Podcast: Financial Considerations when Undergoing a Divorce

Nadine:

My name is Nadine Udorovic, partner at Nicholes Family Lawyers. When couples are navigating an arduous and emotional divorce process, it can be easy to overlook the long-term financial consequences that precipitate after the divorce has been finalised.  It is in this regard that appropriate financial considerations and strategies can be implemented to minimise any negative impacts of the divorce and ensure that steps are being taken to ensure any future goals.

Today we are fortunate enough to be joined by Josh Pennell, Director at Prosper Advisory Financial Services, a wealth-management and business advisory firm. Prosper specialises in providing advice to business owners and family law clients on how to manage their finances and plan for the future. Josh provides financial advice to those undergoing the divorce process and assists clients to make financial decisions after they divorce and also provides financial advice after the settlement has been determined and there has been a change of plan or circumstances.  Josh, thank you so much for joining us today to share your insights on the important financial considerations that parties navigating divorce proceedings should look at.

Josh:

Thanks Nadine, great to be a part of it.

Nadine:

So let’s get right to it.  In your experience, what have you found to be the most common financial challenges faced by those who have undergone or who are going through a divorce?

Josh:

There are a few which are common in a lot of cases. The first one, I would say, would be that a lot of people, even often prior to the divorce, or also during it, or possibly after, just don’t truly understand their financial position; they haven’t got clarity about what is coming in, what’s going out, what assets and liabilities there are, what the value of them is, if there are debts, where the loans are held, the interest rates, all these key pieces of data, so a key thing is making sure that people get greater clarity around that.

Another thing that can be a common issue is often a large asset in the parties’ pool would be the family home and that can create issues when, if someone has a lifestyle need to keep that home and that becomes a large part of the settlement, then will that impact their other needs in terms of being able to access income or investments or more liquid things, because obviously a home doesn’t provide an income and you can’t really access the value of the home to meet your living costs so that is a key consideration.  Definitely balancing out the current needs with the future needs, so do they want to receive more of the more accessible assets or they hope to get more, for example, of the superannuation balances if they are closer to retirement; so looking at the different stages of life considerations.  The other really common one is obviously, tax considerations and also the ramifications of actually potentially having to liquidate assets or split those assets out between people

Nadine:

It is so interesting that you say that about parties and clarifying their financial position because we as family lawyers see and hear that a lot, when parties first come to speak to us, one of the first things we will ask them, in a property case, is: what are the assets and liabilities, which then helps us to determine what a settlement might look like.  It is interesting that often people do not know what the asset position is or what the liability position is.  Very true about the family home as well, because often it is such an emotional asset that parties really either want to hold onto or they can’t imagine selling it or they can’t imagine their former spouse or anyone else living in it, so yes, it can be a very tricky asset to determine what we do with it.  So I guess some of the common assets considered in a financial settlement will include investments and superannuation; is there a way to protect those assets against the possibility of a divorce or separation occurring?

Josh:

Yes, there are a few options: a first would be considering what name you choose to put the asset in, so sometimes people might choose to put assets in the name of the lower-income earner or perhaps someone who is not involved in the business.  That is obviously for tax or asset-protection reasons.  But it does then create the issue that if the asset was effectively yours but you have put it in your spouse’s name, does that create an issue down the track.  Things like superannuation; you can have a nomination on your superannuation as to where it will get paid if something occurred, so that is typically more of an estate planning item, not necessarily planning for a divorce, but that is something that will need some consideration.  Specially, after the divorce is completed, you do need to be reviewing your super nominations and things like your life insurance nominations to make sure they are up-to-date.

From an investment perspective, there is an option out there called an investment bond and that can allow for greater specification as to who would receive that money at a certain future date, or upon death so there is a potential option there.

So there are a few options, just from a general perspective that are more specific, but probably a high-level option, though this is something which you are more expert about, is people looking at Binding Financial Agreements, which are more commonly referred to as a “Pre-Nup” where they are actually documenting how the assets might be dealt with if the marriage was to break down.

