When is it a good time to do pre-divorce planning?
Reflecting back on Divorce Day, George King, Senior Wealth Manager, discusses pre-divorce financial planning.
In case you missed it, Monday 10th January 2022 was Divorce Day, traditionally denoted as the most popular day when people contact a lawyer about ending their marriage. The explanatory refrain generally goes that couples who might have been on shaky ground find the holidays catalysts for action. Whether that is because extended family time causes issues to boil over, dealing with the in-laws again becomes the last straw or time to reflect and new year’s resolutions finally prompt action. In truth, no one precisely knows why it happens, but the increased activity is noticed annually on the first working Monday of the new year. Some believe that the stresses and forced close association of lockdowns and lesser access to friends and other support networks could amplify the effect during these Covid years.
The process of getting a divorce in the UK has undergone a constant set of adjustments over the years. From the landmark case of White v. White in 2000 about the redistribution of finances upon divorce to the more recent Radmacher v. Granatino in 2010, which brought prenups (and after that postnups) to the fore, the legal landscape involving getting divorced remains dynamic.
Additionally, there have always been differences in divorce rules within the UK itself. While not as varied and complex as in the US where the rules vary from state to state, there are enough differences that jurisdictional shopping has often been a key consideration. In the 1800s, Scottish law allowed for marriages that wouldn’t have been possible in either England or Wales – in terms of age requirements, who had the authority to conduct a marriage ceremony, and other factors – leading to the historical popularity of the legendary Gretna Green! These days, Scotland is often known as a preferred jurisdiction for outcomes that may favour the more moneyed spouse.
Currently, to get divorced in the UK, you must claim that your spouse has committed adultery and/or that you find them to be doing some type of intolerable behaviour. There is also a route that allows a couple to separate and wait two years before seeking to file to end the marriage.
A long-awaited change will come into effect for couples considering divorce in a few months. The potential for a so-called ‘no-fault divorce’ was first proposed in 1996 and it is finally coming into effect. As of 6th April 2022, married couples can make a joint application for an amicable divorce without needing to claim or assert that either party has been unfaithful or behaved unreasonably.
So, what are the implications of this change? Well, family lawyers expect that this may help cause the costs of many divorces to fall, for the speed of the process to improve, and help remove one significant element of the difficult conversations which are part of this often-emotional event.
From the perspective of a wealth advisor, I hope that it will open up a greater opportunity for pre-divorce financial planning. If more divorces can occur in a less contentious and more amicable way – with both partners working together for a smooth and open divorce proceeding – there should be more opportunity for financial planning to be a part of the process.
Historically, one of the barriers for wealth advisors to provide pre-divorce planning has been the potential to be called upon to play an official and formal role in contentious divorce proceedings as an expert witness for one party versus the other spouse. In addition, a more controversial divorce often defaults to the lowest required support numbers – including using tools like the Duxbury tables – rather than having an open and honest conversation and engaging in planning with fully transparently provided financial figures (both assets and needs) on both sides.
The central question is often “Will I have enough money?” after the negative financial impact which almost unavoidably comes from divorce. There are so many critical issues that pre-divorce financial planning can help address. Cash flow modelling can help parties to pre-experience what their future life could look like, including stress testing for potential shortfalls and risk areas, the impact of adverse markets, and so forth. The outcome should help in setting expectations realistically, while the inherent uncertainty of future lifestyle, spending and needs can be viewed through scenario analysis. Big life choices are likely to include how much house to rent or buy, from which sources should income be derived, and what are the prospects of continuing to work (for how long) or returning to work.
As ever, when divorce includes cross-jurisdictional assets and issues for couples if at least one spouse is an American and particularly when there are assets (real estate, pensions, etc) in the US, the complexity levels escalate. Being able to pre-plan in those circumstances becomes even more potentially significant.
There will always be plenty of contentious divorces, and the changes coming in April are unlikely to be an option that is considered for a nasty, litigious marital feud. Still, it should open the door to better coordination between family lawyers and wealth managers to provide pre-divorce planning for couples who are parting on good terms with each other.
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