Episode 35: The impact of divorce on family wealth: Planning with purpose during life’s pivots

Oscarlyn Elder:

Divorce marks the end of a marriage and also the start of new emotional and financial complexities. Like many of life's transitions and challenges, the issues raised by divorce can be complicated in unique ways. That's what we'll be talking about today.

I'm Oscarlyn Elder, co-chief investment officer for Truist Wealth, and this is I've Been Meaning to Do That, a podcast from Truist Wealth, a purpose-driven financial services organization. We appreciate you listening. If you want to take notes on today's episode, we have a worksheet that you can download and print. You can find it by selecting this episode at truist.com/dothat.

The stakes are high in a divorce and when significant assets are involved, the issues extend to taxes, estates, and potentially family businesses. I'm talking today with two of my Truist Wealth colleagues who have a lot of experience working with clients through the challenges of a divorce. Jacqueline Parks is regional director of advice and planning, and also a frequent guest here on the podcast because of her wide range of training and deep expertise. Also joining us is Jennifer McManus, a financial advisor with Truist Investment Services. Both Jacqueline and Jennifer hold the certified Divorce Financial Analyst Certification. Thank you both for being here.

Jacqueline Parks:

Thanks. It's great to be back.

Jennifer McManus:

Thank you, Oscarlyn.

Oscarlyn Elder:

Before we get started, I need to note that any comments or references to taxes are informational only. Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking action that may have tax or legal consequences.

Jennifer and Jacqueline, there's a lot of complexity involved in divorce, especially divorce of high net worth couples. We're going to talk about that complexity today, but there's one piece of advice that I think we all agree applies across the board, and that's to involve your wealth advisor in the process early. At the very least, divorcing spouses should keep their financial team informed of what's happening. Why doesn't that happen in many cases? Jennifer, what have you experienced?

Jennifer McManus:

In my experience, clients' emotions are very high when they're going through a divorce. They don't know how to proceed, what's their next step? And also clients primarily will lean on their divorce attorneys.

Jacqueline Parks:

And I'll add while it's really important that the attorney is there to give you the legal advice through this process, it's also important to loop in your tax advisor and your financial advisor so that we can coordinate together with one another and give you the advice that you need through the process.

Oscarlyn Elder:

And so Jennifer, what's the right time to bring in your financial advisor?

Jennifer McManus:

I would recommend to bring in your financial advisor as soon as possible. It's even recommended when you're contemplating a divorce to review that, if you're comfortable, reviewing that with your financial advisor, getting us in as soon as possible.

Oscarlyn Elder:

Is the advisor's role after a client's divorce different from advising someone who has always been single? Jennifer, what do you think?

Jennifer McManus:

In the beginning, I would say yes, it would be different because you have assets that need to be divided, so it could be less assets that we're working with. And then making sure those assets are invested in a manner that's going to help you reach your goals. And then also looking at your new expenses, your budget, creating a new financial scenario based on your individual situation and not your marital situation.

Oscarlyn Elder:

And Jacqueline, what would you add?

Jacqueline Parks:

If the spouse that we are working with is newly divorced was not the primary financial manager for the couple, then similar to an individual who inherits new wealth, we may have a period of education and empowerment for this person to help them understand terms like asset allocation or tax implications that might be a whole new language or a new vocabulary that they need to get up to speed on. And so the wealth team will be working with this individual to make sure that they understand everything that's going on and to help them to articulate their own new financial goals.

Oscarlyn Elder:

I think that's very powerful. What I hear you both saying is that especially as the divorce is fresh and unfolding, that there is this period where an advisor really helps set a new financial roadmap for a client and that there's potentially a period of education and empowerment. And so there is some uniqueness in the journey from that perspective. The changes that come with divorce typically have emotional dimensions. We'll come back in a moment and talk about how to manage that shift.

What's the danger in emotional decision making in the midst of a divorce, especially when there are a lot of assets to be divided?

Jacqueline Parks:

Oscarlyn, it's understandable that emotions are running high during a divorce. We know that often couples will go through the stages of grief during a divorce much like they do with a death of a loved one. However, when it comes to making financial decisions, we want to be rational and not emotional.

I've had an experience with clients who are emotionally tied to an asset. For example, the primary residence or a vacation home, they fight very hard to make sure that that asset is included on their half of the balance sheet. However, we have to remember that personal residence that's not producing income is going to take up a lot of your financial capital and may not be able to produce the income that you need to support yourself. And so working with your advisor to make sure that you have reviewed the income producing assets and making sure that you have the appropriate amount of support to continue to support yourself long into the future is important.

