Few advisors look in real detail at the economic realities of divorce. We've heard that 50% of all marriages end in divorce. But it's actually 45% to 50% of first marriages, while it's 60%-67% of second marriages and 70%-73% of third marriages. With odds like that, financial advisors need to know the complexities beforehand in case their clients' marriages dissolve.
Is there any correlation between divorce rates and the economy? The answer is yes. According to Statistics Canada, the number of new divorce cases has fallen 2% every year since 2006. In a declining economy, married couples think long and hard before going solo, unsure if they can make it apart.
Marriage can be thought of as an insurance policy in that two people have agreed to live on one or two salaries (depending on their circumstances). It's only effective if the person with the bigger (or only) salary does not leave the marriage. The housing market may also have something to do with the falling divorce rate. With declining housing prices, many couples prefer staying in less-than-satisfying marriages to losing the equity they have built up in their homes. And finally, filing for divorce is expensive. In hard times, couples postpone the legal formalities until their incomes rise.
If the economy is improving, as some say it is, divorce rates could rise again-as more couples find the wherewithal to make it alone.
The Harsh Reality
Divorce can be one of the most financially devastating events people ever face, especially women, who are more likely than men to run into money difficulty. According to the latest U.S. census figures, 21% of recently divorced women were living below the poverty line, while only 9% of recently divorced men were.
But there are new trends, especially with changes in state laws, that can cause the spouse with the greater income to bear the greater burden. In a March 12, 2012, Wall Street Journal article, "Divorce Law's New Cut," Sophia Hollander published a chart that highlights these economic realities firsthand. For instance, in New York, which is now a no-fault divorce state, an alimony payer with a $100,000 salary could be left with $22,900 after taxes, when child support of $26,100, alimony of $30,000 and taxes of $21,000 are taken out. The non-working spouse with a zero salary, on the other hand, receives $26,100 of child support and $30,000 of alimony and is responsible for only $5,400 of taxes, and ends up with $50,700 (more than twice what the payor spouse is left with).
Part of the payor's burden is shouldering the legal fees of both spouses and paying an unrealistic amount for child support and other expenses that may leave him or her with fewer dollars than the judge thinks. Many times, child support is calculated by a formula, different for each state, that might not continue to be appropriate for the couple.
And if the payors later lose their jobs, they often still have to shoulder the amounts they agreed to in better times. A law that was supposed to level the playing field has instead turned it upside down, transforming the wealthier spouse into the poorer one.
How Your Clients Will Be Affected
Most clients who get divorced don't think through the financial ramifications of their actions. In short, there are no winners, only losers. No matter what deal your client strikes, it's impossible to come out ahead. If the pie equals 100%, the total left for each spouse will be something less than 100%. No client can end up better after the fact if both parties are tugging at the same dollars.
Moving Clients Forward
Divorce typically takes longer than it needs to. And an extended divorce can have a huge economic impact on your clients and delay their game plan.
Think about it. The client now has two houses, two sets of utility bills and double the usual expenses. Payments that seemed routine to the client before are now more formal and more expensive, since the spouse he or she is supporting will try to make everything under the sun the payor's specific obligation. This means more money than what has previously been spent on child support and new purchases that seem to come out of nowhere because the payee spouse is getting concerned about maintaining sufficient funds for his or her expected lifestyle.
First Things First
If your clients are going through a divorce, the first thing you should do is tell them not to panic. Counsel them to be efficient and thorough and aim to get it finalized as quickly as possible. Hire an attorney and explain to him or her things that could be financially devastating to the client-such as depreciation recapture taxes that accrue when a rental property is sold as a result of the divorce negotiations. How much are the ongoing payments made to the ex-spouse and what are the tax ramifications? What creditors are involved? Remind the client to remove the name of the person who no longer owns the property after the divorce. If the ex is still listed on the loan, the creditors have the right to go after him or her for those payments and the remaining balance.
Blocking Out The Competition
There is also a defensive strategy your clients can take. You can have them contact top divorce lawyers to ask them questions about the case; even if they don't end up working out, these attorneys, as long as your client reaches them first, won't be allowed to confer with the soon-to-be ex because of the potential conflicts of interest it would create.
Many costs are involved in a divorce, including fixed and discretionary expenses. There are lawyer fees, specialty fees for things such as business valuation, fees for mediators, arbitrators, vocational experts and therapists.
Theoretically, these costs will continue for the entire period both spouses are slugging it out and perhaps afterwards. A good lawyer will try to expedite the process and use alternative forms of dispute resolution to limit the process. This will help save costs.
The courts and attorneys usually make the main breadwinner the responsible party for the expenses through the divorce, so your client may be called upon to pay for both parties. It boils down to who is in the best position to pay for these expenses. Sometimes the courts may force an executive order to do just this.