, that’s all they have to live on for the rest of their lives.