As I sit in my office looking at a wave of winter storm clouds rolling over Detroit’s skyline, I’m reminded of the wave of stock market induced panic rippling through many of my divorcing clients. Unfortunately, the recent market downturn coincides with the month that has the highest divorce filing rate of the year: January. In fact, as of January 20th, the S&P 500 was down a dramatic 9.03% YTD. Since divorcing clients are often already feeling unnerved about their financial future, the stock market tumble can heighten their discomfort and may cloud their ability to make sound decisions.
Although counterintuitive, the current stock market environment provides divorce advisors an opportunity to raise important financial issues that their clients might not have been willing to discuss during an expanding market.
Be proactive by reaching out to your clients to discuss their concerns and redirect their worry bugs into a positive direction.
Current Cash Flow Concerns?
For those in the process of divorce, their financial future is uncertain. Yet a properly diversified portfolio should take into consideration market fluctuations and have a stable cushion of cash on hand. If the divorce has raised concerns about whether or not there is enough liquidity in the client’s portfolio, this warrants an appointment with a financial planner to discuss a projected budget.
Everyone in the process of divorce should prepare a monthly spending plan or budget. First, it’s important for the client to quantify the cost of maintaining their current lifestyle so they can assess what they can and can’t afford going forward. Further, a detailed budget gives attorneys the information they need to negotiate on behalf of their client. Substantiating the current lifestyle is a critical component of the alimony equation in most states.
The stock market decline is the perfect excuse to remind your client to get to work on that detailed budget.
Ready to Veer off the Course?
Although none of us can accurately predict where we are in the market cycle, it’s never a good idea to “sell low.” Certainly, the stock market may fall even more in the coming months, but that shouldn’t change a long-term investment strategy.
It is worth asking those in the process of divorce if they’ve assessed their current long-term investment strategy to see if it will be appropriate after the divorce is over. Now is a great time for them to meet with their financial planner (or find a new one) to start thinking about their post-divorce game plan. Since an investment strategy is based on current cash flow needs, risk tolerance level, portfolio size, anticipated retirement income and personal tax situation, it stands to reason that a divorce mandates an updated financial plan. It’s never too early in the divorce process to recommend that your client seek financial planning advice.
Tax Implications of Selling Stock during a Divorce: Tip for Attorneys
Sometimes, regardless of a pending divorce, it does make financial sense to sell an asset at a loss, particularly if clients perceive that the value of that asset will continue to decline for the medium- or long-term. The good news is that capital losses are used to offset the taxes owed on capital gains and can be carried forward from one year to the next. The value of the capital loss (the potential tax savings in the future for one party) can be substantial and therefore needs to be considered within the context of the divorce settlement.
The financial aspects of divorce can be complicated. A jittery stock market can exacerbate these issues. A skilled financial advisor working hand-in-hand with a divorce attorney can help clients remain calm through these uncertain times.