Nadine:

Absolutely, and we have done a whole separate podcast on Binding Financial Agreements so it is a really interesting area of the law and certainly one that you need to look at very closely.  But I agree that those Binding Death Nominations with regards to a party’s superannuation – again, it is amazing how many people do not realise that when they established their superannuation many, many years ago, that they would have made a nomination and so it is very important that they have a look at it, and I guess, when they separate but once again when they finalise their property settlement so that is something that dove-tails very nicely into the advice that we give.  What advice would you usually provide relating to budgeting and cash-flow management during or after a divorce? This becomes a real sticking-point for a lot of the cases that we see, particularly where you might have one party who is not working, and then they really need to budget both for themselves and also for their children.  This can become very difficult to work all of that out.

Josh:

Yes, well my first comment would be that budgeting, whilst many people might find this boring, is absolutely critical to growing someone’s wealth, whether they are going through a divorce or not.  And not just growing wealth but making sure that your finances are in order.  To me this is probably one of the most powerful things in money management overall, and it is often over-looked because people race off and think: what house am I buying and what shares am I buying and what car am I buying, and really, if you are not having money set aside to ensure that you are breaking even or ahead each month, then you are really not going anywhere.

So it is absolutely critical for people to be doing this, especially when or after going through a divorce, or when there has been a significant change of circumstances you need to be making sure that those figures are accurate to your current situation and that could see a whole raft of changes around income, whether there are any government benefits that are involved, your spending, what have you agreed, as part of the settlement as to who will be covering what costs, is there child support and/or spousal maintenance payments coming in or going out, that previously were not, so there are a whole lot of moving parts so it is definitely an important thing to do. People need to be doing it.

I would encourage people to make technology their friend when doing this; things like a spread-sheet will do the job and it is better than nothing, but there are now some great Apps and other things out there for people to be using, to make it easier for themselves.   I would say that this is Job Number One for someone to be doing, whilst they are going through the divorce, and actually forecasting: saying, OK this is the position in which I shall end up in, so what’s it going to look like from a month-to-month perspective and also once the settlement actually occurs, really getting those numbers tighter and accurate.

Nadine:

This feeds into my next question: what is a money map and how can they assist parties undergoing a divorce.  One of the key forms that we use in property settlements is a Financial Statement and attached to that financial statement is a Part N which lists all the various different individual expenses, and that does assist our clients to give us an indication as to what they need on a weekly and then monthly basis, and we can then obviously incorporate that, looking at Spousal Maintenance and Child Support. But can you explain to our listeners what a money map is?

Josh:

Yes, certainly. Money Map is a term that we have come up with and a process we use, to help people actually map out what is happening with their finances.  A simple way to describe it would be to say: if you were to jump in your car now and go to drive somewhere that you’ve never been, you would most probably use the maps in your car or on your phone, which would tell you the way to go, how to avoid the traffic and the roadworks and get to your destination as quickly as possible.  So it is really using a similar mindset around money.

The first part of any map is where you are starting from, so truly understanding what your current position is, so what you were saying there, coming up with the statement of assets and liabilities and understanding where they are at, and also where they might be at, if they were to agree a certain settlement outcome and from there…our aim when we are working with clients who have been through a divorce is to remove them as quickly as possible from any sort of negativity or a stressed state, or as I said, moving from confusion more into clarity and really actually putting a more positive mind-set behind…. well, where are you going now?  Yes, it might be unfortunate that the divorce has happened, but that has now occurred and this is the outcome for you financially, and this is where you are starting from on the map, but where do you now want to go to, what are some positive and exciting things in terms of your life, as well as your money and listing them down and setting out a list of goals, priorities, when do they want to be achieved, how much will they cost and that therefore is your destination on the money map.

Then we look at the strategies, the investments, the opportunities to then find the fastest route from start-point to end-point on the money map, and that essentially becomes the actual financial plan, and things that can be employed to help people move forward, recover financially, and overall lifestyle-wise as well, from that divorce event.

Nadine:

And I presume, Josh, that you would work with clients both potentially at the commencement of a separation and then maybe during the course of the negotiations and maybe again after the divorce as well, so I can see how this money map would be something that you would work with parties ongoing, it may not be necessarily a one-off, would that be true?

