Nothing is to be gained financially by going through the divorce process. It is a lose-lose proposition for both parties. However, when the process already has begun, your role as a financial advisor in assisting clients is to take steps to ensure that they are minimally damaged, both financially and emotionally.
The objectives should be to help clients lose as little as possible. Here are 10 tips for financial advisors to consider in working with their clients.
1. Taking Care Of Oneself First
Once the divorce process has begun, the work of rebuilding begins. The client needs to keep busy and find a consistent routine for family members that fit this newly separated life.
Think of it from this perspective. Your client won't do anybody any good if he or she is not self-focused because other people are depending on him or her. As an analogy, remind clients about the message flight attendants communicate to airplane passengers: "Place the safety mask on you first before you help others." That's because you won't be able to function properly or do anybody else much good if you don't take care of yourself first.
2. Protecting Client Mail
This is an often overlooked issue. Client private mail may still be going to a previous primary residence and may be accessible by the soon-to-be ex-spouse, who may open mail without permission. This could include confidential legal documents from the client's attorney, financial statements, and cancelled checks, as well as other personal and confidential correspondence. Although the unauthorized opening of mail is a federal offense, the other spouse may ignore the rule. As soon as papers are served, the client should forward his or her own mail to a post office box, a friend's house or a temporary residence to ensure privacy.
3. Protecting The Client's Computer
Tell clients to delete all sensitive information from any personal computers that will remain in the house after they move out. Suspicious or nosy ex's may look through the computer to find additional digs that can be used against your client during the divorce process.
Also, a financial advisor should tell clients to stop using e-mail accounts that can be easily accessed and change the passwords. If a home computer connects to the client's office, the ex can hire a techie to access all of that information. Also, computer-literate spouses have been known to restore e-mail that has previously been deleted from an unsuspecting spouse's computer.
If your client is not computer literate, a techie should be hired to save personal information from computers onto a hard drive, zip disk or other product so the information becomes portable. Tell the client to make sure he or she does not leave the information behind in a hard-copy format.
4. Close Joint Credit Accounts
Clients should use a single joint account to continue family obligations and close all the others. Before closing any joint accounts, make sure the client establishes separate credit (see Tip 5) by applying for a credit card or two. If credit can not be obtained personally, it may not make sense to close the joint credit cards right away.
The term "joint" means that either spouse can take out all of the money in that account. Essentially, the first one to the bank wins! In fact, anyone can max out a line of credit above and beyond existing balances. Neither spouse needs permission, a signature or even notice from the other. A general point in closing down a credit card is to write to the company for a hard or permanent close. That means neither one can re-open the account at a later date. If a spouse does run up debt and doesn't pay it back, creditors will come after your client regardless of the date of separation, since your client is the other owner on the account. Also, clients who will continue to own the marital home should change the name on utility bills to theirs alone.
5. Open Separate Credit Card And Bank Accounts
Whether a client can get a separate credit card depends on his or her credit report. Your client is entitled to a free credit report each year under federal law. That report may affect whether your client can rent an apartment, or apply for a mortgage or car loan. It is imperative that credit is managed during the divorce process with a fine-tooth comb because any negative impact on the credit report can hurt long term.
If an ongoing divorce makes it difficult for your client to repay debt, a creditor may be willing to make adjustments. Some creditors will be willing to work with your client if he or she is diligent about continuing to make payments on a timely basis. If your client borrowed money from friends or relatives, be sure that a promissory note is signed so the court will look at this as a loan and not as a gift that doesn't have to be paid back.
6. Protect Separate Property
Divorcing clients should move all valuable separate property from the house before the spouse can damage or misplace those items. Clients should rent a storage unit for large items until they find a new place to live. They can store smaller items, like jewelry, life insurance policies, account records or important papers, in a safety deposit box or with a close friend. These tasks should be done before any divorce papers are finalized. The client should document or videotape the property at the residence or have a witness in the house who can vouch that the property was in the residence.
7. Filing A Tax Return
When a joint return is filed before a divorce, your client is both jointly and individually liable and responsible for any tax, interest and penalties that arise from the filing that return. This means that one spouse may be liable for 100 percent of the entire tax liability even though the ex may have earned all the income. This liability applies even if the divorce decree states that the former spouse would be responsible for any amounts due on previously filed joint returns. Agree how to split a joint refund in advance.
If your client is concerned about any tax liability from a spouse, filing a return using the option of married filing separately would be a better alternative. But after the due date of a return, spouses cannot file separate returns if they previously filed a joint return.
8. Relief From Joint Liability
Through its "Innocent Spouse Rule," the IRS recognizes that some spouses sign their names to a joint return without ever reading it or understanding what is included. In these cases, a spouse who unknowingly signs a fraudulent tax return may be excused from liability for penalties based on that return. But from a practical standpoint, it is difficult to prove that someone was an "innocent spouse." The IRS does have other exceptions that may allow a spouse to be relieved from owing taxes, so advise a client to investigate.
9. Temporary Support Agreements
When your client is creating temporary support agreements, make the focus about support - both spousal and child. The goal is to ensure that basic expenses are covered until things become finalized. If your client is the primary breadwinner, he or she should continue paying bills so the family is minimally disrupted. Also, if the ex goes to court over this issue and loses, your client may end up being liable for both sets of attorney fees.
If your client separates and doesn't have a job or other reliable source of income, he or she might be financially needy and dependent on others. Get temporary court-ordered support in that situation. Your client is entitled to continued support until the process is finalized. If the ex is not paying your client voluntarily, then get the court involved.
10. Re-Entering The Workforce
If your client is a stay-at-home spouse, re-entering the workforce may be grueling. A vocational expert will be needed to assess how much money that individual is capable of earning. If your client has been thinking about changing careers, make these moves before starting the divorce process. A court is less likely to upset your client's plans if already started. If your client has been unemployed for a long time, the ex should provide the funds for your client to become retrained.
This article is part of an occasional series on how financial advisors can help divorcing clients. To read the previous article in the series, click here.