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At The Money Fan Favorite: The Finances of Divorce · Masters in Business

• 0:06
  Speaker 1: I'm is there any life event that's more expensive, confusing,
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  Speaker 1: and stressful than a divorce. You're not only dividing your family,
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  Speaker 1: You're also figuring out the disposition of a lot of assets, portfolios,
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  Speaker 1: real estate, trusts, businesses more. I'm Barry Ritolts, and on
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  Speaker 1: today's edition of At the Money, we're gonna discuss the
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  Speaker 1: finances of divorce and full disclosure. I am and remain
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  Speaker 1: happily married for thirty two years. To help us unpack
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  Speaker 1: all of this and what it means for your portfolio,
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  Speaker 1: let's bring in Patrick Kilbain of the ria Omen Wealth
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  Speaker 1: Partners and also leads the Divorce Advisory Group. So so Patrick,
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  Speaker 1: let's start with the basics. You focus on people going
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  Speaker 1: through divorce. What's the first financial triage you do. When
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  Speaker 1: a new client calls.
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  Speaker 2: Barry, great to be with you, thank you for having me.
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  Speaker 2: When somebody gets hit with this bomb, when this bomb
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  Speaker 2: is dropped on them. You know, I'm a big fan
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  Speaker 2: of coach Lou Holtz and he has an acronym WIN.
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  Speaker 2: It stands for what's important now. So I generally talk
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  Speaker 2: to the person who this might be their first exposure
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  Speaker 2: with the legal system, and I figure out what their
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  Speaker 2: goal is it has their estranged spouse cut them off
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  Speaker 2: from the cash flow from the assets? Is this a
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  Speaker 2: child custody situation? You know, what is the first thing
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  Speaker 2: that we need to handle? And then it's sort of
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  Speaker 2: giving them the confidence and the reassurance that hey, you're
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  Speaker 2: not the first nor the last who's going to go
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  Speaker 2: through this, and I'm going to be your shirpa through
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  Speaker 2: this process.
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  Speaker 1: So I imagine there are some consistent, large money mistae
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  Speaker 1: people make in the first thirty to sixty days of
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  Speaker 1: a separation. Obviously it's very emotional, and you know, most
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  Speaker 1: people don't go through these sort of things repeatedly. What
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  Speaker 1: sort of mistakes do you see before the lawyers and
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  Speaker 1: the written agreements start showing up?
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  Speaker 2: Like most people who have a long history together, they
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  Speaker 2: have solved a lot of problems together. And I see
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  Speaker 2: people trying to work the divorce settlement out among themselves
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  Speaker 2: and the spouse that may not have all of the data,
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  Speaker 2: all of the information, may not know the extent of
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  Speaker 2: their holdings, may make some agreements before they have any
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  Speaker 2: idea what their rights are. So, like you Berry, I'm
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  Speaker 2: a lawyer, although I'm not practicing anymore, I litigated high
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  Speaker 2: networth divorce cases for ten years, and what I try
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  Speaker 2: to do is not give legal advice, but say, hey,
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  Speaker 2: let's slow down a little bit and let's make sure
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  Speaker 2: that you have a full understanding of what you're agreeing
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  Speaker 2: to or waving before you do it.
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  Speaker 1: So I think about all the assets that are involved
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  Speaker 1: in a family dissolution. There's cash, there's retirement accounts, there's property,
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  Speaker 1: there's business interests. How do you help clients understand the
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  Speaker 1: value of what they're negotiating, either cash up front versus
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  Speaker 1: a longer term set of assets.
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  Speaker 2: Great question. So I try to divide everything into different buckets.
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  Speaker 2: So I make sure that my clients aren't comparing apples
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  Speaker 2: to giraffes. They've got to be comparing apples to apples.
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  Speaker 2: And depending on where the spouses are situated and where
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  Speaker 2: each one of them wants to go, we know that
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  Speaker 2: all assets aren't created equal, so there may be an
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  Speaker 2: opportunity working together to reach a divorce settlement that'll be
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  Speaker 2: more advantageous for both spouses than what they would end
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  Speaker 2: up in a court if the court just took a
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  Speaker 2: meat cleaver and busted everything in half.
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  Speaker 1: So you you have a background as a a matrimonial lawyer.
