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Ten Tips for Financial Planners
in a Divorce or Remarriage Situation
Account executives sometimes have the unfortunate
experience of getting sucked into the middle of a client's divorce proceedings.
The following tips are suggested to help you help "stay out of the way" while
also helping both the client and your firm.
1. Ask you client after a divorce is filed, when it becomes final, and
again before remarriage about a Will, change of beneficiary designation, and a
new (or adapted) estate plan.
Typically a divorce is the largest financial event in any
spouse=s life. The
carefully tailored estate plan that you may have made is
shattered by the fact that there will be two estates after the
divorce, and there may be lurking issues of the life insurance
trust or second to die insurance that need to be addressed.
Typically financial advisors work for both spouses and are in the
position to being a professional neutral B a resource B in a divorce proceeding to
both spouses. Typically an estate plan is optimized to transfer
assets with a minimum of death taxation and is generally
inconsistent with what happens in a divorce. See how you can
explain to each side what options that you see for a revised
estate plan to go forward for each spouse. Remember that a final
divorce voids provisions in the Will that leave property to the
now-divorced spouse and also changes the designation of life
insurance from the former spouse (but probably not for life
insurance trust-held policies).
2. Know how restraining orders (TRO) and temporary
injunctions in divorce actions can affect your duties. Even
though for your firm to be technically "bound" by a
divorce TRO, the firm must be "named" specifically as a
party in an Order (who is enjoined from doing or permitting
certain acts) and, further, actually served by a Sheriff (or
other process server) with the Order, a reasonable approach to
divorce TROs is to generally give credence to an Order when you
receive a copy of it--by whatever means. Check with your lawyer
there are any questions. Also be aware that in several counties--including
Dallas and Collin--that the Divorce Court imposes a Standing Order on
both parties to a divorce as soon as it is filed. The standing order
generally prohibits any financial transactions that are not for ordinary living
expenses, ordinary and customary expenses to carry on a party's business,
and for attorneys fees in the divorce. So be aware of this reality if your
client requests to make sudden and extraordinary changes in or withdrawals from
the accounts.
3. Know the basics of character of property (separate or
community) of income, and the consequences of commingling the
two. Be aware of how transactions in an account can commingle
separate and community funds.
In Texas, virtually all income--even that income produced from
separate property and securities, is defined as community
property income. So the interest and cash dividends (not stock
dividends) posted in a brokerage account that contains separate
property securities would cause there to be commingled
funds--both separate and community--in the account. A party can attempt to trace
out what is community and what is separate in an account. Texas
generally applies a rule called "community out first"
when dealing with commingled accounts. What this means is
illustrated by the following example. The client has just
married on January 1. All securities in the account were the client's prior to marriage.
Interest and dividends in January were
$3,000 and these were posted in the account. You and your client
thought that February was time to sell the Widget Company stock,
and the client sold a $5,000 block of Widget Company. About a
month after that, the client directs you to put $5,000 into XYZ
Corporation and the client thinks he is merely investing the
Widget sale proceeds. Wrong! Under the community
out first rule, the first $3,000 used to purchase the XYZ stock
is the community dividends and interest, and then only $2,000
from the Widget Company sale goes into the XYZ purchase. The XYZ
stock is 60% community property and 40% separate property!
An exception to this general rule is the
"quick-in, quick-out" simultaneous sale and purchase of
a security that is recognized by many Texas courts. All this
leads to the complicated task called tracing of separate and
community assets in the commingled account in the event of
divorce or a probate proceeding. You are financial advisors, not
lawyers; however, many of your clients would be appreciative of
being alerted to a possible problem down the road. Other articles
on this website can help acquaint you and your clients about
these issues.
Texas also has an economic contribution statue, which allows funds used to
pay off debts--either separate or community-- to create substantial rights and
claims. You should
make sure your client is aware of this reality that has provided
full employment for appraisers (who must do appraisals of real
property at the time of the marriage and the current time), for
lawyers and for CPA/experts who must figure the character of funds paid from the
time acquisition of the property to the current time as to whether they are
separate funds or community funds.
4. What happens when you receive conflicting instructions
from both spouses? Typically, one spouse wants to
"sell" a security and then the other one calls you and
tells you "not to sell". The answer may depend on the
type of account, as well as your Acontract@ with your client(s).
a. "and" accounts. These are accounts
that require both parties' consent and signatures to do anything.
Require written instructions to execute transactions (or not
to execute transactions).
b. "Or" accounts. Tell both of the parties
that since you have received conflicting instructions, and since
each of them have equal authority over the account, that you can
take no action unless clear authority has been given. Request a
letter signed either by the parties or both of their lawyers
before transacting business.
c. One Party account. Even though you may have
previously dealt with the other spouse who is not listed on the
account (perhaps about other accounts), you probably have a duty
to the account holder to exercise properly received instructions
from the account owner unless you have notice of an Order that
prohibits the transaction. However, in a divorce situation, it is
prudent to receive the account holder's instructions in writing
(dated and signed) so that you have the clear history of the
circumstances surrounding the transaction.
5. Be vigilant and professional and cooperative in the
divorce action. Typically, you are professional neutral, as
you have fiduciary duties to both spouses, and must be
cooperative with both spouses of divorce. If the spouses'
securities in an account are divided in the divorce (or where
individual accounts are awarded to each spouse), be professional
and cooperative in following each client's instructions.
6. In many situations, particularly remarriage, consider or
ask your individual client whether it is his or her intent to
maintain the account as "separate property" or not.
Many times a person wants to keep the capital in an account as
separate property but may not realize that all income from the
account is community property and may be amenable to a suggestion
from you to segregate and collect income into a "sweep
account." Even if the client doesn't want to establish a
sweep account, they will appreciate your knowledge and vigilance.
7. Inquire, especially in remarriage, or even with new
account set ups, if there is a pre-marital agreement.
Pre-marital agreements may fundamentally effect the way a
client's account will be treated by the law. If there is a
pre-marital agreement, ask for the parts of it that effect either
the name on the account or the way that the account will be
handled, just as you would request a partnership or trust
document to establish an account.
8. Where your client confides in you statements like,
"My wife has run off with the gardener," besides
asking, "Is there anything I can do?" You might
suggest your client seek formal help either from a counselor and
also a lawyer. If the client confides in you that he/she has just
been served with divorce papers, you might even suggest specific
names of professionals or referral organizations who could help.
9. Be aware that UGMA accounts and Trust accounts for the
kids may be in dispute.
Once again, if you participated in the process of setting
these up, you may be a professional neutral with competing
fiduciary duties. Sometimes a spouse may want to invade the
account. Yikes!
10. Be aware that sometimes spouses reconcile, and that
a spouse may want to tell you damaging or unflattering or even
intimate information about their spouse. Change the subject and
discourage such outpouring from your client. If your client
reconciles with their spouse, the personal embarrassment of
knowing that you know these horrible tales will probably be
enough to have your client move the business elsewhere!
These tips are intended to aid you in assisting your clients.
There is more information about Divorce and Family Law readily
available at http://www.raggiolaw.com.
This article is available there at http://www.raggiolaw.com/financialplanner.htm
but is not generally accessible by the public.
The author authorize distribution of this article in
printed or electronic form so long as attribution is given and
the links remain embedded.
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