How Financial Experts and Divorce Lawyers Can Best Work Together
Financial Challenges in Divorce
“When is the last time you had sex with your husband and how much is in your 401(k)?”
Each of those questions can be very relevant in a divorce. The scope of the work is very broad. A very experienced divorce lawyer has seen and heard a lot of what goes on inside families and the very intimate relationships between married people. But we do have some limits on our expertise and often find ourselves reaching out to other professionals for some much-needed support and guidance.
Financial advisors are very important resources.
Divorce often focuses on financial matters and the challenges separating one household into two can create. The inclusion of financial experts on your “team” of divorce professionals can provide a great deal of value for the client and their family.
In my over 26 years of law practice, I have had the opportunity to interact with some very good financial advisors, business valuation experts, and certified public accountants. I spent some time with a few of these experts – Christina Todd, Steve Purdy, and Weslie Green – to get their perspectives on the financial challenges divorce creates for families, lawyers, and the financial experts who support them.
Christina Todd, CFP®, CDFA® is a Financial Advisor and Vice President with Cary Street Partners. Weslie Green, CFP®, CDFA® is a Financial Advisor with RiverRock Wealth Management. B. Steven Purdy, CPA, ABV, CVA is a managing director at Valuation Advisory Group.
LACK OF INFORMATION AND DOCUMENTATION
The biggest challenge all three experts identify is the lack of information and documentation.
In my experience, clients may have a strong desire to reach an overall settlement agreement with their spouse, but the “non-financial” spouse may have very little knowledge to help them know what a fair outcome may look like.
Further, some spouses – the ones with all the financial information – sometimes try to take advantage of the other spouse and force a settlement with little to no information provided.
Even in those cases where financial information is provided, some clients still need the assistance of a financial advisor to help them confidently understand and appreciate how the asset works and why it may or may not be a good idea to divide or transfer it in the way the other spouse proposes.
Lawyers also need the input of financial experts to fully understand the financial implications of a client’s case to prepare for negotiations and even going to trial. The lawyer and the expert can work side-by-side for the client’s best interests.
An entire family can also benefit from the use of a “neutral” financial specialist. For example, in cases where the couple agrees to negotiate using the Collaborative Law process, neutral experts assist in creating a financial outcome that works for both the parents and their children.
Regardless of which process you undertake to resolve your divorce case – by negotiation or by going to court – without sufficient information on which to rely, neither the lawyer nor the expert can help a client understand the pros and cons of a proposed settlement.
Lawyers and clients need to work to provide experts with as much information as possible, to not only do their job but do so credibly. An expert who is not credible is of no help to your client.
Not every asset is the same.
Some common distinctions among assets in divorce cases include retirement assets and non-retirement assets as well as liquid and non-liquid assets. Small business interests are also a unique, but important, sub-set of assets in divorce cases.
Very often, at least one spouse in a divorce case does not have all the information or a full understanding of the assets the parties own. Some assets may only be owned by one of the spouses and not both. This is especially true when closely held business interests are involved.
Christina Todd cautions against “not understanding the nuances of different assets,” such as tax treatment, when comparing retirement and non-retirement accounts.
When conducting business valuations, Steve Purdy needs to know everything he can about the business being valued. Steve highlighted the importance of being able to conduct a proper interview with the business owner to really understand how the business works. Steve needs “to understand the raw data, where it came from, and where it can take you.” For any business valuation expert, he recommends “don’t take canned responses” from the business owner.
Financial specialists can help clients understand the difference and can help lawyers negotiate the best outcome based on the financial nuances among assets.
Weslie Green offered the example of Social Security benefits. One spouse may not fully understand how they work and how they can make a claim against their spouse’s benefit as an ex-spouse after divorce. One spouse may claim to “offer” a share of the benefit in settlement negotiations when really it wasn’t theirs to offer in the first place. It is a claim an ex-spouse can make regardless of the other spouse’s agreement. The parties have no way to change the Social Security rules and regulations. Some spouses do not understand this.
Weslie also provided the example of restricted stock units (RSU’s) which are normally received by higher earning executives. The right to receive the RSU is based in part on time worked for the company and often won’t become available as an asset they can use (i.e., “vest”) until sometime in the future, perhaps after a divorce is granted. RSU’s are not guaranteed at all and need to be dealt with separately on an “if, as, and when” the RSU vests basis rather than valued as a presently existing asset. Further, like other assets, RSU’s can be divided into “separate” property of the owning spouse and “marital” property which can be divided between spouses.
ASSET TRACING AND VALUATION
In divorce matters, Virginia divides property into “separate” and “marital” property. There can even be situations where property can be a hybrid of both (i.e., both “part-separate” and “part-marital” property).
Separate property is that property owned prior to the marriage, inherited during the marriage, given during the marriage to a spouse by a third party, and property earned after the parties separated. Marital property is essentially all the other property earned during the marriage.
“Tracing” is the process of following the separate property to determine if it is can sufficiently identified and proven to be separate property rather than marital property. For example, if $100,000 is on the table to divide, and one spouse can show through the “tracing” of assets that $50,000 of the $100,000 is their separate property, then that spouse takes their $50,000 and then the parties divide the remaining $50,000. In the end, assuming an equal division of the remaining $50,000, one spouse ends up with $75,000 of the total and the other $25,000.
Experts are often brought in to help “trace” the contributions of separate property by one or both of the spouses in the hope that the spouse with the separate property can carve it out of the marital property like in the example above.
Experts are also brought in to test a claim of separate property. Does the spouse claiming to own separate property have sufficient information and documentation to successfully trace that separate asset or not? Should we agree it is their separate property or not?
Either way, to successfully “trace” assets, experts need to confidently rely on the evidence and not speculate beyond the information provided, thus losing their credibility. “Do I have a hunch sometimes,” Steve Purdy asks. “Sure. But what does the evidence show?”
Understandably, divorcing spouses often have challenges in digging up old financial information that may prove helpful to their case. As Weslie Green observed, “Most people don’t track finances year to year thinking they will later divorce.” But the lack of account statements and other financial records can present problems.
LONG TERM FINANCIAL IMPACT
Experts will frequently recommend first looking at the long-term impact of financial settlement before signing on the dotted line.
As Christina Todd warns, “You can't make isolated financial decisions without looking at the bigger picture.”
Weslie Green similarly cautions against “making emotional financial decisions.” She suggests you need to know where you want to be post-divorce. To do so, ask yourself the following questions:
Where do you want to live?
Where do you want to work?
Where do you want your kids to go to school? To live?
This is a lot easier for the spouse who initiates divorce versus the one who doesn't.
Based on her experience, Weslie also believes budgeting for spousal support is the biggest hurdle for the non-financial spouse.
Budgets look forward, but for some spouses there is no place to start from. They never handled the finances have no idea how much it takes on a month-to-month basis to meet their ongoing needs. Many budget items are not known, for example the cost of living in a new residence. These spouses experience anxiety and hesitation to move the process forward.
Steve Purdy cautions attorneys against not bringing in the financial expert early enough so the expert is not “stuck with lack of information” and “inadequate time to prepare.”
Lawyers need to identify potential issues and bring in their financial experts quickly.
If you have any questions for the three experts highlighted in this article, please feel free to reach out to them directly.
If you are a potential client or financial advisor and have questions about these and other issues that a family law attorney can answer, feel free to contact us at Evolution Divorce & Family Law, PLLC.
We’d be happy to help!