Divorce is a difficult process, especially for couples with complex finances. In addition to the emotional challenges of separation, divorcing couples must grapple with the stresses of disentangling their financial lives as well. Wealthy couples over 50, in particular, must deal with a number of complicated issues not typically faced by younger couples, such as the division of large retirement plans, private equity investments, hedge funds, real estate holdings or business interests.
In the face of such daunting challenges, it's easy to understand why a divorcing couple might want to simply divvy things up and move on with their lives. But doing so without conducting a thorough analysis of the assets and liabilities involved can have serious financial repercussions, the effects of which can be felt for years to come.
Before any decisions are made, divorcing couples should consider the following to ensure that their portfolio is on solid footing.
Recognizing the Value of Liquidity
A portfolio that is weighted too heavily in illiquid investments, such as private equity or concentrated stock positions, exposes the investor to heightened volatility and risk. A diversified portfolio that contains a reasonable allocation to liquid assets can help limit potential losses, and provides an advantage in volatile markets. In contrast, it may be difficult to sell illiquid investments in a down market, tying up assets when they may be most needed.
Think About Long-Term Needs
A narrow focus on generating income in a portfolio can be a drag on performance, especially in a low interest rate environment. Investors should consider whether their need for income and low volatility in the present outweighs the potential for long-term growth, and the ability to provide income in the future.
Consider the Impact of Inflation
Rising inflation and increases in living expenses over time can significantly reduce the value of a conservatively invested portfolio. For clients with a long-term investment time horizon (say, 10 to 20 years), investment portfolios should be positioned for growth and not exclusively for income.
Understand State Tax Laws
Where an investor lives can seriously affect the after-tax returns of his or her portfolio.
Investors should be mindful of the impact of state taxes when selling their assets. Timing can be critical, especially if the investor has plans to move from a high-tax state to a state with low or no income taxes. The investor may be better off waiting to sell assets until the change in residency is complete.
Three Steps to Understanding Your Cash Flow in Divorce
We utilize a three-pronged approach for addressing these important concerns. When working with family law attorneys and their clients, we provide them with an in-depth analysis of the health of their portfolio.
First, we review the key components of the investor's portfolio, analyzing important factors such as the concentration and weighting of assets, how well the investments have performed against benchmark indices, and the overall construction of the portfolio. Next, we determine what the investor needs in order to maintain their lifestyle and address any wealth transfer needs. Finally, we work with the attorney and their client to identify what's important to the investor — whether financial independence, leaving a legacy for the next generation or fulfilling philanthropic desires — so future investment decisions can be guided by a new set of goals and objectives.
Working with clients is more than simply the implementation of a process — it's an ongoing conversation, one that helps us deliver thorough, well-crafted strategies that help assure family law attorneys and their clients that their assets are positioned to fulfill their expectations.