Oscarlyn Elder:

It strikes me, Jacqueline, that there's some similarities here with our investment philosophy and that the reason we have a philosophy is to ground us ultimately in process within our decision-making to try to remove emotion as much as possible from the decision-making so that ultimately we can drive the outcomes that our clients want from their financial plan. And this is a very similar situation. What you're saying is that an overreaction, an emotional reaction, can actually harm in the short term as well as the long term, the financial roadmap that could set a client up for achieving their specific financial goals. So many divorcing couples who have substantial wealth have been married for a long time and they're at a later stage in life. Are there unique challenges with a gray divorce?

Jacqueline Parks:

I'll confess, I really don't like this term gray divorce, because it means divorcing for couples that are over age-fifty and I am just over age-fifty myself, so it doesn't feel good to hear that term gray divorce. But yes, there are unique financial challenges for couples in this segment. We know that the overall rate of divorce in our country is declining. However, the rate of divorce for older couples in this segment is increasing.

As we see an individual divorcing that is closer to retirement age or already retired, they have perhaps less ability to create income, wage income, because they're no longer working. They may be older than they would like to be to start a new career or to create some new income. They also need to think about who is going to be their agent under a power of attorney or under a medical directive, because normally couples will name one another, name their spouse as their primary agent, but if you're divorced, you now have to think about, well, who would I want to step in and make financial or medical decisions for me if I couldn't make them for myself?

Oscarlyn Elder:

Jacqueline, you've brought up something really important and that is with couples who are divorcing later in life, this move, the importance to plan for longevity and/or extended care becomes elevated. And so within the divorce, not only do you kind of have the immediate challenges, but you have this need for really additional planning with often a greater sense of urgency.

And we know from our discussions on this podcast that folks don't like to think about extended care planning. They don't really like to think about the longevity planning that is today necessary for folks, but we just want to make sure that we point out the importance with a gray divorce, if you will, to focus in this area and to make sure that the checklist is completed and that you have your plan in place for the long term. So the emotional aspects of divorce can be difficult, but a lot of the process itself comes down to determining a fair division of assets, and that's not easy either. We'll talk about some of the numbers questions when we come back in a moment.

Jacqueline and Jennifer, high net worth clients by definition own a lot of assets. When they divorce, those assets have to be divided either by negotiation or in some cases by judge. How prevalent are prenuptial agreements and do those agreements actually simplify the settlement process?

Jacqueline Parks:

I will say that in my experience, prenups are more prevalent in high net worth situations, but they are overall rare. I would love to see more often the prenups are in place. I do think that that can help to simplify the settlement process.

I do frequently find myself counseling high net worth families to discuss the possibility of prenups with their children, and I've participated in a number of those conversations just to educate the young adult what is the purpose of a prenup, what might be included in a prenup, what you can and cannot include in the prenup. And to have those conversations well before they're engaged in love so that they can again approach it, not from an emotional standpoint, but from a rational standpoint and understand that it is in their best interests to help protect the wealth for future generations.

Oscarlyn Elder:

Jennifer, what trends have you seen around prenups within your experience?

Jennifer McManus:

What I've seen is that most prenups are upheld. So if they, if they go in front of a judge, they are upheld. It's really important that when you're drafting the prenup that each party has their own individual attorney to make sure that their rights are protected. So it can make the process much easier if there is a divorce situation.

Oscarlyn Elder:

That's good for us to hear, for our listeners to hear, that our experiences that prenups actually do simplify the settlement process. Let's talk for a moment about children and if they're children as a result of the marriage, especially minor children, their welfare is at least one element that both sides should be able to agree on prioritizing. What are the most pressing child related issues for a divorcing couple?

Jacqueline Parks:

Well, I'll start off and say that I think it's very obvious that the couple is going to primarily be concerned around who is caring for the children, where are they going to live and on what schedule are they going to be seeing the other parent where they're not primarily living, and then also any child support obligations. As much as we're going to try to divide the assets and sever the financial relationship with the couple, they're going to continue to need to be cooperative and work together in caring for the children until at least they're 18 years old. So this is something that it can be contentious and can be emotional, but is something that does need to be addressed.

Oscarlyn Elder:

What about elements like college tuition planning specifically? So when we think about 529 plans, what have we experienced in that realm with our clients?

