At The Money Fan Favorite: The Finances of Divorce

Divorce is an expensive, confusing, and stressful experience. Dividing up family assets, including not just the family home, but portfolios, real estate, trusts, and other businesses. There are big mistakes to avoid. Patrick Kilbane is General Counsel of the RIA Ullman Wealth Partners, where he leads the Divorce Advisory Group. In addition to his years as a divorce attorney, he is also a Certified Divorce Financial Analyst (CFDA) and Wealth Advisor at the firm. Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 2:06Barry Ritholtz?

  Is there any life event that's more expensive, confusing, and stressful than a divorce? You're not only dividing your family, you're also figuring out the disposition of a lot of assets. Portfolios, real estate, trusts, businesses, more. I'm Barry Ritholtz, and on today's edition of At the Money, we're going to discuss the finances of divorce. And full disclosure, I am and remain happily married for 32 years. To help us unpack all of this and what it means for your portfolio, let's bring in Patrick Kilbane of the RIA Omen Wealth Partners, and also leads the Divorce Advisory Group.

• 2:50Barry Ritholtz?

  So Patrick, let's start with the basics. You focus on people going through divorce. What's the first financial triage you do when a new client calls?

• 3:01Speaker 04

  Barry, great to be with you. Thank you for having me. When somebody gets hit with this bomb, when this bomb is dropped on them, you know, I'm a big fan of Coach Lou Holtz, and he has an acronym WIN. It stands for What's Important Now. So I generally talk to the person who this might be their first exposure with the legal system, and I figure out what their goal is. Has there a strange spouse? Cut them off from the cash flow, from the assets? Is this a trial of custody situation? You know, what is the first thing that we need to handle? And then it's sort of giving them the confidence and the reassurance that, hey, you're not the first nor the last who's going to go through this, and I'm going to be your sherpa through this process.

• 3:45Barry Ritholtz?

  So I imagine there are some consistent, large money mistakes people make in the first 30 to 60 days of a separation. Obviously, it's very emotional, and, you know, most people don't go through these sort of things repeatedly. What sort of mistakes do you see before the lawyers and the written agreements start showing up?

• 4:07Speaker 04

  Like most people who have a long history together, they have solved a lot of problems together. And I see people trying to work the divorce settlement out among themselves, and the spouse that may not have all of the data, all of the information, may not know the extent of their holdings, may make some agreements before they have any idea what their rights are. So like you, Barry, I'm a lawyer, although I'm not practicing anymore. I litigated high net worth divorce cases for 10 years. And what I try to do is not give legal advice, but say, hey, let's slow down a little bit, and let's make sure that you have a full understanding of what you're agreeing to or waiving before you do it.

• 4:51Barry Ritholtz?

  So I think about all the assets that are involved in a family dissolution. There's cash, there's retirement accounts, there's property, there's business interests. How do you help clients understand the value of what they're negotiating? Either cash upfront versus a longer-term set of assets?

• 5:13Speaker 04

  Great question. So I try to divide everything into different buckets so I make sure that my clients aren't comparing apples to giraffes. They've got to be comparing apples to apples. And depending on where the spouses are situated and where each one of them wants to go, we know that all assets aren't created equal. So there may be an opportunity working together to reach a divorce settlement that'll be more advantageous for both spouses than what they would end up in a court if the court just took a meat cleaver and busted everything in half.

• 5:48Barry Ritholtz?

  So you have a background as a matrimonial lawyer. How does that change the way you sit down as a financial advisor when you're having these conversations with clients who are just starting the divorce process?

• 6:04Speaker 04

  Excellent question. I have a perspective from litigating these cases for 10 years and seeing people at the very beginning of the process. And I think a financial planner, a wealth manager, an asset manager who may not have that same experience may want to get right into the details. You mentioned the word triage earlier in this conversation. I mean, this client, this family is coming to you. I mean, they're experiencing trauma. The wound may be fresh. So I think we really have to slow down, and it's sort of like, you know it when you see it. You're ready to delve into the financial planning and start talking about Barry 2.0

• 6:47Speaker 04

  when Barry is ready to start thinking about Barry 2.0. But a lot of these people come in, and they're in a total fog. They're trying to figure out where their next dollar is going to come from. How is cash flow going to... Even, let's back up. Where am I going to live? So we have to sort of satisfy that bottom level of Maslow's hierarchy of needs before we can even get into that financial planning conversation.

