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Divorce in Today’s Economy

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While divorce has always been an expensive undertaking, higher inflation is making it an even costlier event.

As people cope with rising costs for nearly everything they need to buy, inflation is also having a significant impact on divorcing couples. It now costs more to maintain the same lifestyle, which is stretching people’s wealth as they split one household into two. Also rising are interest rates, as the Federal Reserve tries to get inflation under control.

Navigating a divorce while preserving wealth in the current economic climate will require sound planning, expert advice and likely a willingness to compromise.

Spending more to separate

The decision to divorce spurs a host of other critical decisions: Who will keep the marital home? Where will the other spouse live? Will the primary caregiver have to work outside the home? Inflation raises the stakes for all of these questions (and more).

Home prices and rents have risen by double digits in many areas. Prices for cars and furniture have gone up, as have wait times for delivery. Building two households after a divorce has the potential to put a significant dent in a family’s wealth.

In addition, the “grey divorce” trend, in which divorce rates are rising among couples in their 50s and 60s, makes time a significant factor. Older couples may not have as much time to rebuild their wealth if it takes a significant hit during a divorce. The fact that the U.S. may be heading into a recession only adds to the issue. The key is to pursue strategies that seek to preserve as much wealth as possible. There is simply too much to lose and, depending on your age, potentially not enough time to recover.

Impact of higher interest rates

Between March and November 2022, the Fed has hiked its benchmark interest rate six times, and additional increases are planned. Higher interest rates are raising the cost of borrowing and adding unexpected complications to the challenges of divorce in three key ways:

1

Mortgage rates

It is common practice for the spouse who remains in the marital home post-divorce to be required to remove their ex from the mortgage. The only way to do this is to refinance. But given where mortgage rates are today, that might mean giving up a 3% rate (or less) on the current mortgage for a 7% rate on the new loan. A more expensive loan will have an impact on monthly cash flow. In addition, depending on the new debt-to-income ratio, qualifying for a new mortgage might not even be possible.

2

Liquidity challenges

Many high-net-worth divorces include the division of illiquid assets, such as business, real estate or private equity interests. In years past, finding sources of inexpensive debt to buy out the other party’s interest was a common practice. Today, this has become increasingly difficult, forcing some to co-own these types of assets even after divorce.

3

Market volatility

The rise of interest rates is also creating extreme volatility in the equity and fixed income markets, making it harder than ever to equitably divide investment accounts. Account balances are dramatically changing week by week. An unfair division of assets could result if a spouse elects to take one account over another without fully understanding the holdings. It’s also important to understand the potential tax consequences if rebalancing the account post-divorce is necessary in order to fund new goals, reduce risk or both. Working with a trusted financial advisor and CPA can help a divorcing couple accurately value their investments, even in a volatile market.

Working together to protect the family’s wealth

Despite the stress of inflation, rising interest rates and market volatility, it is important for divorcing couples to recognize that working together in the midst of all the uncertainty can help protect the wealth they have worked so hard to create over the years.

Seeking out expert advice, becoming informed on the available options and keeping emotions at bay is key to give divorcing couples the perspective they need to evaluate the entire picture and make informed decisions — which is more important than ever in today’s economic climate.

Case Study: Finding a compromise they both could live with

A client couple, both over 55, owns a commercial interior design company that is worth about $20 million. The wife started the business 15 years ago, and the husband joined five years later. The business has provided them with a good standard of living and, while they do not make great life partners, they are good business partners. Both spouses want to remain involved with the company and continue to receive an income, and neither of them has the ability to buy the other out.

They disagreed over the ownership structure of the business, however. Each one wanted the maximum they could get, and they both wanted to retain a majority interest in the company so they could make unilateral decisions. Rather than wait to divorce and litigate the issue, they each hired a family law attorney to serve as a consultant. Given today’s economic uncertainty, they both knew that a recession would reduce the value of their business — and that litigation would only make things worse.

The couple settled on an ownership structure that they could both live with. The wife gave up more ownership than her consulting attorney thought she was legally entitled to, and the husband received more than his legal share, but ultimately gave up a majority stake. They worked with their advisors to create a postnuptial agreement that detailed their percentage of ownership in the business, their respective salaries, and how distributions of excess profits, or future contributions to cover expenses if things get tight, would be handled — all before the couple filed for divorce. While neither of them “won,” they have protected the value of the business, which they can use to fund each of their lives going forward.

Additionally, the couple struggled with what to do with other assets, particularly the marital home they had shared for more than a decade. They worked together with their financial advisor, who asked key questions to better understand their immediate and long-term goals post-divorce — which for both spouses was financial security. A comprehensive analysis of their assets and estimated expenses post-divorce helped them to see that each could best meet their goals by selling the home, and splitting and investing the proceeds. Selling the home also allowed them both to reduce their living expenses, which provided some peace of mind in the midst of today’s financial uncertainty.

For help navigating divorce amid rising costs and interest rates — or helping your clients do so — please reach out to one of our advisors.

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Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel.  All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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