Jacqueline Parks:

So with 529 plans, there is one owner or custodian of that plan that would be either of the two parents. What we have seen is that after the divorce, there is going to be still one owner of that plan, and there may be the other spouse might want to create their own separate 529 plan to contribute assets to that plan for the children. So it's possible for one child to have two plans that are supported by different parents.

Usually when a couple is divorcing, there are trust issues that are underlying the cause of the divorce, and so there is sometimes a lack of trust in the other spouse's ability to manage that asset, and so there's a desire to have some control themselves in making sure that the children's college savings are funded appropriately. It might be over contribution, if you will, if both parents are doing it, but it's better to have too much than not enough.

Oscarlyn Elder:

What about insurance? Insurance is ultimately risk mitigation, whether it's health insurance or life insurance? What are our conversations with divorcing clients around those two elements specifically?

Jennifer McManus:

It's very important that a client reviews their life insurance to make sure that beneficiaries have been updated. When someone is paying child support, you want to make sure that if something happens to them, if they're disabled or if they pass away, that you're still going to be able to receive those funds. So you want to make sure what's set in the divorce decree that is supported with insurance.

Oscarlyn Elder:

Let's take a moment and really click into the child support element and life insurance, because I don't know that I've really thought about this before. So Jacqueline, tell us more about what typically happens when child support is being paid.

Jacqueline Parks:

So I don't know if it's typical, but it is possible if one spouse is obligated to make child support payments to the other spouse, obviously if they pass away, that support will end. And so it might be desirable whether it's for the recipient spouse or for the payor spouse to explore getting life insurance to cover that obligation in the unlikely event that there is a death before the children reach maturity.

Oscarlyn Elder:

That's really important for folks to know, Jacqueline, that there is the possibility of life insurance reducing the risk around child support obligations and the death of the payer. Jennifer, are there any other things that come to mind around insurance, perhaps health insurance as well that you just would want folks out there who may be divorcing to think about and know?

Jennifer McManus:

Yes, I think it's important that when you're with children is making sure you understand who is going to provide health insurance for the child and ensure that that's documented in the parenting plan. Most likely you're not going to be able to be on your spouse's insurance, so you may have to go out and get your own insurance. So that can be a process and a cost, so we need to consider those options.

Oscarlyn Elder:

And all of that information gets built into the post-divorce financial plan that someone should put in place and begin to build really from the moments that they're thinking about divorce.

Wealthy couples will likely have a variety of assets that need to be assigned a value. We talk about valuation of assets. Some are going to be easy, like a deposit account, but others can be more complicated. Jennifer, can you talk about the valuation of different types of assets?

Jennifer McManus:

So I think it's important when we're looking at businesses or homes to hire experts, whether an appraiser, business valuation expert. Also understanding is educating our clients to know that different financial products or different financial assets have tax obligations, liquidity issues. So understanding how each asset works and how it's going to affect your financial plan.

Oscarlyn Elder:

So a couple of things that I heard you say. It's really important that folks understand the liquidity of each asset, meaning when can they take that asset and convert it into cash? And that can vary based upon investment type especially. So it's important that folks understand liquidity and it's important that folks also understand potential capital gains consequences of the assets that they may receive in a division of property.

Jennifer McManus:

You have to definitely take a look at the asset. Later, there will be tax implications. So when you're doing your settlement, making sure that you know that there'll be tax obligations and how do you deal with that in your divorce settlement?

Oscarlyn Elder:

All assets are not created equal. All gains perhaps are not equal based upon how the gain has occurred over time. And this is an important element for folks to work with their CPA, with their tax advisor on so that they're not surprised in a negative way down the road from a tax perspective. That's ultimately what we want to make sure of. We want to limit surprises and keep wealth intact over time. It's essential.

Jennifer McManus:

Yes, and I think that's why, again, another reason why it's so important to get your financial advisor involved in the very beginning.

Oscarlyn Elder:

So some clients build their wealth through a family business and that type of asset can certainly complicate a divorce. Even if one partner primarily ran the business, the other may have made it possible through their own sacrifices and support. How can each spouse make sure they're being treated fairly in the split? Is it usually best for one side to just buy out the other? Jacqueline, what do you think?

Jacqueline Parks:

Well, I think a primary question is whether the business is a marital asset. That might be something that's addressed in the prenup if there was a prenup, but it's certainly something that the attorney is going to be discussing with you. Then beyond that understanding what is the value of the business?

