Divorce: how being informed leads to a better outcome
Divorce is a sensitive topic that can be a life-changing experience with major financial implications—especially when significant wealth and complexity are involved. And today there are more couples taking that step as the COVID-19 pandemic has put additional pressure on marital relationships that might have already been under strain. It’s an unplanned outcome of an already difficult year.
In this blog post, we’ve taken a clear-eyed view on steps to take if you’re going through this situation or you know someone who is. Here’s what you should consider to protect yourself, your legal and financial interests and your emotional health, to create the best possible future for yourself.
“Divorce can run the gamut from being an amicable arrangement to being like a death in the family,” explains Newport Managing Director and Portfolio Manager Michael Vanderburgh. “But as somebody who has gone through this personally, I try to provide assurance to clients going through divorce that, over time, everything is going to be okay.”
To start with, you’ll need a team of experienced professionals who can support you with the best possible advice on all aspects of your situation. A call to Newport is often the first one that clients make, and we urge them to start by building that team.
So where should you begin?
First things first: Understand your legal position
We always advise clients to retain family law legal counsel as soon as a separation occurs or is being contemplated. It is absolutely critical to understand your rights, the law and the divorce process as you start down this path. This is true even if you haven’t yet decided to divorce.
“Rarely, if ever, do we work with a couple that has a complete understanding of what they’re embarking on,” Vanderburgh says of the divorce journey. “So much angst happens because they don’t know.”
Unfortunately, a common scenario is that couples initially try to negotiate between themselves. Things can escalate miserably, especially if one partner is uncooperative, better informed or has a domineering personality.
What about the concern that involving a lawyer too early will incur unnecessary legal expenses? In our experience, that myth is unfounded. In fact, lawyers and the courts will assist in reconciliation if that is practical and possible. More importantly, their involvement will help protect you from inadvertently acting against your own financial or legal interest.
“Legal counsel on both sides help to level the playing field and may protect you from saying the wrong thing, offering something you shouldn’t or getting upset, explains Vanderburgh. “When each party is armed with legal information, they are empowered by that information. And it takes the temperature way down.”
So how do you choose the right lawyer for your situation?
Find and manage the right lawyer for you
As with any field, family law professionals have different approaches—some are combative, others are conciliatory or empathetic. It is important to choose the lawyer best suited to your personality, your situation, and, most importantly, your desired outcome.
We will often make a referral for Newport clients. And there’s good reason for that. We know many family lawyers and we know our clients, so we are uniquely equipped to help our clients find the right fit.
Once you’ve selected your family law counsel, it’s vital that you properly manage your lawyer, not the other way around. At Newport, we are sometimes called upon to assist in navigating what is new and daunting terrain for most clients. This may include reviewing the lawyer’s engagement letter and staying involved so that they don’t feel like they are left alone with a new lawyer in an emotionally charged, financially complex situation.
Vanderburgh advocates a collaborative or negotiated approach, as opposed to going to court. “You want to take the courts out of negotiations as much as possible,” he says. “If you can’t agree to divide contentious assets like vacation properties, art or the family cottage, the court could order it sold. You don’t want a judge making those decisions—that’s when everyone loses.”
Lastly, Vanderburgh recommends thinking about your future needs and goals before entering into divorce settlement negotiations. “Step back and understand what’s actually valuable to you instead of arguing endlessly, exhausting yourself and potentially costing yourself a fortune,” he says.
“Is it really worth the stress of fighting to keep a painting that you didn’t want in the first place? We often tell clients that ultimately, an effective, non-judicial negotiated settlement will require both parties to compromise and give as well as take.”
Understand your financial situation
Gaining a clear understanding of your financial position is another early priority in the process.
Wealthy couples frequently have unequal balance sheets, where the bulk of the assets are held in one spouse’s name—sometimes the result of complex tax planning structures.
This can complicate matters, especially when many people are unfamiliar with the rationale for their own financial structuring and uneducated in the legal nuances of divorce, not to mention the impact of provincial family law on their shared assets.
As part of the process, you and your spouse will have to disclose all aspects of your finances and the lawyers will draw up a formal financial statement for each of you. It’s important to remember that being forthright and fully disclosing everything from the start serves everyone well in the long term—as does a discriminating and realistic view of what can happen during divorce proceedings.
“You can’t necessarily trust your ex-spouse to behave in a way that benefits you any longer—and involving children completely changes the equation. If you don’t go through the process in a transparent way, you’re opening yourself up to a world of hurt,” says Vanderburgh.
When it’s difficult to contemplate all that needs to be done and everything seems urgent, consider these steps to help you organize your affairs and approach the situation with a clearer mind.
1. Gather the important facts
Your lawyer will require all of the facts and background on your current situation to begin to draw up financial statements.
- Gather financial information, starting with your bank accounts, investment accounts, insurance, as well as salary and tax return information for you and your spouse. It’s not uncommon for one partner to be more informed than another. For instance, if you don’t know how much your partner earns, or the balance of your TFSA or joint investment account, now’s the time to find out.
