At SVB Private Bank, we are here to help guide you through important life milestones and help you plan for major financial transitions. In this article, we look at the impact divorce may have on achieving your personal financial goals and offer tips specifically for entrepreneurs and investors to more easily navigate this complex event.
For those that don’t have financial protections in place, it’s common to become overwhelmed with anticipation of the challenges that lie ahead when going through a divorce – a stressful process, difficulty maintaining lifestyle and the ability to meet long-term financial goals. These concerns create a significant amount of “emotional overhead”, which can short-circuit your ability to think clearly and make good decisions.
However, there are financial planning strategies and steps you may want to take as you prepare for this transition. Here are five recommendations tailored for entrepreneurs and investors.
- Consult the experts
- Get organized
- Conduct a thorough review
- Update estate trustee, power-of-attorney documents.
- Understand the impact on net worth
1. Consult the experts.
Each spouse in a divorcing couple typically chooses their own lawyer. But also consider consulting other specialists who can advise you on tax, estate and insurance issues.
Choosing an attorney is your most important step. An experienced divorce attorney will help you understand the path ahead, including your rights and responsibilities. A common misconception is that once each spouse selects a lawyer, mediation is no longer an option. Opposing lawyers can help forge solutions and sometimes encourage mediation as a way to promote communication and find a path to resolution.
SVB Private Bank Relationship Managers may help you assess your current and longer-term needs, including how to handle your insurance, assets, un-vested shares, estate, and liquidity needs to meet your objectives. They can connect you to other professional advisors, including an estate planner and tax professional, to help you set new goals and modify your financial planning strategy.
Consider consulting a CPA to help you to understand the tax implications of divorce. It’s important to identify each party’s responsibility for current tax liability, allocation of estimated tax payments, refunds and tax loss carryforwards. The CPA may also help you understand the tax consequences of your new filing status, potential home sale, potential sale of your company, asset transfers, medical expenses, dependent exemptions, child support, and any payments to your former spouse.
Key takeaway: The right experts can provide you with timely advice to help reassess financial planning goals and develop new strategies to reach a successful outcome.
2. Get organized.
Divorce proceedings often hang on organization and recordkeeping. Working with experts, assess your financial picture and create a decision-making framework to help you know what decisions lie ahead and the implications they hold. To do that, your SVB Private Bank Relationship Manager will review a number of items with you, including:
- Assets: checking, savings, brokerage and retirement accounts statements; capital account statements.
- If you’re a venture and/or private equity investor; shareholder certificates and valuation detail (e.g., most recent 409A valuation) for any private company ownership
- Grant and exercise documents
- Keep in mind that un-vested and un-exercised private shares are not the same as common equity
- Income information: tax returns, W-2s, and recent pay stubs
- Liabilities: mortgage statements, credit card accounts, student loans, medical bills and other personal debt in your or your spouse’s name
- Other: employee benefit plans and insurance policy statements
Key takeaway: Thorough records will be helpful when dividing assets and liabilities. Creditors can pursue you for liabilities on joint accounts, regardless of whether you or your spouse incurred the debt – so it’s important that you uncover and report all liabilities. One must-to-do is obtaining your credit reports from each of the three major credit-reporting bureaus to ensure you have a complete list of debts attached to your name.
3. Conduct a thorough review.
Sometimes a divorce may dramatically change your income and expenses. So it’s important to create a new personal budget to reflect new monthly costs, including housing, insurance, food, utilities, and transportation. Reevaluate your cash flow, retirement savings, educational savings accounts and insurance needs. Also, review your public and private investments – and any ongoing financial commitment those investments require – in light of your new circumstances.
If an exit occurs alongside the divorce, make an assessment of your option exercise program and determine the time frames you have for exercise, lockups, escrow and related payments. Stay realistic on payouts if the exit comes with stock payments and not cash. Be especially aware of expiring grants as you go through and emerge from the divorce proceedings as many clients find themselves in a time and cash crunch.
Once you fully understand your financial picture, you and your advisors are prepared to evaluate your goals and adapt your strategy as needed.
Key takeaway: Know your personal financial picture, including assets and liabilities. Be aware of your option exercise plans and the timing. The clearer the picture, the better you can design strategies to reach a successful outcome.
4. Update estate trustee, power-of-attorney documents.
Make sure to review your trust and will. There are some critical items that you may want to update immediately. For example, check whom you have chosen to serve as your estate trustee as well as your financial and medical power of attorney. This is particularly important if the divorce is contentious. Note that certain documents cannot be changed until after your divorce is final. Your will and beneficiaries on retirement accounts and insurance policies should be updated after you have a divorce decree; state laws typically don’t allow you to disinherit a spouse.
Key takeaway: Estate planning can easily be overlooked during a divorce but it’s critical to re-evaluate your plan and make sure it reflects your life change. Consult with an experienced estate planning attorney who can discuss the benefits and limits of estate planning during the divorce process.
5. Understand the impact on net worth.
State laws vary on rules for splitting property and assets acquired by either or both spouses during the marriage. These assets may include taxable investment accounts, retirement accounts, bank accounts, annuities, life insurance, real estate, cars, etc. Your advisors can help you understand the impact on your net worth and then adjust your financial plan to meet new goals.
Investors and entrepreneurs may face concerns about how a divorce will impact their business, particularly since equity in a business likely is your most valuable asset, not to mention the time and resources spent nurturing and growing it. Unless you’ve taken steps to address this situation in advance (e.g., pre-nuptial/post-nuptial or shareholder/partnership agreements that address divorce), your spouse likely is entitled to part of the asset. Other strategies you may consider:
- Give your spouse a greater percentage of marital assets in exchange for his or her share of the business asset.
- Agree to a long-term payout – with interest – equal to the value of your spouse’s share of the business (often called a Property Settlement Note).
Key takeaway: It’s incredibly difficult to divide up what you’ve worked so hard to build together. No doubt, you’ll be tempted to make decisions that are driven by emotion. Your advisors can help you keep these emotions in check and focus on what’s most important – planning for your new future.
SVB Private Bank is here to help.
While the divorce process is an unpleasant experience, it’s possible to navigate this transition while still addressing both your emotional and financial well-being. SVB Private Bank has the experience to help you navigate these challenges, and will work with your advisors to provide a path to reset goals and plan for a successful tomorrow.