Hard as the conversation may be, the best plans are made before a breakup even appears possible
Divorce is, first and foremost, a difficult emotional and personal moment in the lives of a couple ending their marriage. What sometimes gets overlooked in the throes of all those heavy emotions are the significant financial consequences that come with a divorce. Existing net worth, assets, and incomes can be completely revised in the process of a divorce and the consequences for a financial plan can be significant. Because divorce is a reality that many people choose not to confront until it’s too late, the negative emotional and financial consequences can be even more dire. Daniel Britton, AVP of Tax & Estate Planning at IG Wealth Management in Winnipeg, has seen those dire consequences impacting countless Canadians.
As difficult as it can be to plan for, Britton is of the view that Canadians need to prepare for the possibility that they will get divorced. He outlined the importance of legal documents such as a marriage contract in anticipation of a marriage. He also stressed the importance of advisors in this process, as the people who will work with clients in the aftermath of a divorce, working on plans that can still allow them to achieve their goals inclusive of the financial consequences of their breakup. That process begins, for advisors, with an understanding of what they have to do when their clients get divorced.
“There’s the initial professional obligation piece of it, which is vital to sort out. That’s making sure who your client is and if you’re on joint engagement, you’re handling that correctly,” Britton says. “Then you really need to have an open line of communication with the clients’ tax advisor and legal counsel. Legal counsel is probably the one steering the ship. They will be how advisors know what the client is keeping and what the ongoing expenses and everything associated with those assets are. Then, of course, comes actually designing the plan.”
Offering perspective in a difficult moment
Even if clients don’t have a marriage contract or any kind of documents planning for their possible divorce, Britton says that a financial plan can also help them manage in that moment. Those without a financial plan aren’t able to even reckon with questions around how the divorce affects them financially. If they have a plan already, it can be adapted to reflect new realities and shifting goals.
The clarity and perspective that a financial plan can provide is extremely useful for clients going through a divorce, Britton says. Divorce is fraught with emotion and conflict and can easily result in someone getting tunnel visioned around a single bone of contention. A financial plan can show them if the house they’re so fixated on keeping is even affordable to maintain under the current conditions. The financial plan can be instructive on where to compromise and show how the legal fees associated with a protracted divorce process can be devastating for the divorcing couple.
“Tunnel vision in any legal dispute, but divorce especially, is bad. It’s like the fog of war,” Britton says. “If you have professionals around you who can give you objective advice that is going to just give you such a better outcome.”
Proactive planning before divorce
For all the ways a couple might not want to engage with a tricky subject like divorce, Britton insists that there can be significant value in making preparations. He notes, anecdotally, that he’s seen more young clients open to the idea of marriage contracts and domestic agreements. Those younger generations are also more open to keeping finances more separated and independent, even as they work with advisors to build plans that serve shared and common goals. Britton says that these agreements can serve as a roadmap for those couples, even if they never need it.
While some may be open to the idea of a marriage contract, others are still unwilling to engage on the subject, thinking that the marriage will last. Marriage contracts can also be expensive to draw up, as well, as they require hiring two lawyers. Britton says that advisors can play a role encouraging young couples to build some kind of plan, noting that while a contract can be expensive up front, it’s far cheaper than the cost of litigating a divorce without any kind of agreement.
Adjusting plans for late-life divorce
According to statistics Canada, the average age of divorce in Canada is moving up. In 2017 it was 47 for men and 45 for women. That’s up from ages 40 and 37 for men and women in 1970. Divorce, therefore, is occurring for many either in or approaching the crucial years leading up to retirement. That can have significant impacts on a client’s risk tolerance. If they just had to give away a significant portion of their net worth, or if they just got a new income stream, then how they relate to their existing wealth could change a great deal.
In those situations Britton insists that the advisor’s role is crucial. The ability to model out new realities, revise goals, and explain why new approaches to asset allocation might be necessary can be of huge value to clients facing a host of new uncertainties. In each situation, Britton insists that advisors need to pay close attention to the particularities of a client’s life, needs, and goals.
“It’s about advice. Each situation is so different, especially in this type of scenario. There are certain areas where you can have a rule of thumb but there are always different people, different personalities, different family structures, different assets,” Britton says. “You have to have open lines of communication and you have to make sure that clients go into their decisions with eyes wide open.”
