Cash Flow Modelling on Divorce

Divorce is, for too many, an unfortunate life event and one that often creates an unsettling financial insecurity. A marital breakdown can throw an individual’s financial plans and the investments that power them into disarray. This will have a negative effect on future lifestyle aspirations.

At Forrester Boyd Wealth Management we find that using cash flow modelling during divorce negotiations can help to assess and identify an individual’s financial needs and make sure that any financial settlement which is reached is fit for purpose, from their perspective at least. If we are in a situation where your client has already received their settlement, the emphasis, using cash flow modelling would be on managing realistic expectations of spending and lifestyle goals for the future and ensuring that they do not run out of money.

Our specialist financial planning support can be instrumental in assisting your clients review their circumstances, re-establish their goals and navigate their way through what may be uncertain territory. The knowledge that your client’s financial situation is being continually reviewed by a fellow professional, should help deliver peace of mind.

What is a cash flow model and why does your divorcing client need one?

Essentially, a cash flow model or forecast is a detailed summary of your client’s finances. It takes into account all their assets, liabilities, income streams and expenditure. It can be a complex or daunting task for certain clients to organise and fully understand their finances, especially in circumstances where they have not been directly responsible for them during the marriage. We find that building a plan with them makes it easier to understand what type of settlement they require, which of course will also help you to help them.

For those clients going through a divorce, developing a realistic and sensible cash flow model will assist them to ascertain the level of income they will need for their future. In addition to taking into account day-to-day spending it can also include additional future requirements, retirement income, the cost of dependents such as school fees and even expenditure on holidays, and ad-hoc items such as house improvements. Inflation, future returns investment growth, discussed and agreed with your client, as well as interest rates and taxes will also be factored in.

Of course, it is not always possible for a client to maintain exactly the same standard of living in the aftermath of a divorce and a cash flow model can highlight this and help the client to manage spending and expectations going forward. Different scenarios can be modelled in order that comparisons can be made and discussed as part of the negotiations.

What about post settlement?

A cash flow model is essential for managing future expectations. If it shows that the client has the potential to run out of money, it is far better to know this at the outset and review spending accordingly, rather than be unpleasantly surprised further down the line.

Establishing a financial plan once they have reached a settlement is essential for your client, but this will be worthless if they fail to continue planning and it is vital that they review their objectives at least annually to assess whether they are on track to achieve their lifestyle aspirations. Changes might have to be made or objectives amended as time progresses and we would meet with your client at least annually to this end.

If a capital lump sum has been awarded, cash flow modelling can be used to work out how to structure a suitable investment portfolio that can provide income in the most tax efficient way and also in line with the client’s attitude towards investment risk.

Why work together?

Our cash flow modelling tools, which also facilitate budgeting, enable solicitors and our advisers at Forrester Boyd Wealth Management to collaborate to support clients going through a divorce and create a structured plan for the long term. With expertise in ever evolving areas such as pension sharing, investments and financial protection, our highly qualified team is here to help you and your clients through all the difficult stages of the divorce process and hopefully enable them to view the future with a degree of confidence.

By working together, solicitors and financial planners can ensure that their separating clients can undergo as smooth a transition as possible to their new lives. Our cash flow modelling tools are a fabulous and practical way of ensuring that a client has sufficient money to fund their day-to-day life, future needs, goals and aspirations and ultimately their retirement.

To discuss the benefits of cash flow modelling on divorce, please contact us for a meaningful discussion on how we can support you and your clients. We would also be keen to elaborate on how we use the tools in other areas that may be relevant to your firm, such as planning for the future cost of care or in the negotiation of a PI settlement.

The Role of the Trustee when it comes to Investment

The role of a trustee is of course one that should not be entered into lightly, as it carries risks and responsibilities. Whether appointed as a trustee under a will or standing as a trustee of a trust established during an individual’s lifetime, there are specific duties that trustees must comply with. In this article, we will consider those duties and responsibilities in more detail and the specific requirements in respect of trust investments set out in the Trustee Act 2000.