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  Speaker 1: How does that change the way you sit down as
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  Speaker 1: a financial advisor when you're having these conversations with clients
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  Speaker 1: who are just starting the divorce process.
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  Speaker 2: Excellent question. I have a perspective from litigating these cases
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  Speaker 2: for ten years and seeing people at the very beginning
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  Speaker 2: of the process, and I think a financial planner, a
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  Speaker 2: wealth manager, an asset manager who may not have that
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  Speaker 2: same experience, may want to get right into the details.
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  Speaker 2: You mentioned the word triage earlier in this conversation. I
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  Speaker 2: mean this client, this family is coming to you. I
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  Speaker 2: mean they are experiencing trauma. The wound may be fresh.
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  Speaker 2: So I think we really have to slow down. And
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  Speaker 2: it's sort of like, you know what, when you see it,
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  Speaker 2: you're ready to delve into the financial planning and start
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  Speaker 2: talking about Barry two point zero, when Barry is ready
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  Speaker 2: to start thinking about Buried two point zero. But a
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  Speaker 2: lot of these people come in and they're at a
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  Speaker 2: total fog. They're trying to figure out where their next
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  Speaker 2: dollar is going to come from, how is cash flow
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  Speaker 2: going to even let's back up, where am I going
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  Speaker 2: to live? So we have to sort of satisfy that
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  Speaker 2: bottom level of Maslow's hierarchy of needs before we can
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  Speaker 2: even get into that financial planning conversation.
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  Speaker 1: So the past few divorces I've witnessed from relatively close,
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  Speaker 1: the big question becomes who gets the house? It always
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  Speaker 1: seems to be one of those things. It's an emotional decision,
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  Speaker 1: it's a financial decision. Is there a better framework for
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  Speaker 1: addressing that? How do you avoid that from becoming so toxic?
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  Speaker 1: So were the roses sort of disaster?
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  Speaker 2: I think you have to really start and understand why
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  Speaker 2: somebody wants the house. You made a great point. Is
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  Speaker 2: this an emotional decision? Is this a financial decision? Do
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  Speaker 2: I have comfort in my neighbors? Is the house house
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  Speaker 2: in a public school district where I want my children
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  Speaker 2: or child to continue to go to school until they
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  Speaker 2: reach the age of eighteen? And then once you really
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  Speaker 2: have a good idea why that's the case? And Barry,
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  Speaker 2: maybe that spouse wants the house just because they know
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  Speaker 2: the other spouse wants the house. So we have to
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  Speaker 2: sort of take a step back and understand the true motivations.
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  Speaker 2: And then we start talking about the financial problems and
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  Speaker 2: the tax problems that come. Well, a married couple of
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  Speaker 2: this has been your primary residence for two of the
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  Speaker 2: last five years. You can exclude up to half a
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  Speaker 2: million dollars of a capital gain if there is one.
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  Speaker 2: Of course, if you're single, then you can only exclude
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  Speaker 2: up to two hundred and fifty thousand dollars of the game.
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  Speaker 2: What's the basis? Do we have a state tax situation?
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  Speaker 2: So there are a lot of different layers, and I
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  Speaker 2: again back to my previous comment, I don't think we
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  Speaker 2: can even hit on that until we have a true
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  Speaker 2: understanding of what the client's motivation is and when they're
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  Speaker 2: emotionally prepared to have that financial discussion.
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  Speaker 1: You mentioned taxes. It's easy to imagine how taxes can
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  Speaker 1: just flip the math what are the big tax traps
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  Speaker 1: and divorce settlements to avoid?
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  Speaker 2: All of these assets are different. They may be tax
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  Speaker 2: at ordinary income rates, capital gains rates. To your listeners
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  Speaker 2: a very sophisticated audience, But some of our clients who
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  Speaker 2: are going through this process are also very sophisticated, but
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  Speaker 2: that hasn't been their role in the household. So a
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  Speaker 2: lot of it is re educating them and understanding or
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  Speaker 2: trying to have an idea what is their tax situation?
