How Advisors Can Help Wealthy Clients Through 'Gray Divorce'

You can also advise the client against settling for a particular investment that might not provide financial security, even if the so-called prospects seem reasonable at first glance. The investment might not grow yearly as expected or potentially may even yield negative results in the worst-case scenario. These are just some of many factors to consider in this area.

Tax Liabilities

Tax liabilities are an important matter that often come into play during the assessment of investments and savings. Oftentimes, if a high-net-worth couple used to file their taxes jointly, it is likely that one of the partners was making the major financial decisions in the marriage, whereas the other would go along with everything.

If a home is sold during a divorce, the sale may be subject to a capital gains tax. A savvy financial advisor can determine who pays that tax and whether the tax affects the property enough that you may decide to forgo the home in lieu of another asset or assets. 

When the home was the couple's primary residence, and your client lived in it for two of the preceding five years, they might be eligible to exclude up to $250,000 of the gain on the sale of the house. But if both spouses meet the ownership and residence tests, they might be eligible to exclude up to $500,000 of the gain. Therefore, future capital gains can be tricky, even decades after a divorce.

Retirement Savings

Although retirement savings are often a neglected subject when discussing the financial impact of a divorce, they can sometimes be the couple's second-largest asset after the marital home. Retirement savings are invaluable assets your client owns, and it is crucial for divorcing couples to comprehend how much they may gain or lose from the division of retirement funds. There are several ways to split a retirement fund, but achieving a just resolution can be stressful.

Once again, the financial professional can help tremendously and assist the partners in untangling the complex financial situation created by retirement savings, which can be of many types. You will need to provide a cash equivalent transfer value for the spouses' retirement savings dated at their separation.

Retirement plans refer to pensions, 401(k)s, and individual retirement accounts. Typically, courts treat retirement plans in the same way as all other assets accumulated during the marriage, which means in a community property state these assets will be divided.  

Suppose the client contributed to the retirement account before or during the marriage. In that case, an exact calculation needs to be made to assess the contribution to the marital estate. Of course, there are situations where you can advise the client to offer some other asset in exchange for keeping the entire 401(k). 

The most common practice in the case of 401(k)s and IRAs is to advise the clients to create new accounts where the owner-spouse transfers their portion of the assets to avoid penalty fees for early withdrawal/distribution. 

Business Assets and Licenses

Few HNW people who own a business realize that their partner might be entitled to a share of the business upon divorce, even though they have not been involved in running the company or even working there. This happens because the court usually considers every type of asset and is unlikely to distinguish between business and other assets unless there is legal paperwork that requires otherwise.

If a couple were married 40 years ago and one of the partners earned a professional license five years later, subsequently starting their own business, the spouse without the license might be entitled to a portion of its worth. In the divorce settlement negotiations, that claim could be made, particularly if the spouse had made professional sacrifices to ensure the other partner's success, such as leaving their job to raise their children. This is a complex scenario where a financial advisor can help HNW couples decipher their situation's particularities.

Inheritances and Trusts

As a rule, in the vast majority of U.S. states, inheritances are not subject to equitable division because they are not deemed marital property. Instead, these assets are treated as separate property belonging to the person who received the inheritance and typically are not divided between the spouses in a divorce. But you need to be aware of states such as New Hampshire, where an inheritance may be deemed a divisible asset in the divorce proceeding.

You should also pay attention to special situations such as transmutation of property, the other spouse's contribution to a specific inherited asset, or increasing the spousal or child support based on the other spouse's inheritance.

As a potentially problematic asset, a trust is usually considered separate property of the spouse who owns it. Ordinarily, the trust's assets are not subject to equitable division unless they contain marital property. Suppose, for example, that one of the partners moved assets into a trust during the marriage. In that case, the assets may no longer be marital or community property nor subject to property division in a divorce. Contrary to popular belief, however, trusts are not always fully protected in the event of a divorce.

Trusts are fact-specific during a divorce, and each case will be handled uniquely. As a financial advisor, you need to consider how the trust is drafted and structured, any applicable letter of wishes, and the narrative involved in governing the trust. The court will most likely want to see those documents organized and dealt with before deciding whether to treat the trust as a financial resource or nuptial settlement.

Sean M. Cleary, Esq. is the owner and founder of The Law Offices of Sean M. Cleary in Miami. He and the firm allocate a significant portion of their practice to high-net-worth divorces, and assist couples during pre-suit, filing the lawsuit, discovery, negotiation, mediation and trial, as necessary.