How You Can Help Clients Protect Their Finances

As a financial planner, you're not expected to handle all of the difficulties that arise when your client is going through a divorce. But what you can do? Protect his or her financial security for the future.

Whether you're hoping to specialize in divorce planning or just working with divorcing clients as the need arises, it's important to take a multifaceted approach. From establishing a spending plan to protecting jointly held assets, here are some key areas on which to focus.

In the wake of divorce, both parties will need to adjust their lifestyles—and establish a spending plan. Your first task is help your client create a new strategy for saving and investing. These steps will help get you started:

• Have your client create a record of annual and monthly expenses based on recent history.
• Assess his or her emergency fund.
• Develop a plan for building up savings, if needed. 

Next, help your client compile a net worth statement, including marital and separate assets and debt, as well as each asset's tax basis. Keep in mind that the definition of a "marital asset" differs from state to state, but there are general guidelines you can follow:

• Calculate anticipated income. This includes income from dividend-paying stock of a closely held business, royalties, and rental property.
• Determine retirement income. Valuation of retirement income will depend on the characteristics of the retirement plan. Be sure to account for both private plans offered through employers, as well as public plans offered through federal, state, or local agencies.
• Review the tax implications of different assets. If assets will be liquidated shortly after the divorce, this task is very important. A cost basis review, for example, will help allocate capital gains between the parties, as will a comparison of qualified assets to nonqualified assets. Other factors to consider are transfer or liquidation restrictions, surrender charges, and lack of marketability.

The next order of business is to protect your client's credit. This entails accounting for all debt and taking the following steps:

• Request a credit report (e.g., from Equifax, TransUnion, or Experian).
• Review credit or debit card accounts or lines of credit. Here, you'll want to determine if any should be closed or need a change in authorized users. If there's a balance, work out a plan to pay it in full.
• Freeze a home equity line of credit. Even if there's no balance, freezing is a necessity. A line of credit is like a blank check and will result in a lien on the home; the same is true for brokerage margin accounts.

Once the divorce is final, marital assets can be sold or transferred under an attorney's guidance. The attorney may recommend, for example, splitting the cash accounts into two individual accounts so that both parties have liquidity. Duplicate statements or restricted authorization may be appropriate for the remaining accounts, depending on your client's situation.

There are many tax implications of a divorce. Testing the after-tax values of property division, alimony, and child support can help you find the right combination for your client.

Generally speaking, no loss or gain is recognized when assets are transferred between ex-spouses within one year after the date of divorce. This transfer can occur anytime within six years of the divorce if a separation or divorce agreement instructs the parties to make the transfer.

Finally, to avoid current taxation or other penalties, your financial decisions must adhere to a court-ordered property division, divorce, or separation agreement. Before moving any financial assets, be sure to consult with the attorney, employers, custodians, and insurance companies. 

Would your client's financial future be at risk if his or her ex-spouse were to pass away? If so, suggest life insurance on the life of the ex-spouse as a condition of the divorce settlement.

It's expected that settlements will be equitable, but your client should be aware that it's often not a literal 50/50 split of assets. One spouse may be awarded more property to compensate for the other's ability to earn a higher income, or one spouse may be willing to trade a higher-value item for one that is more liquid. When it comes to the settlement agreement, focus on the big picture: ensuring that your client is aware of the short- and long-term effects of the settlement by projecting the impact on retirement, education, and cash flow planning.

Once you've handled the many issues that come with divorce planning and your client is ready to look to the future, help him or her explore the options. Whether it's relocating, going back to school, or exploring a new career, you can help your clients create a solid financial plan to help turn their dreams into realities.

What other areas do you need to focus on to protect your client's assets during a divorce? Share by commenting below.

Editor's Note: This post was originally published in May 2014, but we've updated it to bring you more relevant and timely information.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.