• 7:12Barry Ritholtz?

  So the past few divorces I've witnessed from relatively close, the big question becomes, who gets the house? It always seems to be one of those things. It's an emotional decision. It's a financial decision. Is there a better framework for addressing that? How do you avoid that from becoming so toxic, so "Worth the Roses" sort of disaster?

• 7:36Speaker 04

  I think you have to really start and understand why somebody wants the house. You made a great point. Is this an emotional decision? Is this a financial decision? Do I have comfort in my neighbors? Is the house in a public school district where I want my children or child to continue to go to school until they reach the age of 18? And then, once you really have a good idea why that's the case... And Barry, maybe that spouse wants the house just because they know the other spouse wants the house. So we have to sort of take a step back and understand the true motivations. And then we start talking about the financial problems and the tax problems that come. Well, a married couple, if this has been your primary residence

• 8:20Speaker 04

  for two of the last five years, you can exclude up to half a million dollars of a capital gain, if there is one. Of course, if you're single, then you can only exclude up to $250,000 of the gain. What's the basis? Do we have a state tax situation? So there are a lot of different layers. And I, again, back to my previous comment, I don't think we can even hit on that until we have a true understanding of what the client's motivation is and when they're emotionally prepared to have that financial discussion.

• 8:51Barry Ritholtz?

  You mentioned taxes. It's easy to imagine how taxes can just flip the math. What are the big tax traps in divorce settlements to avoid?

• 9:02Speaker 04

  All of these assets are different. They may be taxed at ordinary income rates, capital gains rates. To your listeners, a very sophisticated audience, but some of our clients who are going through this process are also very sophisticated, but that hasn't been their role in the household. So a lot of it is reeducating them and understanding or trying to have an idea, what is their tax situation going to be post filing? They may be in a totally different tax filing status. They may be going back to work. They may not be going to work. They may have investment income imputed to them. They may have to use IRS Rule 72-T if they're before 59 and 1/2

• 9:43Speaker 04

  to be able to tap into retirement accounts because of imputed investment income. Of course, those laws vary by state, but that's why it's so helpful to have somebody who really knows that perspective and can work with the various tax and estate planning professionals to be thinking about these issues.

• 10:03Barry Ritholtz?

  What about retirement assets? What do people need to know about avoiding penalties or getting a bad allocation? There's a whole other QDRO thing that I'm wholly unfamiliar with. What are the issues in divorce with 401Ks, 403Bs, IRAs, any joint or individual retirement asset?

• 10:25Speaker 04

  Yeah, such a magnificent question. You and I talked about Quadros preparing for this conversation. Quadro is an acronym that stands for Qualified Domestic Relations Order. It is a subsequent court order that is used to segregate a retirement plan that's subject to ERISA. ERISA stands for the Employee Retirement Income Security Act. But if your spouse is a participant in a government plan, a government plan may not accept a Quadro. Then how in the heck do we divide that marital asset? So again, I think it always requires us to take a step back

• 11:06Speaker 04

  and get a hold of a document called a summary plan description, which sets out the rules and regulations of each retirement account. Barry, we've heard people say all the time, the only way to eat an elephant is one bite at a time. And whether it's a retirement account or some other asset, we have to be very intentional and very careful and go with each asset. What is it? Is it a qualified or a non-qualified account? How do we divide it? What are the tax consequences? And I know you and I are going to talk about other contingent assets down the road like carry and restricted stock and so on and so forth.

• 11:47Speaker 04

  But what's the best way to actually accomplish this on each asset? And then, you know, maybe with that asset, we say, wait a minute. I don't want to have to deal with my estranged spouse in the future to get my fair share. Isn't there a way that I can, you know, barter this away and get something else that works better for me? So those are all the discussions that are asset by asset level.