Josh:

Yes, 100%.  Obviously things are always evolving, even 10 years after someone’s divorce,  there will be things that will be changing in their lives.  So we find that anyone’s money map and financial plan is an evolving thing which needs to be updated.  In terms of when it is best for people to be getting advice, we find, and because all our initial consultations are cost and obligation free, we often find that a client might come to us, have a bit of a chat, get some support with some initial general thought-provoking discussion which is at no cost.  Often we find that one of the big advantages for people is that this does give a feeling of actually having a bit of support and knowing where to turn when the timing is right. So they may not need any formal written advice at that time, but that can be provided more from a format of helping them decide: OK, is the settlement which is being put to me the best to be doing, and are then any risks or opportunities which I’m not seeing, from a financial perspective of perhaps doing things differently. And then when they actually settle obviously their financial position is now known and that is a great time to be re-assessing the map and the overall planning, as I said, to get them really moving forward as quickly as possible, and not just recovering but actually thriving, you know, it’s not the end of the world. It is not an enjoyable event, and I have been through it myself, but we don’t want it to be defining people’s lives or have it slowing them down for 1 to 10 years, so how do we recover and move forward as quickly as  possible, with the right plans in place?

Nadine:

Yes, it is so important,  what you are saying; that is really how we work, that holistic approach, having assistance from someone like yourself, because we can present to our client what a property settlement might look like, in terms of what the law would provide for, but then practically, you have to be able to put that in motion and you have to be able to make that work for your own individual lifestyle and your needs. So I think that is an amazing tool that you are using

So I guess, reaching a point of financial certainty; it is so important for parties who are going through separation or divorce, what strategies do you suggest for those moving from financial confusion in the wake of their separation or divorce?

Josh:

Well the first bit of advice would be not to waste too much time, don’t just try to sweep it under the rug and think that it is all going to be OK.  Spend a bit of time actually prioritising what decisions need to be made, what things need to be reviewed, I actually wrote an article about the multiple of things that need to be reviewed and updated when someone has gone through a divorce to make sure it is all now based on their new current position. What we talked about before re superannuation and life insurance beneficiaries is just one example of that but there are probably 10 to 20 things that need to be checked in on, so spend a bit of time, make it a priority, try to make it a positive thing and rather than it being an extra thing on your jobs list, focussing on:  OK what do I want to achieve with my life now, what am I working towards, what are the great outcomes that I want to achieve rather than: Oh I’ve got to fill out that form, I’ve got to do this and that, really try to  get away from that mindset. We find that the money mapping process is probably the simplest way to do it, because it ensures that they have clarity over their current position which is obviously vital, to make sure you are starting out understanding where you are at, and then bringing in that positive element, discussing the goals, the strategies and the investment opportunities that present themselves.  In a nutshell, actually spend the time on it, make it a positive experience and focus on the things you want to achieve going forward.

Nadine:

Absolutely, I guess it is that cliche: turning a negative into a positive, which can happen and it does.  For the benefit of our listeners, give us the details of the article which you have referred to, what is it called, and where can we find it?

Josh:

Well you have put me on the spot there! I can’t really remember what I called it.  But it is on our blog, I think it is on our LinkedIn and so for our website which is www.prosperadvisory.com.au and under our blogs, there are actually quite a few blogposts related to divorce.  I also started a monthly free educational email called “The Family Law Financial Journal” which people are welcome to join as well, where the aim of that is for lawyers and their clients to have more ideas and understanding of the key things to be thinking about during and after divorce, so that article is just one piece of that content, so people are welcome to read that.

Nadine:

That’s fantastic, Josh.  I shall be jumping on and joining all of that and having a read. Thank you so much for your time today; it has been really helpful and I think a lot of our listeners should be taking a lot of that with them into any discussions which they may be having with their family lawyers but also with their accountant; it really is a team effort to see people through this process.  And it is not all negative, there can be silver linings and some positives at the end of it.  So Josh, thank you again for your time today.

Josh:

Thank you, Nadine, great to join you.

Useful Links:

Prosper Advisory Financial Services: https://www.prosperadvisory.com.au/

Disclaimer: Nicholes Family Lawyers intends the information provided in this podcast as general information only, please contact Nicholes Family lawyers if you require specific information and advise in relation to any family law matter.