- Prepare a balance sheet that includes all assets (real estate, business, cars, art, investments) as well outstanding debts (mortgages, lines of credit, loans) and income and estimated expenses. Expenses can include education, medical and dental expenses, ongoing children’s expenses, and other expenses that you anticipate incurring.
- Ensure that appraisals for any real estate property are up to date. A reputable mortgage broker can assist you with fair and accurate market values, regardless of whether you sell or retain the assets.
2. Plan your financial independence
Unfortunately, this is a time when people have been known to act rashly or with undue malice, draining joint bank accounts or maxing out credit cards. Now is a good time to begin separating your finances from those of your spouse.
- Establish a bank account in your name so that you have financial control. If you are earning income or a salary, have those monies deposited to your individual account. You can always transfer funds to a joint account as required for any shared expenses that you and your spouse may have.
- Get your own credit card. It’s important to know that a primary credit card holder can cancel access to a spousal card, at any time and without warning.
- Speak to your financial institution and your Portfolio Manager about any joint accounts that may have significant funds or liabilities, for instance a home equity line of credit. If your bank manager or Portfolio Manager is aware of the situation, they will be able to assist and make the process easier.
3. Obtain and review your financial plan
If you have a well-prepared financial plan, it will already have many of your assets and liabilities, income and expenses documented. If you do not have a copy of your plan, contact your advisor for a copy.
Your financial plan is an excellent starting point to ensure that you have accounted for everything that you and your spouse have of value, and also highlights the expenses you’ll need to account for in the future.
Build a team of professionals that work for you
Central to understanding your financial situation—and one of the most important advisors on your team—should be a qualified chartered professional accountant. They can help manage tax and other financial considerations, especially for business owners.
“Cash flow can be a major challenge during divorce proceedings,” Newport Portfolio Manager Ian Maclean says. “While the courts will protect access to cash flow for both parties, this can take time. I can think of one situation where our client had no source of immediate cash and had to dip into her RRSP, even though she was expecting a $5 million settlement. The RRSP wasn’t enough, so the accountant, who was integral during the entire process, was able to quickly release a promissory note from the company to bridge the temporary funding gap.”
You may also want to consider hiring a Business Valuator to help you properly assess the value of any business holdings that are owned. Newport makes recommendations for advisory support and provides practical advice every step of the way for our clients. Having someone in this pivotal role is an important consideration.
Of course, not everyone on your team needs to be a professional service provider billing by the hour. For example, Newport includes wealth planning services as part of our fee structure. Friends and family are an equally important (and free) part of your support network. It’s important to know who to turn to for what.
“I had a friend who needed to vent during a particularly challenging period of her divorce and left a very expensive one-hour message on her lawyer’s voicemail,” Maclean recalls. “The lawyer sent her a bill for his time to listen, transcribe and respond to the message. Make sure you have people to lean on who aren’t charging you by the billable hour.”
Plan for the future
Once a settlement has been agreed upon and you know how the assets will be distributed, you’ll want the right advice to manage and grow your wealth. That includes working with your wealth manager and the rest of your advisory team to address a wide range of financial considerations.
If you don’t have a financial plan, this would be an excellent time to work with your wealth manager to chart out a course for the future. It will help you map out anticipated living costs, and also help you through an emotionally fraught time in the here and now.
Among other items, be prepared to review and re-write your will and powers of attorney, considering child custody and financial support, while planning for future expenses and earnings with accurate projections.
When auditing your assets, be sure to review beneficiaries on everything from your registered savings accounts to insurance policies.
“I know of one instance where a woman saw her deceased mother’s six-figure life insurance benefit paid to an ex-spouse instead of her, because the beneficiary designation hadn’t been changed prior to her mother’s death,” comments Maclean. “Her mother would not have wanted this and it was a costly reminder to pay close attention to detail when reviewing accounts and policies to ensure those designations reflect changes in marital status.”
And finally, assess your financial literacy and strengthen it if necessary. Regardless of who managed the household finances previously, there will be change ahead. Be assertive in seeking any help you need to increase your financial understanding. Newport helps our clients with that, too.
Take time and take care of yourself
Divorce can be a major disruption in one’s life and, in certain cases, the psychological, emotional even physical costs shouldn’t be underestimated. For some, the grief feels overwhelming and healing takes time. As one woman observed of her experience, “Divorce is like the death of a spouse, but without the same level of social support.”
Other couples approach the dissolution of their union as the natural evolution of their relationship; the concept of “conscious uncoupling” is part of the new lexicon that is redefining divorce in the 21st century. Still others describe a tremendous sense of relief.
Whatever range of emotions you may be experiencing, a focus on your own physical and emotional wellness can help you manage the journey. Counselling can also be an important piece of the puzzle to help you remain whole through the journey.
A new beginning
Remember, you have the rest of your life ahead of you.
A divorce is likely to be one of the most significant life transitions you’ll ever experience. And it could also be the beginning of an exciting new chapter, one that can be both energizing and overwhelming to contemplate.
It’s important to know that you’re not alone. While it could take a year or more to bring greater stability to your financial life, our team—and your extended network of advisors—is prepared to be with you every step of the way.
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