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“The road to Hades is paved with good intention” is a saying that likely resonates with many divorced folks. After all, no one walks down the aisle hoping the marriage will eventually dissolve.
However, the reality is many marriages do end in divorce. In the U.S., the percentage is said to be half. That’s an unfortunately large percentage and one that underscores the notion that divorce is, well, an unfortunate reality.
Add to that, most divorces come with substantial financial implications for one or both involved parties. While advisors aren’t marriage counselors or family therapists, nor should they pretend to be, they can play important roles for both divorced clients and those close to getting married. Obviously, the needs of clients in those two camps are vastly different, but in both scenarios, advisors can be helpful. Let’s examine how and why.
Being Proactive Before the Nuptials
A prenuptial agreement often carries with it negative connotations. Some clients might look at as writing off the marriage before the union commences. However, it’s a subject worth bringing up if both parties are bringing substantial assets to the marriage or if there’s a big gap – one spouse-to-be is affluent and the other is nowhere close to that status.
“When you get past the jokes and stigma that many associate with prenups, such an agreement can be beneficial to everyone involved. If both individuals are open and honest about their intentions and concerns, the creation of the agreement should go smoothly, and the process may help clarify your individual and shared wishes,” notes Austin Jarvis of Charles Schwab.
Jarvis also highlights the importance of prenups in later-in-life marriages. In a hypothetical example, two people with substantial assets and multiple heirs ought to consider a prenup because the children are apt to be concerned about how a divorce could affect estate plans.
In addition to a prenup, there other avenues for being proactive before a marriage that can buffer against some of the financial downside of divorce. Those include working with an advisor to formulate a clear estate plan, working with advisors to build a solid trust and will and ensuring beneficiary information is up to date so that investment and retirement accounts don’t end up in the wrong hands.
Helping the Heirs
Most adult children aren’t sitting around hoping for their parents to pass away so that they can get their hands on inheritances. However, those heirs are right to be concerned about how divorces could affect estates, particularly if dissolved marriage arrives late in life.
On their own, married clients can ensure documentation is in order, maintain separate accounts and make sure that large-ticket assets, houses, cars, etc., are properly titled. Advisors can improve the situation by discussing discretionary and domestic asset protection trusts. The former is a form of irrevocable trust in which the grantor selects an heir.
“Typically used for protection from creditors, this type of trust may be useful in protecting assets from divorce claims, including alimony. Several states have favorable laws for this type of trust, but the trust and trustee must be sitused and located in those states to take advantage, respectively,” Jarvis said of domestic asset protection trusts.