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  Speaker 2: Going to be post filing. They may be in a
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  Speaker 2: totally different tax filing status. They may be going back
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  Speaker 2: to work, they may not be going to work. They
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  Speaker 2: may have investment income imputed to them. They may have
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  Speaker 2: to use IRS rule seventy two to t if they're
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  Speaker 2: before fifty nine and a half to be able to
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  Speaker 2: tap into retirement accounts because of imputed investment income. Of course,
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  Speaker 2: those laws vary by state, but that's why it's so
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  Speaker 2: helpful to have somebody who really knows that perspective and
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  Speaker 2: can work with the various tax and estate planning professionals
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  Speaker 2: to be thinking about these issues.
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  Speaker 1: What about retirement assets? What do people need to know
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  Speaker 1: about avoiding penalties or getting the bad allocation? There's a
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  Speaker 1: whole other qdro thing that I'm wholly unfamiliar with. What
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  Speaker 1: are the issues in divorced with four to one k's
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  Speaker 1: four h three bs iras any joint or individual retirement asset?
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  Speaker 2: Yeah, such a magnificent question. You and I talked about
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  Speaker 2: quadros preparing for this conversation. QUADRO is an acronym that
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  Speaker 2: stands for qualified domestic relations order. It is a subsequent
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  Speaker 2: court order that is used to segregate a retirement plan
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  Speaker 2: that's subject to ARISA. ARISA stands for the Employee Retirement
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  Speaker 2: in Security Act. But if your spouse is a participate
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  Speaker 2: in a government plan, a government plan may not accept
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  Speaker 2: a quadro. Then how in the heck do we divide
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  Speaker 2: that marital asset? So again, I think it always requires
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  Speaker 2: us to take a step back and get a hold
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  Speaker 2: of a document called a summary plan description, which sets
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  Speaker 2: out the rules and regulations of each retirement account. Barry.
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  Speaker 2: We've heard people say all the time the only way
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  Speaker 2: to eat an elephant is one bite at a time.
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  Speaker 2: And whether it's a retirement account or some other asset,
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  Speaker 2: we have to be very intentional and very careful and
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  Speaker 2: go with each asset. What is it? Is it a
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  Speaker 2: qualified or a non qualified account? How do we divide it?
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  Speaker 2: What are the tax consequences? And I know you and
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  Speaker 2: I are going to talk about other contingent assets down
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  Speaker 2: the road, like carry and restricted stock and so on
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  Speaker 2: and so forth, But what's the best way to actually
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  Speaker 2: accomplish this on each asset? And then you know, maybe
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  Speaker 2: with asset with that asset we say, wait a minute,
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  Speaker 2: I don't want to have to deal with my estranged
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  Speaker 2: spouse in the future to get my fair share. Isn't
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  Speaker 2: there a way that I can, you know, barter this
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  Speaker 2: away and get something else that works better for me.
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  Speaker 2: So those are all the discussions that are asset by
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  Speaker 2: asset level.
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  Speaker 1: That's complicated. Let's talk about something even more complicated. What
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  Speaker 1: do you do with I liquid assets private businesses that
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  Speaker 1: are not Hey, it's easy to split a portfolio of
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  Speaker 1: publicly traded stock. What do you do about a company
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  Speaker 1: that is private and one of the spouses is running
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  Speaker 1: and how do you put how do you know figure
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  Speaker 1: out what it's worth and who gets what?
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  Speaker 2: You and I can look at our brokerage account statement
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  Speaker 2: or a retirement account statement and have a pretty good
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  Speaker 2: idea what that asset is worth. With an asset that
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  Speaker 2: we know that has value but we're not sure what
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  Speaker 2: that value is required to hire another professional called the
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  Speaker 2: business appraiser or a valuation expert. And the crazy thing
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  Speaker 2: about the divorce world, Barry, is it imposes these fantasy
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  Speaker 2: rules and regulations that you and I would never have
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  Speaker 2: to discuss with a married couple. We talk about enterprise
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  Speaker 2: goodwill and personal goodwill when we come to the value
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  Speaker 2: of a business. So your firm a valuation expert can say, okay,
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  Speaker 2: this firm is worth x you know, million dollars. But
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  Speaker 2: in a divorce context, especially my home state of Florida,
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  Speaker 2: we have to look at what's the value of Barry's
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  Speaker 2: firm without Barry, and the value of Barry's firm without Barry.
