Divorce planning a modern “must”

The breakdown of a marriage is hard on clients in many ways: emotionally, physically and financially. The only easy thing about it is getting the court to sanction the dissolution.

According to Statistics Canada, more than 100,000 Canadians get divorced annually, with 43% of marriages ending in divorce before the 50th anniversary.

A study by the BMO Retirement Institute estimates those who get divorced between the ages of 67 and 80 have the largest decrease in wealth and the largest increase in poverty. This is particularly alarming, as this group also has the highest rate divorce.

The challenges and pitfalls of planning for such an event are numerous, more so because advisors have to steer their clients away from the emotional turmoil that they are going through. But the benefits are rewarding and worthwhile, says Caroline Dabu, vice-president, retirement and financial planning, BMO Financial Group.

“Because divorce is an emotionally charged event, financial implications—especially over the long-term—can be underestimated,” said Dabu. “For individuals going through a divorce, it’s essential to take a step back from the emotional element and consider finances, both short- and long-term, carefully, whether that means revisiting your financial plan or speaking with a financial professional.”

For better or worse, Canadians are increasingly factoring a divorce scenario into their retirement planning.

“There are an unprecedented number of people who are entering retirement and going through divorce at the same time; a third of marriages won’t make it to their 30th anniversary [and] the rate of couples divorcing at age of 65 has doubled since 1980,” said Dabu. “The financial implications of couples divorcing when they are heading into retirement, or in retirement, are more complex [as] they have accumulated more assets.”

Financial shock A single person heading into retirement not only faces the prospect of a declining income, but often similar, if not higher, living expenses. Yet most Canadians only rank the financial impact third on the list of areas of life most seriously affected by divorce, after family and health.

For clients contemplating divorce, or in the middle of one, it is vital to consider joint and personal assets, bills and bank statements, joint accounts, and investments pension.

“[Have] that checklist in front of you…classify them based on pre-marriage and separation dates,” she said. “Another important point is drawing up an early financial agreement to state [whether] debt, for instance, should be split.”

Those with general familiarity with family law know how important it is to update wills and power of attorney between separation and divorce, she added.

Tax relief in grief Divorce will also have an immediate impact on future tax returns, said John Waters, tax planning specialist, BMO Nesbitt Burns.

“Certain deductions may not be available; certain tax credits, like the spousal credit or pension income splitting options, may not be available; if there are children involved, the child tax credit and childcare expenses [deduction] may not be available to both parties,” he said. “These types of things often need to be negotiated.”

Another consideration is the loss of the ability to transfer property to a spouse, in lifetime or upon death, on a tax-deferred basis and the loss of ability to pass registered plans tax-free to a spouse designated as the main beneficiary.

Tax-Free Savings Accounts (TFSA), for example, are not adequately understood by many, said Waters. “It is possible to transfer this TFSA account directly from one spouse to the other spouse’s TFSA account on the marriage breakdown, but recognize that it would have no reinstatements of the TFSA room of the transferor spouse, nor [would it be counted toward] contribution room of the recipient spouse.”

Real estate Planning ahead when emotions are not high is a responsible approach to protecting one’s future, says Laura Parsons, a BMO mortgage specialist. Too many people do not consider their home equity, and they may be forced to dispose of their home when in an unfavourable market.

“After we take into consideration mortgage penalties, legal fees, realtor fees, and land transfer taxes, there could be nothing left,” she warns. “One of the best approaches is to get one or two independent appraisals to establish the value of the home an seek advice from a realtor and a mortgage expert.”

Fortunately, younger couples seem to have a better handle on their real estate obligations; they tend to keep their finances separate and contribute to a joint account to cover their shared costs. “I don’t think it’s such a bad idea and I think they understand more what could happen than [the older generation],” said Parsons.