Journal of Financial Planning: February 2023
Danielle Andrus is the editor of the Journal of Financial Planning. She can be reached HERE.
Divorced clients need everything that married and single clients need and then some, according to Heather Locus, CFP®, CPA, CDFA. Locus is a partner and national divorce practice group leader at CI BDF Private Wealth. She noted that the financial planner may be the first professional a client comes to when they begin considering divorce.
“One of the ways we can help them the best is to just get organized on their finances; help them understand what investments they have, if they have access [or] helping them get access to anything they can, like tax returns—just try to answer their questions and make them feel more comfortable with the finances.”
That early planning can empower clients to use their time wisely. “When they interview divorce attorneys and other professionals, they can be very efficient with their time and the attorney’s time and the billable hours,” Locus noted.
She cautioned that if a prospect reaches out because they are going through a divorce and need their own planner, they may not have had much responsibility for managing finances in their marriage and will need additional care and education through the process.
“They are looking for that help, and they often feel a lot of shame,” she said.
Advising Clients Through Divorce
Divorce is an expensive process and clients will likely end up spending more than they ever budgeted for as they separate households, on top of the legal and professional fees incurred. Hurt feelings and resentment can exacerbate bad spending habits if one partner uses the other’s behavior to justify their own spending.
“No matter how many assets they have or how many zeros in their compensation statement, they’re probably going to have to make some adjustments,” Locus said. “People will say, ‘He’s spending money on this so I’m going to spend money on that,’ or ‘She’s doing this and not being careful so I’m going to go do that,’ and that can quickly make people spend even more at a time when they need to be even more thoughtful on trying to cut expenses.”
Creating a marital balance sheet will help the planner and client understand exactly what assets and liabilities are in play, Locus said. She warns that planners should wait until a written offer is being discussed between the divorcing parties and their attorneys before running any retirement projections or Monte Carlo analysis.
“Planners want to be careful of not setting expectations of what people need or what they should get because that’s just not the way divorce works,” she explained. A client may feel like they’re entitled to certain assets, but where they live will impact what they are actually awarded.
“It doesn’t really matter how much they need or how much people think they should get, it’s what’s possible given the law in their state, in their county, and what the spouse can negotiate. Most times, spouses can negotiate almost anything and the courts will bless it if they both agree, but it’s actually incredibly harmful to run projections that aren’t realistic in the case,” Locus explained.
Another recommendation Locus shared: set up an email just for divorce-related communications. “Divorce often takes one to two years, sometimes six months—I’ve had cases as long as six years. They might be looking at communications many years down the line. If they start [a separate email] initially, it helps them review that quickly. It also prevents them getting triggers or unexpected emails at work or even in their personal email where they might be looking at things for kids, school, etc., so it helps them contain things emotionally as well.”
Finding the High Road
Clients are managing big feelings during a divorce and may be inclined to punish their former spouse by being as difficult as possible. Even when they feel like they’re being well represented, the divorce process is inherently contentious and uncomfortable.
“Even if both spouses and attorneys are doing a good job, the process is just challenging to get through. It frankly sucks to pay professionals to unwind your family and to go through a legal process that you have almost no control over,” Locus acknowledged. However, planners can help their clients regain feelings of control by keeping them focused on what they want for themselves at the end of the road, including how they will look back at their own behavior.
“We try to help divorcing clients or new clients be laser focused on what they want long term—they can’t control the spouse and they have little control [but] some influence over the process. Try to help them focus on the one or two most important things during the divorce,” she said.
And while a client likely doesn’t have very charitable feelings toward their former spouse, approaching the process with as much kindness as they can muster will help them feel better about themselves at the end of it.
“I tell people, ‘I’m not saying be kind or thoughtful or clear in your communications with your spouse because they deserve it. I’m saying do it because it’s the smart thing. It’s going to help you get the settlement that’s going to help you create the best next chapter [in your life]. And all you can control is walking away with your own integrity and knowing that you handled things with grace.”
She added, “Divorce isn’t fair. The process isn’t fair. It’s not equal. It’s not even necessarily equitable. It’s incredibly unusual that even one person in a divorce thinks they get a good deal, much less both. The way people regain control is being focused on what they really, really want and making really smart business decisions.”
Ideally, clients will work with a therapist to manage the negative feelings that come up in a divorce in the healthiest way, but Locus noted that invariably, those feelings will eventually come out in financial decision-making.
“It’s really important in divorce for the planner to empathize with the client . . . but our job is to help them factor in emotion and make sure they’re long-term planning for what’s most important to them, but then not allow them to make emotional decisions. It’s informed, thoughtful decisions based on the options they have in the case,” she said. “Unfortunately, divorce is often a series of least-worst decisions . . . but people do have to make decisions and move on.”
Who Gets the Planner?
As planners advise their clients, they naturally develop relationships with them. Planners who are advising a client couple may be faced with a difficult decision if they decide to end their marriage. In cases like that, Locus recommends planners turn to their compliance department first to determine the best path forward. Planners should establish rules for how clients will access joint assets. Thorough and thoughtful documentation is important, especially if both parties are clients, as communications are more likely to be subpoenaed, she said.
