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How financial advisers can be ‘invaluable’ in divorce cases

4th July 2016

Having already turned down the billionaire's offer of £37m, former wife Christina Estrada is seeking five times that sum, enough to fund her alleged income needs of £6.5m a year.

The case is making headlines for her “excessive and exaggerated” demands, including a £68m house in Belgravia, £1m pa for clothes and £26,500pa to pay her mobile phone bills.

But it highlights the importance of properly preparing a client’s divorce case as to their future income and capital needs. This party is normally the wife, but there is no gender distinction and claims can be made on behalf of husbands as well.

London has attracted the super-rich divorcees like bees to a honey pot. Partly, this is because the English system insists on full financial disclosure from both parties and partly because it does not discriminate between the traditional male/female marriage roles of homemaker and breadwinner.

Largest payout to date

Spouses can seek a share, sometimes even an equal share, of the other’s wealth and one of the factors the court must take into account is the standard of living enjoyed by the family. The court has discretion to make whatever orders it considers to be fair and this has served to build up a reputation for London as being the divorce capital of the world.

"In the majority of cases, the assets and income are divided by reference to the needs of the parties. But where there are excess assets, interesting issues arise."

The largest payout to date is thought to have been that awarded to Mrs Cooper-Hohn in 2014, who received £330m representing about 36% of her financier husband’s £870m fortune.

In the majority of cases, the assets and income are divided by reference to the needs of the parties. But where there are excess assets, interesting issues arise, such as whether the unique effort of one party to the creation of the family’s huge wealth should be rewarded with a larger share of the capital, as was the case in Cooper-Hohn.

It would seem that the Estrada decision will not be based on equality either – her case is seemingly calculated by reference to her needs rather than the sharing principle. She is seeking the capitalisation of her maintenance claim so that she would receive one immediate lump sum in lieu of regular payments in the future.

When it comes to the preparation of a client’s case, the first stage is to complete the Financial Statement or Form E, the detailed form used to disclose all of their financial circumstances.

This is intended to provide a comprehensive picture of each party’s assets and income plus their future capital and income needs. There will be an opportunity for the other party to ask questions later if they need additional information or documents but costs can be saved by ensuring that the Form E has no gaps and likely questions are anticipated and answers provided in full.

Honesty is vital – if the other’s party’s solicitor has any suspicions that disclosure has not been full and frank, this can cause delay and push the legal costs up substantially.

Invaluable assistance from advisers

Prompt assistance from the client’s independent financial adviser can be invaluable at this stage, especially if the adviser is familiar with the requirements of the Form E. The adviser can ensure that all the necessary financial information and documents are collected and delivered to the solicitor in good time. The adviser can also prompt the client to consider any tax implications, such as capital gains tax on the sale of any of their assets, and to identify any issues that may arise as to contested valuations.

In respect of the assessment of the client’s future needs, they must state their full capital requirements, including housing, possibly multiple properties, in a high value case, cars and repayment of any debts. But the most troublesome aspect can often be the monthly expenditure budget, such as in the Estrada case.

The sharing principle does not apply to issues of income, so the quantum of maintenance is decided on the basis of need alone. The court will have regard to the parties’ standard of living, so while Estrada’s claims may seem extreme by most people’s standards, she may succeed if she can prove that this is the lifestyle she enjoyed during the marriage and it would be reasonable for that to continue.

At an interim hearing, the judge remarked that the husband had “throughout provided this family with an extraordinary standard of living and it is one which they both enjoyed”.

The balance can be difficult to find; if the budget is too modest, this can adversely affect the quantum of the client’s award but if the budget is exaggerated the court can view it as just a “wish list”.

This is illustrated by the notorious budget put forward by the charity campaigner Heather Mills in her divorce from Paul McCartney in 2008. She fatally damaged her credibility with the court by failing to put a rational and logical case for the future needs of her daughter and herself.

Despite the fact that the parties had lived in a fairly modest way, considering their wealth, during the marriage, Heather Mills put forward a ridiculously high budget of £3.25m a year.

This budget included items that simply could not be justified such £39,000 a year for wine - she is tee-total - and was penalised in the award as a result.

Clients must be advised that if the case proceeds to a final hearing, they have to be able to justify each and every item under clinically precise cross examination from the other party’s barrister. This can often mean careful analysis of the client’s bank account and credit card statements to ensure that what they think they might spend in the future is rooted in reality rather than their pipe-dreams.

But in the words of one High Court judge, “it is a mistake to regard the standard of living as the lodestar. As time passes how the parties lived in the marriage becomes increasingly irrelevant. And too much emphasis on it imperils the prospects of eventual independence”.

So the family’s previous standard of living will be a starting point for Estrada’s claims, but she will then have to show that it is reasonable for that standard to continue and that this would not be incompatible with the duty of the court to terminate her claims as soon as is financially viable.

The aim is to ensure that a financial provision order should enable a gentle transition from the marital standard of living to the standard that the wife should expect as a self-sufficient woman. If the marriage has been long and the wife will continue to have child caring duties after the divorce, the court is more likely to decide in favour of a life time award, known as joint lives maintenance, but such awards are hard to obtain.

Assisting with sensible calculations

Recent judgments have provided guidance to state that once the children of the family have reached year two at school, most wives could be expected to return to work at least on a part-time basis or to start retraining for a new career.

Much work may need to be done as to her likely income earning ability in the future and this leads to problems with the calculation of her likely future mortgage ability.

To borrow you must prove an income, but what if the income is uncertain? The wife may not have firm evidence as to her likely future salary or maintenance award.

There is therefore much scope here for independent financial advisers to assist with sensible calculations of future income and mortgage capacity reports plus also pension investments.

Parties may not be particularly financially astute, particularly if their former spouse has always made the financial decisions during the marriage and this is the first time they have ever had to be independent.

In addition to calculating future needs, there is much scope for advice as to the likely income that could be achieved from a capitalised maintenance award and the myriad of investment choices facing a newly divorced spouse.

The financial marketplace can be bewildering and careful advice from a financial adviser can make a huge difference to a spouse facing a worrying and uncertain future.

Judith Fitton's article was published online at The International Advisor on Monday 4th July 2016.

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