What you donÃt know can hurt your clientsóand your practice.
Divorce is not what it used to be, and financial advisors should be aware of how attitudes and laws have changed.
Today, more women come to divorce lawyers for some of the same reasons men have historically, says Donald C. Schiller, a main partner with Schiller, DuCanto and Fleck, Chicago, one of the nation's largest matrimonial law firms. "Their husbands haven't grown with them," he says. "They make more money than their husbands. They want to trade in one model for another."
Spouses wishing to avoid paying alimony, he says, would do best to divorce in the historically "anti-alimony" states of Indiana or Texas. However, experts say that as divorce generally has become easier nationwide the clear trend among state laws is to require greater disclosure of finances earlier in the relationship and fairer dealing about money between spouses. In fact, the American Law Institute in Philadelphia now suggests that a prenuptial agreement be drawn up at least one month before the wedding.
"In light of the fact that the divorce rate is more than 50%, it might be prudent for a financial advisor to at least advise people what the consequences could be if they were confronted with a divorce," suggests John D. Gregory, professor of law at Hofstra University in Hempstead, N.Y. "The problem here is that you don't ordinarily think about what's going to happen when a marriage breaks up if things are going swimmingly."
If you fail to be equally upfront with both spouses about their finances from the onset, you could face trouble down the road from your married clients or clients who might become husband and wife, attorneys warn.
Sandra J. Morris, an attorney in San Diego and president of the American Academy of Matrimonial Lawyers in Chicago, says she sees the potential for possible conspiracy charges to be levied against a financial advisor some day if a marriage breaks up. "There's a trend to imposing a fiduciary obligation on both parties (in a marriage) to disclose fully all income, assets and debt to the other party," Morris says. "Financial advisors need to be careful. They could be considered part of a conspiracy if they insist on not disclosing assets."
Morris advises that you learn the rules in your own jurisdiction. "Be aware of them so you can advise your clients to consider these things, or seek legal advice." There also is a move afoot in California to impose a fiduciary obligation even if a couple is not married. "The trend is toward imposing larger and larger responsibilities on each person to operate with the highest good faith and fair dealings-even if they don't love each other any more," Morris says.
Violet P. Woodhouse, certified family law specialist and financial planner in Newport Beach, Calif., says her concern is not about conspiracy charges but that careless financial advisors could find themselves in deep trouble in a very innocent situation-such as the death of one spouse in a very happy marriage. The problem, as she sees it, lies with an increasingly litigious society and fairly standard rules that fall under the jurisdiction of the NASD, Securities and Exchange Commission or state. Changes in fiduciary duties between spouses that have been evolving in California state law since 1992, she notes, have brought this issue to the forefront.
Typically, one spouse is more financially involved than the other, she explains. What happens if the financially involved spouse dies, and thesurviving spouse suddenly is saddled with reams of margin debt? It could be the financial advisor's head. Of course, these issues usually come up only when money is lost.
"I don't think a lot of people [advisors] are clear about who their client is," Woodhouse warns. "That is what needs to be clarified."
Woodhouse says advisors might consider having clients sign a letter that states that the spouses have differing interests, including their ability to tolerate risk, the investments they might choose, and their level of investment sophistication and that they recognize these differences.
If the less financially sophisticated spouse is delegating responsibility of money management to the more sophisticated spouse "you probably should sit down and have a conference with these people and put it in writing as well as the obligation of the investment advisor," Woodhouse says. "You might outline who is primarily going to be talking to the advisor, who is to be receiving directions to invest money. Find out where the prospectuses are going.
"If there's one person who's the decision maker, we get the spouse to sign that they have given the person special power of attorney to make investment decisions."
Advisors should also be aware that courts are distributing assets differently than they have in the past. For one thing, more types of assets are up for grabs in a divorce. It used to be that in a divorce the spouse who had title to a property-except in community property states-could receive that title, Gregory says.
Now, he says, virtually all states have laws providing for the equitable distribution of property in a divorce. "Years ago, executives did not have to be concerned about pension benefits," he says. "Now, if they're acquired during a marriage, they are clearly available. The same is true for corporate holdings-even what has now been defined as professional good will."
Susan V. Edwards, a family law attorney and mediator in Berwyn, Pa., says she has noticed changes in child support laws that make it much easier to collect. Bank accounts, driver's licenses and even business licenses are being seized to get deadbeat spouses to pay up. "A lot of times people will think they can open an account in another state, but they've gotten a lot more aggressive at finding this hidden money and much more aggressive about collecting child support than ever before." In fact, Edwards says lately in Chester County, Pa., courts she has seen judges in the middle of divorce cases actually pick up the phone and call the IRS when they spot improperly filed federal tax returns.