“We immediately flag the account, and if either spouse wants to take money from that account, then we do verbal confirmations with both. Emails are not acceptable; you need to talk to both clients and make sure that they agree,” Locus shared.
“It’s a fine line because we’re often best positioned to help them. You want to help them both because you do know their finances and probably have their trust, but we’d have an inherent conflict of interest. We have a policy to send a letter to both clients and explain that [conflict of interest].”
If both clients are willing to waive that conflict, Locus explained, they can continue working with the adviser on investments and receiving help with high-level financial planning.
Locus noted that her firm’s divorce rate among existing clients is very low. Money is a common source of conflict, and she suspects that “having that consistent time and space to reflect on money, to talk about it, to create that infrastructure really helps a lot of marriages.”
“Some people who don’t see a path for their marriage to continue the way it is don’t always see the path for other options that may not necessarily be divorce,” she added. For these couples, discernment counseling is a short-term therapy approach to help couples determine if divorce is the best option for each party. It isn’t “designed to fix the marriage,” Locus said. “It’s only one to five sessions to help couples get on the same page.”
Even if couples who go through discernment counseling do end up divorcing, it can help bring closure to the relationship and start the process with better communication that leads to a faster, easier, and less expensive divorce, Locus suggested.
Although advising a client through a divorce can be challenging and complex, Locus calls it “our most messy and meaningful work. It definitely takes a unique planner to want to embrace it, but it is incredibly rewarding when you can help with the process. . . . You can have a significant influence on how much stress they feel during the process and how fast they recover.”
Locus encourages planners to “[not] get too scared if you have a couple of challenging experiences up front. There’s a fair amount [of planning] unique to divorce tax wise, and a lot just emotionally. Like any new skill set, it takes a while.”
A divorce is a significant life change, and there can be lasting financial planning implications. For example, clients who decide not to remarry after a divorce are entitled to ex-spousal Social Security benefits.
Social Security and Divorce
As clients approach retirement, a former marriage impacts how and when they claim Social Security benefits. Most clients who remarry will be ineligible to claim spousal benefits based on their ex-spouse’s work record. The exception is if the ex is deceased and the new marriage happened after the client turned 60, according to Jim Blair, co-founder of Premier Social Security Consulting. Blair worked at the Social Security Administration for 35 years before founding the firm with Marc Kiner.
For divorced clients to claim Social Security benefits based on their ex-spouse’s work record, the client must be at least 62 and have been married to their ex for at least 10 years. If the divorce happened within the previous two years, there’s an additional rule: the ex must be collecting a disability or retirement benefit through Social Security.
Divorced clients can only claim spousal benefits from one living ex-spouse at a time, but they can switch which former partner’s record they’re drawing benefits from, according to Kiner.
“Say I’ve got three exes: Betty, Amber, and Chloe. If I was the higher earner, they could all draw off me at the same time. If I was the lower earner, let’s say Betty turns 62 first. I can get a higher benefit off Betty, so I can claim off Betty. Two years later, Amber turns 62. If the benefit off Amber is higher, I can switch. Two years later, Chloe turns 62. If my benefit off Chloe is higher, I can switch again. So as my ex-spouses turn age 62, I can switch to the new ex turning age 62 if the benefit off that ex would be higher. If, when I file, all my exes are at least age 62, the filing dictates I collect off the ex that gives me the highest benefit.”
One of the biggest challenges in helping divorced clients claim Social Security benefits based on their ex-spouse’s work record is just finding out what they’re entitled to receive, according to Blair.
“They can’t just call up Social Security and say, ‘Hey, what can I get off of this individual’s work record?’” Blair said. “They’ll have to provide Social Security with a divorce decree. If the divorce decree shows the date of marriage, that’s all they need. If it doesn’t, they would need their marriage certificate as well.”
The divorced client will also need their ex-spouse’s Social Security number, which could be challenging for less diligent record keepers.
“If they don’t have it, normally Social Security can come up with that,” Blair said. “The more information they have, the better: their ex’s name, date of birth, state of birth, mother’s maiden name, those kind of things. Then Social Security can search their records and come up with it. That’s where sometimes the old-time stuff is better. When we used to have everything on microfiche, you would just go to the microfiche and find somebody, but you can’t do that anymore.”
Blair warned that clients may get some pushback from Social Security employees leery of sharing another person’s information. However, clients have a right to know what benefits they are eligible for, and Blair encourages clients to stand firm.
“What they have to remember is they’re not asking for what [their] ex is eligible for. They’re asking what they are eligible for. By law, Social Security has to provide you with information on what you’re eligible for, but they sometimes give them a hard time about it. But if they stand their ground—they might have to ask to speak to a supervisor—they can get the information.”
Restricted Applications and the 10-Year Rule
Among the eligibility requirements to claim ex-spouse benefits is for the dissolved marriage to have lasted at least 10 years, but clients don’t necessarily have to celebrate a tin anniversary to be eligible. Kiner points out that a lot of planners and clients assume that the marriage officially ends with the date the divorce decree is signed, but the clock actually runs out when the decree is filed with the court. He recalled a client he had a few years ago. The client was married for nine years and nine months, and didn’t think he met the 10-year rule.