Whether, in the case of will trusts, where the executors will be the trustees, where funds are set aside for a child or children under the age of 18 via a trust, where parents or chosen trusted individuals or professionals, such as a solicitor.

Dealing with trust investments

Quite evidently you will not need us at Forrester Boyd Wealth Management to advise you about the responsibilities of honesty, integrity and good faith on behalf of any trust’s beneficiaries. Indeed, these very words are by-words of your profession and codes. However, when acting on behalf of future beneficiaries, particularly in the difficult and turbulent times for world markets, we might be able to support you, as trustees, when it comes to investing assets in line with a trust’s objectives.

The Trustee Act 2000 introduced updated default rules for investments made by trustees. Unless the powers conferred by the Act are over-ridden within the trust deed, the Act provides significantly wider investment powers than previously and gives trustees the power to invest the trust capital as if they were the absolute owners themselves.

A statutory duty of care applies to all trustees, whereby they must exercise such care and skill as ‘is reasonable in the circumstances.’ A professional trustee, or one having special knowledge and experience, would be subject to a higher duty of care. This statutory duty applies to decisions taken when investments are made or reviewed, property or land is purchased, managed or insured, or if a decision is taken to appoint a third party to assist in the investment process. The standard investment criteria set out in the Trustee Act 2000 stipulate three key elements that must be adhered to.

Firstly, trustees need to ensure that the investments selected are suitable for the trust in question. Factors that a trustee must consider here are the objective of the trust and requirements of the beneficiaries, the time horizon for investment, and the level of risk to which trust investments are exposed.

Secondly, any investments selected need to show sufficient diversification, as appropriate to the trust in question. For the majority of cases, this means that the investment strategy needs to allocate funds across different assets (such as equities, fixed interest securities, property and cash) geographies and sectors. The precise level of diversification will be determined by the terms and purposes of the trust. For example, in the case of a trust holding £5,000 for the benefit of a child who will be 18 in a year’s time, it is highly likely that a cash deposit would be appropriate and the need for diversification would be low. Conversely, a large trust fund providing income to a beneficiary and capital to residual beneficiaries in the future, would be expected to invest in an adequately diversified portfolio and this is perhaps where Forrester Boyd Wealth Management can add true value and expertise.

Thirdly, trustees need to keep investments under regular review. This is frequently overlooked by trustees, and the importance of this requirement cannot be overstated. In today’s rapidly changing investment landscape, arranging an investment portfolio and not reviewing the suitability and performance on a regular basis could lead to significant underperformance, and invite criticism from beneficiaries. It is understood that a regular review is absolutely key to any trust or indeed client where Forrester Boyd Wealth Management are involved.

The need to obtain advice

The Trustee Act requires trustees obtain qualified investment advice when considering exercising the power of investment or reviewing existing trust investments. The only exclusion to this requirement is where trustees reasonably consider obtaining advice to be an unnecessary step, for example, where the trustee believes they possess the relevant skills to reach a decision. Given the potential risk of criticism or litigation from beneficiaries, we would not expect to see many trustees make decisions themselves without seeking appropriate advice.

To assist with the regular review of trust investments, trustees are able to delegate certain functions, for example, ongoing management of trust investments, to an agent, who acts on the trustees’ behalf. When delegating this responsibility to a professional, there needs to be firm agreement in place as to the objectives of the trust investments, the level of risk and any other guidance, such as the need to produce income that is relevant.

Frequently, trustees look to appoint an adviser such as Forrester Boyd Wealth Management who can build suitable portfolios or assist in appointing an investment manager or managers to do so on a discretionary basis. This will ensure that the trust portfolio is kept under close review and changes are made to the investment portfolio as appropriate.

If you are interested in discussing the above with one of our experienced financial planners at Forrester Boyd Wealth Management please contact us. As SIFA Professional members we can also provide you with a copy of the widely respected ‘Guide to Trustee Investment’.