It's not just the laws surrounding divorce that have changed in recent years. Many areas surrounding marriage have undergone a revolution. It's getting harder to avoid the "elective share," which is the portion of an estate that state laws generally permit a spouse to elect in the event of a spouse's death, experts say. In Florida, for example, if your male client preferred his mistress to inherit his estate rather than his spouse, it once was quite easy to get around Florida's law that requires a spouse to get at least 30% of the probated estate. Assets could be sheltered in a revocable living trust; the elective share also could be avoided by setting up certain joint accounts, buying cash value life insurance or setting up an IRA or 401(k) plan. That changed for persons who died after October 1, 2001, when virtually all assets were permitted to be up for grabs for spouses seeking their minimum 30% share. Estate plans needed to be rewritten.
Things are changing for persons who aren't married, too. Although gay marriages are not legal anywhere in the United States, Vermont in 2000 legalized "civil unions." These provide gay and lesbian couples with virtually all the rights and responsibilities of marriage established by the state. "Domestic partner benefits are more common than they ever were," says Dorian Solot, author of "Unmarried To Each Other" and executive director of the Alternatives to Marriage Project in New York. One in four Americans now works for an employer that offers domestic partner health benefits, she says. But if you add a domestic partner to a health plan, you still pay federal income tax on those benefits. You don't if you're married.
"It's getting easier for unmarried couples to do many things together-buy houses, get loans, get credit cards," according to Solot. "The biggest difference is that unmarried couples are still considered legal strangers, so they have to be very careful when they become financially intertwined. The stakes are higher if they don't have a will or durable power of attorney for finances."
Prenuptial agreements, which formerly were used largely in second marriages, are more widespread and being used more in first marriages. They are appropriate in cases in which there is an imbalance of assets, says Harvard law Professor David Westfall, and in situations where there is an imbalance of claims-such as if one spouse has several grandchildren and the other has none. About half the states, he says, now have a uniform premarital agreement act, which makes it more difficult to resist enforcement of a prenup. In fact, Edwards said she was shocked at one recent Pennsylvania Supreme Court decision that upheld a prenuptial agreement-despite the fact that the young bride-to-be was provided with a ring represented as a diamond but which turned out to be cubic zirconium. The court ruled it should have been appraised before she married him.
Grant Rawdin, president and CEO of Wescott Financial Advisory Group LLC, in Philadelphia and Palm Beach, Fla., says he has been getting a growing number of emotionally charged situations concerning inheritances in a marriage. "It's a very powerful emotion," he says. We're seeing it more and more as more wealth accumulated from the older generation passes to their children, who are right now in their fifties or sixties and planning for their own security."
A wife will receive an inheritance, and although it is clearly beneficial for the couple's estate planning for the wife to transfer some of the assets to her spouse, she typically will refuse.
Rawdin, who also is an attorney, says that in such instances he tells his clients that he's not making a judgment but that he would like them to know all the issues involved. He might offer some ideas to get around the transfer. But even if there is nothing else that can be done, "I've not had anybody say put it (the inheritance) in both names."
Other changes to consider with clients who are married or may be getting married, according to the National Conference of State Legislatures:
A growing number of states are reducing marriage license fees for couples who complete premarital counseling. Leading the push: Florida, Maryland, Oklahoma, Minnesota and Tennessee.
More states-15 at this writing-either require classes for divorcing parents or allow courts to order parents to take these classes. Four other states, including New York, introduced but failed to pass similar legislation in 2002. Tennessee passed legislation in 2002 that allows courts to consider a divorced parent's refusal to attend education classes as evidence of a lack of good faith.
Arizona, Arkansas and Louisiana let engaged couples ask the state to enforce a higher standard of marital vows in the form of a covenant marriage. Generally, these laws require couples to make every attempt to reconcile, and provide for a much longer separation than usual before a divorce decree can be filed. Five states-Indiana, Iowa, Mississippi, Missouri and Oklahoma-introduced covenant marriage legislation in 2002.
Several states-so far, unsuccessfully-are attempting to make divorce more difficult to obtain.
Don't forget that the marriage tax penalty, which made certain married couples with similar incomes filing jointly liable for higher federal income taxes, gets some relief in 2003 and 2004. The new tax law widens the standard deduction for married couples filing jointly to double that for singles. However, experts say that couples with itemized deductions are apt to get little relief. The National Conference of State Legislatures notes that Colorado and Idaho had already eliminated the marriage penalty on state taxes, and that Arizona, Arkansas, Idaho and Missouri eased tax burdens for married couples.
And Westfall suggests that you start thinking seriously now about the implications of new reproductive technology for your clients' estate plans. You want to make sure it's clear in your clients' legal agreements, for instance, that assets left to a grandchild should include-or exclude-offspring from donated eggs or sperm.