There are multiple ways that a business can be valued and those are all valid different ways, but that means that different appraisers could reasonably come up with wildly different values for the business. Unfortunately, valuation and specifically business valuation tends to be an area that can extend the divorce litigation and significantly increase the attorney costs.

Oscarlyn Elder:

So this is really a situation again where details matter, specifics matter, each situation is unique. There are unique professionals who specialize in business valuation, and if you're in this situation, it is really important to have a team around you that is well suited to the circumstances.

Jacqueline Parks:

Correct. And then the second part of your question of whether it's better for one side to buy out the other, as I mentioned previously, we are typically in a divorce trying to sever the financial relationship that the couple has with the other. If the business value is high, that might be a very difficult thing to do, and so there may not be enough marital assets to put on the other side of the balance sheet for one spouse to entirely get the business and the other spouse to get the other assets. It might be necessary for one spouse to structure payments to the other spouse over a period of years to facilitate that buyout. Or the spouse who gets the business might need to, for example, take out a loan to do a lump sum buyout of the other spouse.

Oscarlyn Elder:

And that brings us back to the point that we've made right from the beginning and that is that an advisor really has a key role to play throughout this whole process. The team absolutely matters. And with that, we'll come back in just a minute with some final thoughts.

Jennifer and Jacqueline, thank you again for being here to tackle this tough subject. We always like to leave our listeners with some kind of action plan or to-do list. If this topic hits home immediately for some of our listeners, what is your primary recommendation?

Jacqueline Parks:

I think whether you are in the midst of divorce right now or you think that it may be on the horizon, it is critical for you to know your balance sheet and begin to understand your individual income and expenses. Jennifer, how about you?

Jennifer McManus:

The most important thing is to get your financial team involved early. We can help you through the process, help make it smoother. Second is once your divorce has been settled, making sure that everything that you agree to, division of assets changing of beneficiaries, estate planning is all taken care of.

Oscarlyn Elder:

Thank you both for those very important action items. We want to make sure that folks hear that because this is a very strong call to action that you've got to know your balance sheet and your income expense levels. You need to get the team involved early and then importantly, Jennifer, you got to follow through on everything that's in the settlement.

Speaking of to-do list, one more question for you both is that we have a tradition of asking our guest what's the one thing that they've been meaning to do that they haven't done yet and that they're willing to commit to do now for our audience? So Jennifer, why don't you go first? What's on your list?

Jennifer McManus:

Number one on my list is to make an appointment with my accountant to help me transfer a portion of my daughter's 529 plan to a Roth IRA. That's very important because it allows her to continue tax deferral growth of her funds and hopefully make that tax-free and start her future off very well.

Oscarlyn Elder:

That's a great to-do item, one that we haven't had on the podcast before, and you may inspire some listeners to find out more about that type of Roth conversion. So thank you very much for sharing that with us. Jacqueline, you're a repeat guest, so I'm going to give you a choice. You can update us on the progress of one of your past to-do items or you can share a new one.

Jacqueline Parks:

I'm actually going to share a new one with you, Oscarlyn. My husband and I recently relocated to a new state, and so in the midst of unpacking boxes and getting settled into our new home, I have on my to-do list to contact and hire a new attorney and get new estate planning documents executed for us that are valid in the new state.

Oscarlyn Elder:

So Jacqueline, that's also a terrific to-do item. I don't think we've had that type of item show up before in our conversations on the podcast. And just really important reminder for folks that if you're moving into a new state, it's important that you get this information updated.

Jacqueline and Jennifer, thanks so much for joining me today because this has been a great conversation. Divorces are rarely easy or simple, but you've really helped us to understand what many of the issues are and how having advisors available can really help smooth the process.

Jacqueline Parks:

It's been a pleasure, Oscarlyn. Thank you for having us.

Jennifer McManus:

Thank you, Oscarlyn.

Oscarlyn Elder:

Listeners, I want to thank you as well. If you liked this episode, please be sure to subscribe, rate and review the podcast until friends and family about it. If you have a question for me or a suggestion for this podcast, email me at dothat@truist.com. I'll be back soon for another episode of I've Been Meaning to Do That, the podcast that gets you moving toward fulfilling your purpose and achieving your financial goals. Talk to you soon.

Disclosure speaker:

Oscarlyn Elder is an investment advisor representative, Truist Advisory Services, Inc. Jennifer McManus is a registered representative, Truist Investment Services Inc. and investment advisor representative, Truist Advisory Services, Inc.

Any comments or references to taxes herein are informational only. Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.