How Advisors Can Help Wealthy Clients Through 'Gray Divorce'

What You Need to Know

The divorce rate has increased among couples over 50 and even more so among HNW couples.
While many HNW couples have complicated marital agreements, these documents often are far from ironclad.
In most U.S. states, inheritances are not subject to equitable division because they are not deemed marital property.

As a term describing the rising divorce rate among couples 50 and older, the “gray divorce” was coined in 2004 by AARP. Dividing assets in middle age or later in life is stressful and significant for most if not all couples. It may be the most substantial financial setback any of the partners will ever face. This is a reason why high-net-worth and ultra-high net worth people are usually counseled to bring a financial advisor to the negotiation table in case of a forthcoming divorce. 

Clients need to have a complete financial understanding regarding the division of their hard-earned assets. As a financial advisor, you need to provide your expertise when quantifying the couple’s long-term needs, such as asset allocation, retirement funds, trusts and complex financial investments. You will help determine your clients’ future for years to come. So, how can you effectively be in your clients’ corner and be a valuable part of their representation team?

The Elements that Make a Gray Divorce More Complex

While the social stigma associated with divorce has significantly diminished over the past few decades, the divorce rate has increased only among couples over the age of 50, and even more so among high-net-worth partners. The reasons why people decide to split after so many years spent together include poor financial management, addiction, growing apart and infidelity. 

Gray divorces can be particularly hazardous to financial health. For many people, divorce after 50 comes with a significant financial shock. A study from the Journal of Sociology found that people who get separated after age 50 should expect a whopping 77% drop in their assets.

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Furthermore, many women also experience what has been described as a “collapse” of their income after a gray divorce. Starting in 1990, the rate of gray divorces has doubled in the U.S., and researchers estimate it will triple by 2030.

High-net-worth divorces are more complex than the average divorce because of the more convoluted financial situation these couples find themselves in. Property division becomes a significant point of difficulty in HNW divorces because wealthy couples often have unconventional assets that can be challenging to value and divide. Besides traditional financial assets such as bank accounts, HNW couples often have one or more of the following:

Retirement accounts.
Investment accounts.
Stock options.
Business ownership.
Real estate.
Vehicles.
Artwork.
Jewelry.

In addition, most HNW couples have complicated marital agreements, including prenuptial and postnuptial agreements, that must be thoroughly discussed and, in some cases, defended throughout the divorce process. Some of these documents are far from ironclad and leave plenty of room for interpretation.

While some U.S. states are community property states, others are separate property states. In the former, the property acquired by either spouse during the marital union is usually deemed jointly owned by the couple. In the latter, the person who acquired the property typically remains the owner regardless of what happens.

Because the legal arena of gray divorce is so complex, the guidance of a financial advisor is essential for the couple who seeks to end their marriage. HNW partners can get a financial advisor involved in their case once their divorce settlement is agreed upon. Having such an expert retained early on will help the client make the right decisions, reorganize their life, and take control of their financial future.

Division of the divorcing couples’ assets will ultimately depend on, among other things, the advisory services the clients receive, laws in the state where the divorce occurs, and the specific facts of the case.

How Financial Advisors Can Handle a Gray Divorce Efficiently

As a financial advisor, you can help HNW partners comprehend their situation and how they will be affected by the separation. You will also offer added perspectives in assisting the couple in evaluating various potential settlement proposals. 

Relevant Resources

Some of the essential details you will need to know and comprehend before joining the negotiation table in a high-net-worth divorce are family assets, retirement accounts, debt, and the earnings of your client’s spouse. You will have to do a careful and thorough asset and debt inventory to allow the lawyer to secure the amount your client is entitled to.

Moreover, because divorce often involves overwhelming emotions, HNW spouses’ judgment can easily be compromised at times, causing the couple to make mistakes that could take years to recover from or cost hundreds of thousands of dollars to repair. Therefore, your involvement is of utmost importance. The following are the essential aspects you can help your clients with during their HNW divorce procedures.

The Marital Home

Sometimes both partners in a high-net-worth divorce have a visceral reaction to the divorce and cling to their marital home, often triggered by emotional experiences and memories. Your role is to make them question whether keeping the former marital home is wise for them and their family, especially when children are involved.

For instance, if a significant mortgage is attached to the property, it might not be worthwhile to keep the house. This is where you come in. You will need to run a cash flow model to determine whether the cost of the mortgage along with the regular bills (property taxes, maintenance, etc.) can be covered by the spouse who wishes to keep the house, and at the same time whether doing so also allows them to meet all their other financial needs (for example, retirement savings, spousal support, alimony, etc.).

Investments and Savings

In a high-net-worth divorce, investments and savings are often challenging to divide between the former couple. Investments and savings will typically be part of the financial divorce settlement, and dividing these financial assets should be relatively straightforward if the partners can negotiate with each other. 

Nonetheless, spouses might need to value investments and savings and ultimately pay taxes if they sell, transfer, or cash them in. You can help them by carefully analyzing the situation and eventually shedding light on the bigger picture so that the partners can make the decision that favors each of them the most when it comes to investments and savings.