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  Speaker 2: That's the marital asset in Florida, that's what we have
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  Speaker 2: to divide. So a year prior, somebody may have offered
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  Speaker 2: to buy the family business for fifteen million dollars. But
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  Speaker 2: if you take Barry out of that family business and
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  Speaker 2: the value of the office buildings and the furniture and
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  Speaker 2: sell and so is a million, then the marital share
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  Speaker 2: is five hundred grand And you have a spouse thinking,
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  Speaker 2: wait a minute, I'm going to end up with seven
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  Speaker 2: and a half million dollars of this asset, but really
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  Speaker 2: in maybe half a million dollars, or you know, you
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  Speaker 2: can pick any other example. So you need that expert,
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  Speaker 2: and then you need to understand how the state dissolution
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  Speaker 2: of marriage laws apply to valuing that asset within the
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  Speaker 2: context of a divorce.
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  Speaker 1: Really really interesting. What do you tell clients about cash
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  Speaker 1: flow planning right after the divorce? Suddenly whatever emergency fund credit,
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  Speaker 1: even just a household budget. All that stuff gets thrown
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  Speaker 1: out of the window. How do you rebuild that? How
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  Speaker 1: do you face that first year of spending reality.
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  Speaker 2: In the context of the divorce negotiations. I try to
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  Speaker 2: help my clients and lawyers think about asking for a
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  Speaker 2: larger than normal emergency savings fund. We talk about, hey, look,
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  Speaker 2: this is how much money you have to spend on
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  Speaker 2: a monthly basis. But that first year where this now
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  Speaker 2: single person is in charge of their monthly budget, there
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  Speaker 2: may be some surprises, and there may be a learning
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  Speaker 2: curve and so on and so forth. So I try
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  Speaker 2: to really build up that experience, and maybe even if
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  Speaker 2: it's not an alimony case, maybe it might be helpful
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  Speaker 2: to get the case settled if there can be alimony
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  Speaker 2: for a short period of time, to help with that
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  Speaker 2: transition and ease somebody in to being responsible for probably
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  Speaker 2: the first time in a long time, of managing their
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  Speaker 2: own cash flow.
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  Speaker 1: So final question, if you could give one piece of
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  Speaker 1: advice to someone starting the divorce process, what's the best
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  Speaker 1: decision or even document then improves the outcome for everybody.
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  Speaker 2: In my state, there's a document that's required to be
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  Speaker 2: filed by each party in every case, and it's called
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  Speaker 2: the financial affidavit. I see in New York I think
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  Speaker 2: it's called a network statement or so on and so forth.
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  Speaker 2: It is a daunting, overwhelming document, but really it's a
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  Speaker 2: form that you're normally required to sign. You take an
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  Speaker 2: oath and say that what you put on here is truthful.
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  Speaker 2: But you outline all of your sources of income, all
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  Speaker 2: of your expenses, all of your assets, and all of
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  Speaker 2: your liabilities. So from a financial standpoint, if you could
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  Speaker 2: take the time and make that as accurate as possible,
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  Speaker 2: that's going to really go a long way to helping you,
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  Speaker 2: your lawyer and the other financial professionals on your team
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  Speaker 2: get a really precise idea of what we're dealing with.
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  Speaker 2: So spend that time, take the time upfront, and you
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  Speaker 2: may not have all the information that you need to
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  Speaker 2: answer that question until you get the discovery from the
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  Speaker 2: other side. And what I tell people all the time
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  Speaker 2: is that's okay, disclose it and then put a footnote
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  Speaker 2: that says, hey, I don't have this information, and when
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  Speaker 2: I get it, I'll update it. And then when you
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  Speaker 2: really break it down like that and let people know, hey,
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  Speaker 2: you can amend this document. I see them start to
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  Speaker 2: relax a little bit and say, okay, I got this.
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  Speaker 1: So to wrap up, I'm going to quote Patrick, divorce
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  Speaker 1: is really a financial or tax problem disguised in a
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  Speaker 1: divorce costume, and that really sums it up. It's as
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  Speaker 1: much about separating your personal lives as it is to
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  Speaker 1: figuring out your financial and asset lives going forward. Take
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  Speaker 1: it seriously, make sure you get good counsel and follow
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  Speaker 1: the process that your lawyer and financial advisor walks you through.
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  Speaker 1: I'm Barry Results. This has been Boomburgs at the Money