Deciding to Separate? Help your clients face transition with confidence.
- Dealing with the Grief Process
Divorce is a major life event that touches all aspects of a person’s well being. Worries about financial security, where they will live, hanging on to mutual friends, family dynamics and lifestyle may all be at risk. Many people going through this process should be encouraged to seek professional counselling. It is a good idea to make connections to reputable counsellors so that you are able to provide referrals to your clients.
- Assembling Key Financial Documents
Your client comes into your office and tells you that their partner has been unfaithful in the marriage more than once. Because she has young children she has put up with it but can no longer deal with the emotional toll it has taken on their relationship. Her husband is the primary breadwinner and takes care of the bills. She is concerned about her financial well being because she has not worked in many years and has no idea about the family’s finances. Her husband gives her an allowance and it has not occurred to her until now, that she has no idea how to pay bills or manage her finances on her own. This client does not know what various financial documents you have requested look like and is overwhelmed with the idea of tracking them down. It may be a good idea to refer her to a financial organizer who can help her to assemble the key documents you will need to properly represent her in her divorce case.
- Recommend that your clients set aside funds aside for an emergency as they prepare to separate. Encourage them to create a budget to reduce expenses now
If your client was not up to speed on the financial matters of the household they may be caught off guard to find out, all might not be well. Funds in joint accounts may have disappeared, been squandered, or worse. These clients need to budget 3 to 6 months of living expenses to pay for new and unexpected costs, should income stop or become unreliable during the initial separation. It may be a good idea for your client to retain the services of a financial planner to help them get a handle on this.
- A Word on Credit
It is important for a client contemplating separation to know where they stand financially and to identify the debts that will need to be organized. Knowing their credit rating will be particularly helpful at this time as they seek cash to refinance, and to maintain liquidity. Credit scores under 650 will tend to be worrisome and many banks will not want to lend or offer low interest financing if a score is below this amount. Encourage your clients to take steps to improve their credit rating. Start by closing accounts no longer used, and ensure you are taking steps to build your own credit identity by having a credit card solely in their own name. Online credit companies like Credit Karma offer free instant credit reports.
- Help clients to understand the value of their family’s net worth
The definition of net worth is what you owe versus what you own. After debts have been subtracted a couple’s net worth is defined as the assets left over that can be divided. This is often a contentious issue for separating
couples as they are often surprised to learn that the personal debts of their spouses are also divided equally is well. Understanding net worth will help your client sort out their financial health and prioritize goals as they work toward a divorce settlement.
- Home Sweet Home
Many clients are reluctant to leave the family home. It is often a source of comfort and stability not only for the separating spouses, but for the children as well. Determining whether to keep or to or sell the family home can be an emotional decision. Unfortunately, the decision to stay in the home will ultimately need to be examined from a financial standpoint. Points to consider include: will staying in the home affect my financial well being over the long run? Will I be able to carry the costs of and house bills on my own? Will I need to remortgage the property and pay mortgage expenses and fees to remortgage?
- Pension Considerations
Not all pensions are created equal. Some pensions are easier to split between spouses than others. For example, CPP allows for an equal split of pension credits during the time the couple lived together. This means the spouse with the higher credits would have to transfer some their credits to the lower credit spouse. All applications for pension credit transfers must be referred to Service Canada and the rules for this are complex.
On the other hand, Defined Contribution Plans can be transferred to a spouse using a marital breakdown form. Fifty percent of the value of the pension would normally be transferred, based on value on the date of separation or breakdown of marriage. This is the most straightforward of pension plans to split as it is based on current values accumulated in the plan. Your client should get clarification from the administrator to confirm they have all the documents they need to process the transfer. Defined Benefit pension plans tend to be the most lucrative of the pension plans especially if they offer inflation protection. They are often the most complex of the pension plans to transfer as it is based on an income stream instead of a value. Issues to consider include: Does your client have the option to take the pension funds now in a lump sum? Will the funds be transferred to a locked in account or can be transferred to a RRSP which offers more flexibility? Will they need to wait until their ex spouse retires to claim the pension? Is their spouse already on pension? Who will manage the investment? Can it remain in the pension? Will the ex-spouse continue to be entitled to survivor benefits? How will the pension benefits of the separating spouse be valued in the divorce settlement?
- Insurance considerations
Many clients who rely on their partner’s child support and spousal payments are concerned about what will happen if their ex-partner passes away. How will they make up the lost income? In some cases, life insurance plans were in place prior to the breakdown. Important questions to ask your client are: Does your ex partner have life insurance in place? Who is the owner of the policy? Is the plan still in force? Including life insurance in terms of the settlement to protect spousal and child support payments provides the ex partner with the assurance of long term financial stability should the unexpected happen.
- Changing Beneficiaries and Reviewing the Will
A will is invalid after a divorce. Many clients may need to be reminded of that fact or have simply overlooked redoing their will altogether. Clients will need to think through who will manage their assets, protect the interests of their children, and execute their last wishes in the event of death. For example, does the ex spouse have joint custody of the child? Will the child live with the ex spouse in the event of death? Will that spouse have access to the funds left on the child’s behalf? How will the income for the child be administered?
- An Interdisciplinary Approach
A separation or divorce is life changing, and the impact of the decision to separate will be felt for many years to come. Because divorce touches so many areas of a person’s life it can be a nerve wracking and all consuming for many clients. Help them go through this process with confidence by taking an interdisciplinary approach. It is impossible to be everything to your clients. Assemble a team of professionals who can help you and your clients navigate the myriad of issues to be dealt with. This will leave you with more time to focus on what you do best for them.