With more than a third of Canadian marriages ending in divorce, most advisors will at some point find themselves guiding clients through this emotionally painful and often financially destabilizing time.

As a financial advisor, you can be of enormous assistance in helping clients get a clear picture of the long-term financial ramifications of decisions concerning division of assets, preferably before the legal process gets underway.

“People are looking at a dramatic change in lifestyle and emotions are often high,” says Doug Lamb, a certified financial planner and chartered accountant with Spera Financial Inc. , an affiliate of Dundee Private Investors Inc. in Toronto. “Clients may not be in a frame of mind to make decisions with long-term consequences for themselves and their families.”

“It may be impossible for both people to maintain their current standard of living once they’ve made the transition to two households,” says Cathie Hurlburt, a CFP and registered financial planner with Integrated Planning Group in Vancouver, an affiliate of Assante Financial Management Ltd. “But there is more than one way to di-vide the assets, and some ways are smarter than others. The problem is: tough adjustments often need to be made, and many people have not managed money well as a couple.”

Although divorcing parties are entitled to half of the assets that were grown during the marriage, that doesn’t mean each asset gets divided down the middle. Trade-offs are often involved. The husband may hang on to his entire company pension, while the wife keeps RRSPs or non-registered investments of equivalent value.

“People need to get an idea of the value and tax implications of various assets,” says Linda Cartier, a CFP and an RFP, president of Financial Decisions Inc. in Sudbury, Ont., and co-founder of the Academy of Financial Divorce Specialists along with Akeela Davis, a CFP and RFP with TD Waterhouse Private Investment Advice in Vancouver and author of Your Divorce, Your Dollars. “Many are not aware that some assets have an embedded taxable capital gain that will be triggered when the asset is sold. It’s not enough just to get an appraisal on a property or a valuation of a stock portfolio.”

While RRSPs are considered joint property and can be transferred tax-free from one spouse to another in a divorce settlement, no matter whose name they are in, doing so does have tax consequences. For example, when money is withdrawn from an RRSP, it is fully taxable as income, and the recipient’s tax rate in retirement must be factored into the calculation when valuing RRSP assets. And, if the higher-income spouse has been putting money into a spousal RRSP for the less wealthy spouse as an income-splitting strategy, should the less wealthy spouse cash it out within a three-year period after a deposit is made, the contributor is liable for the taxes on any withdrawals made in that three-year window.

“Lawyers often miss aspects of future cash flow,” Hurlburt says. “They may not have a firm grasp of all the financial implications.”

Similarly, the cash value of a house must be adjusted for legal costs and commissions that would be incurred on a sale. The matrimonial home is typically the larg-est asset owned by a couple and is considered joint property from the first day of the marriage. It is also the asset with the highest emotional significance. One of the divorcing spouses may want to keep the house to provide continuity for the children. If there is a recreational property, its value can be balanced against the primary residence, but it does not have the same tax-exempt sta-tus. The second property’s value at the time of the divorce must be adjusted to take account of the capital gains taxes that would be due if it was sold at current market value.

To arrive at an equitable split, therefore, the dollar value of RRSP assets, an investment portfolio or other taxable assets cannot be measured directly against the dollar value of a tax-free principal residence because of the different tax considerations.

“The housing decision is huge,” Hurlburt says. “Here in Vancouver, people spend as much as 70% of their income on housing. That puts a huge strain on the budget, and when couples split up, there is often not enough left over for each to have a similar home. The solution is to downsize after divorce.”

@page_break@Pensions are another complicated asset, particularly for couples who have been married for many years. With a growing number of couples divorcing later in life, often when it’s too late for a dependent spouse to establish a career, pensions are a valuable source of income and are typically combined with other financial support payments. Future pension income has a value at the time of divorce, and spouses are entitled to a share of their partner’s pension or to a lump sum based on the present value of that future income stream. A variety of considerations come into play when calculating the value of a pension, including the duration of the marriage and the age at which the pension-holder plans to retire. An accurate estimate usually requires an actuary’s expertise.

Pension income is similar to spousal support payments because divorcing spouses must decide if they want to be tied to their former partner or whether they want to negotiate a one-time settlement. The problem with support payments or a decision to take a share of a spouse’s future pension is that circumstances may change. The spouse who would be paying a divorced partner a share of his or her pension could die before becoming eligible for a pension, or could change jobs or become disabled. Taking a lump sum or a larger share of RRSPs at the time of divorce may make sense for a spouse without a pension or with a smaller pension.

“Sometimes it’s better to have ‘a bird in the hand’,” says Lamb.

A growing number of advisors are acquiring designations in divorce-related financial planning to serve existing clients and attract new business. Cartier’s Sudbury-based AFDS offers a course for financial planners on the financial aspects of a divorce. The course covers Canadian taxation rules, pensions and RRSPs, and includes self-study and class sessions. Graduates earn the financial divorce specialist designation, as well as continuing education credits. The Michigan-based Institute for Divorce Financial Analysts also offers courses in Canada for the certified divorce financial analyst designation.

The emotional trials of a divorce often require a little hand-holding, but clients need to realize you are there to help them make informed financial decisions. Show empathy, but encourage them to seek professional counselling if they are having emotional difficulties.

Similarly, you are not responsible for providing legal advice, although your work can reduce the time and cost of the legal process.

If a couple — and both partners are clients of yours — are divorcing, it’s best that you advise only one partner and recommend the other to another advisor. Alternatively, you may find that an impending divorce is the reason a new client comes to you; if so, you can work freely to determine what’s at stake. IE