by Kenneth G. Raggio
Bankers and 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 company.
- Know and follow your firm’s stated policy about temporary restraining orders (TRO) and temporary injunctions in divorce actions. Your manager or the Legal Department can help you if you have any questions. 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. Once again, check with your manager or the Legal Department if there are any questions.
- 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. Repeat: Interest and dividend income even on clearly separate property is community income! So the interest income 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. 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. All securities were the client’s prior to marriage. Interest and dividends in the first month or so of the year 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. The articles mentioned later can help acquaint you and your clients about these issues.
- What happens when you receive conflicting instructions from both account holders? Typically, one spouse wants to “sell” a security and then the other one calls you and tells you “not to sell”. The answer depends on the type of account.a. JTROS/”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.
- Be vigilant and professional at the time of the divorce. If the spouses’ securities in the 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. Typically, one spouse will want to transfer the securities out of the brokerage firm, or at least to another account executive. Wish them well and perhaps make a note to call in a few months to see if there is anything you could do to help them.
- In many situations, particularly remarriage, consider or ask your client whether it is their intent to maintain their 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.
- 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. In tip #2 above, a premarital agreement can transform that interest and dividends income on separate property to be separate income.
- Inquire after a divorce and again before remarriage about change of beneficiary designation for the account.
- 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 or even 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.
- Be aware that UGMA accounts and Trust accounts for the kids may be in dispute.
- 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 account elsewhere!