“I asked him to send us his divorce decree and we determined that it was date stamped whereby he did meet the 10-year rule. So he was able to file for benefits off of his ex-spouse by filing a restricted application. . . . without asking the right questions, he would have missed out on the opportunity to collect off his ex-spouse.”
Prior to the Bipartisan Budget Act of 2015, clients could file a restricted application allowing them to claim their spousal benefits without also taking their own Social Security benefits and earn delayed retirement credits for their own benefit. The act eliminated that strategy, but Blair noted that “anyone born by January 1, 1954, is grandfathered in under the old rules. They’re aged 69 now and approaching 70, and by the end of this year, it’ll be gone.”
Divorced clients who are in that small pool of people who were born before 1954 and have not reached full retirement age yet can still take advantage of restricted applications.
Calculating Social Security Divorce Benefits
Social Security benefits are based on the highest 35 years of earnings, indexed for inflation, Kiner said. For a spouse with a significantly shorter work record, their benefits based on their own work record will be much lower.
“However, if the ex-wife goes back to work and increases her benefit, that will decrease what she can get off of the ex-spouse,” Kiner said. Depending on the size of the relative benefits, Blair added that “it’s not always wise in that situation for the ex-wife to go to work just to increase her benefit because she might get less from her ex-husband.”
Blair added that if clients are entitled to an ex-spousal benefit, there’s no reason to delay claiming their own Social Security benefits past full retirement age. “You do earn delayed retirement credits, but for every dollar you increase your benefit [beyond full retirement benefits], you decrease the spousal benefit,” he explained.
Some divorced clients may have contentious or even dangerous relationships with an ex-spouse. If clients shut down when talking about their ex, having conversations about claiming these benefits can be difficult, but Blair pointed out that claiming benefits off an ex-spouse’s work record doesn’t adversely affect them and the ex-spouse wouldn’t even know it was happening.
“A lot of times there are reasons people don’t want to have anything to do with their ex. Their marriage ended very badly. There might have been some domestic abuse involved, or they’re fearful that if their ex finds out that they’re drawing off of their work record, they may come and harass them or maybe even physically abuse them again. That’s a real concern. So they need to also understand their ex will have no idea that they’re drawing on their work record if they don’t tell them. Social Security would never tell them.”
Divorced clients are entitled to 50 percent of their ex-spouse’s primary insurance amount if the ex-spouse is still alive. If the ex-spouse has passed on, the client can claim 100 percent of their ex’s primary insurance amount. Divorced clients who don’t claim benefits resulting from a prior marriage are effectively leaving money on the table, but the conversation about what to do with those benefits can’t be avoided, even if the client decides it’s not worth the trouble.
“Maybe it’s a few dollars, maybe it’s several hundred dollars, but they are eligible, and by law, if they’re eligible, Social Security has to do one of two things: They either have to take an application or get a statement from the person that they don’t want to apply,” Blair said.
Applying the Earnings Test
Prior to the month a client reaches their full retirement age, Social Security will withhold $1 for every $2 that they earn over $21,240, Kiner explained. At full retirement age, the earnings limit increases to $1 for every $3 over $56,520.
“The earnings test will apply to benefits that an ex-spouse is receiving either off their own work record or off the ex-spouse’s work record,” Kiner said. “Let’s say it’s an ex-wife; her own benefits are subject to the earnings test, and her earnings will impact what she can get off of her ex-spouse also, but the earnings of the ex-spouse will not impact the ex-wife.”
Planners should familiarize themselves with these rules because Blair noted one of the most common Social Security planning mistakes that planners make when developing their recommendations for clients is failing to factor ex-spousal benefits into a client’s plan or underestimating the benefit.
Social Security rules are complex, and Kiner warned that the administration itself can give clients the wrong information.
“We hear horror stories all the time from advisers and our clients about getting misinformation from the Social Security Administration. It just happens all the time. It’s unfortunate, but it does.”
Some clients may reflect on their divorce and the years leading up to it as a horror story. Whether clients are in the midst of dissolution or years past it, planners play an important role in helping them find a satisfying conclusion.
Sidebar: Divorce and Financial Recovery
There are financial benefits to marriage, from combined incomes to more favorable tax treatment, but some clients may find themselves in better financial situations when the dust settles from a divorce. If a spouse refuses to seek treatment for substance abuse disorders or gambling issues, or just has dramatically different money values that lead to poor decision making, a client may need independence from their spouse to be happy and successful.
“From a financial perspective, separating—even if they do have to pay marital support or child support—still can ultimately allow them to recover faster,” Locus said. She noted that, occasionally, clients who are having trouble in their marriage may decide to stay together to protect their children, but doing so could hurt people who are in prime earning years.
“If you’re staying married another five or 10 years, . . . that can make a very significant difference in how many assets a spouse gets in the property settlement and maintenance and other things. Each person needs to weigh all of the consequences, but there are definite advantages to getting divorced.”