• 12:12Barry Ritholtz?

  That's complicated. Let's talk about something even more complicated. What do you do with illiquid assets, private businesses that are not? Hey, it's easy to split a portfolio of publicly traded stock. What do you do about a company that is private and one of the spouses is running? And how do you put, how do you, you know, figure out what it's worth and who gets what?

• 12:35Speaker 04

  You and I can look at our brokerage account statement or retirement account statement and have a pretty good idea of what that asset is worth. With an asset that we know that has value, but we're not sure what that value is, you're required to hire another professional called a business appraiser or a valuation expert. And the crazy thing about the divorce world, Barry, is it imposes these fantasy rules and regulations that you and I would never, you know, have to discuss with a married couple. We talk about enterprise goodwill and personal goodwill when we come to the value of a business. So your firm, a valuation expert can say, okay, this firm is worth X, you know, million dollars.

• 13:20Speaker 04

  But in a divorce context, especially in my home state of Florida, we have to look at what's the value of Barry's firm without Barry? And the value of Barry's firm without Barry, that's the marital asset in Florida. That's what we have to divide. So a year prior, somebody may have offered to buy the family business for $15 million. But if you take Barry out of that family business and the value of the office buildings and the furniture and so on and so forth is a million, then the marital share is 500 grand. And you have a spouse thinking, wait a minute, I'm going to end up with $7.5 million of this asset. But really, it may be half a million dollars or, you know, you can pick any other example. So you need that expert and then you need to understand

• 14:05Speaker 04

  how the state dissolution of marriage laws apply to valuing that asset within the context of a divorce.

• 14:13Barry Ritholtz?

  Really, really interesting. What do you tell clients about cash flow planning right after the divorce? Suddenly, whatever, emergency fund, credit, even just a household budget, all that stuff gets thrown out of the window. How do you rebuild that? How do you face that first year of spending reality?

• 14:34Speaker 04

  In the context of the divorce negotiations, I try to help my clients and lawyers think about asking for a larger than normal emergency savings fund. We talk about, hey, look, this is how much money you have to spend on a monthly basis. But that first year where this now single person is in charge of their monthly budget, there may be some surprises and there may be a learning curve and so on and so forth. So I try to really build up that experience. And maybe even if it's not an alimony case, maybe it might be helpful to get the case settled if there can be alimony for a short period of time

• 15:16Speaker 04

  to help with that transition and ease somebody in to being responsible for probably the first time in a long time of managing their own cash flow.

• 15:26Barry Ritholtz?

  So final question, if you could give one piece of advice to someone starting the divorce process, what's the best decision or even document that improves the outcome for everybody?

• 15:40Speaker 04

  In my state, there is a document that's required to be filed by each party in every case, and it's called a financial affidavit. I see in New York, I think it's called a net worth statement or so on and so forth. It is a daunting, overwhelming document, but really it's a form that you're normally required to, you know, sign, take an oath and say that what you put on here is truthful. But you outline all of your sources of income, all of your expenses, all of your assets and all of your liabilities. So from a financial standpoint, if you can take the time and make that as accurate as possible, that's going to really go a long way to helping you, your lawyer,

• 16:22Speaker 04

  and the other financial professionals on your team get a really precise idea of what we're dealing with. So spend that time, take the time upfront. And you may not have all the information that you need to answer that question until you get the discovery from the other side. And what I tell people all the time is, that's okay. Disclose it and then put a footnote that says, hey, I don't have this information. And when I get it, I'll update it. And then when you really break it down like that and let people know, hey, you can amend this document. I see them start to relax a little bit and say, okay, I got this.

• 16:58Barry Ritholtz?

  So to wrap up, I'm going to quote Patrick. "Divorce is really a financial or tax problem disguised in a divorce costume." And that really sums it up. It's as much about separating your personal lives as it is to figuring out your financial and asset lives going forward. Take it seriously. Make sure you get good counsel and follow the process that your lawyer and financial advisor walks you through. I'm Barry Ritholtz. This has been Bloomberg's At the Money.

• 17:44Speaker 05

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