Individuals with high net worth often present a unique situation to their respective matrimonial attorneys. There are simply more financial resources to fund support and to share. Substantial business assets are often involved and extensive categories of personal expenses (including nannies, private schools, second and third homes and an affluent lifestyle) must be reckoned with. The support question in a typical divorce is: how can two households be supported when this intact family could barely survive (financially) when they were together? In a high net-worth family, the issue is not can support be afforded, but how much support is enough? This expert advice will answer all of these questions, and make the process far less stressful.
Prenuptial agreements are one of the most effective tools in managing the exposure of one spouse’s significant assets to potential division. While a difficult subject to broach with your intended, a properly drafted premarital agreement can save the parties significant emotional and financial expense. These agreements can address property division, spousal support and virtually every financial issue that may arise during a divorce. High net-worth individuals that have a vested interest in protecting family assets and/or assets remaining from a prior divorce should especially consider a prenuptial agreement.
In fact, senior members of family businesses will often require young family members to enter such agreements before they will be granted full shareholder rights in the family business. If there is no premarital agreement in place, a divorce may expose the family wealth to possible division.
It is critical to any divorce but especially to a high net-worth divorce to have a detailed understanding of the financial lifestyle of the marriage as well as the assets and liabilities of the marriage. For a business owner, someone involved in a family business, or an individual with complex investments, this is even more important. Only with a complete picture and awareness of each asset and liability can your attorney effectively act to limit your exposure to asset division.
If you are a business owner or have an interest in a closely held business, you need to take steps to protect the business and your interest in the business from the effects of the divorce process. While it can be difficult to avoid involving the business in a messy divorce, it is possible to limit the exposure of the business to the interference of a non-titled spouse’s equitable claim for a piece of the business.
One way to do this is through a shareholder agreement clause that limits the transferability of stock in the event of a court order entered pursuant to a divorce. The shareholder agreement can also delineate business valuation methods, buy/back provisions and other terms designed to allow the titled shareholders to retain possession and/or limit damage caused by being forced to share the value of the company.
The applicability of the above-described asset protection mechanisms should obviously be discussed with your accountant and lawyer together. It would be prudent to involve an attorney specializing in estate planning as well.
As a preliminary step you should immediately schedule a meeting with your financial planner, accountant and attorney, discuss the exposure of each asset to being divided. You will also need to analyze the tax consequences related to the methods of any distribution. With an understanding of what you have and owe, your attorney will be able to present your complex financial picture to the court in a succinct and clear way. Because family courts are generally busy and have limited time to invest in any particular case, it is critical for your professionals to present a cogent plan of asset division to a judge.
There is a saying that “when you have nothing, you have nothing to lose.” This may hold true with divorcing couples who started with nothing. But with high wealth individuals, there is a lot to lose if planning is ignored. Nobody wants to disrupt their engagement with talk of planning for a possible divorce. To ignore long-established statistics is unwise, yet that is precisely what many individuals do. Families build a business and plan for business contingencies, yet they ignore interpersonal family crises that may interfere with the long-term viability of the family business. Marriage is not only an interpersonal relationship but also a financial relationship.
Divorcing couples often do not fully understand that the Internal Revenue Service and the state are financial partners in your divorce. Shifting of income from the spouse paying support to the spouse receiving support can create significant additional cash flow to both spouses.
Depending on the type of assets or interests subject to distribution, there can be serious tax ramifications as a by-product of the distribution. You and your attorney should work closely with your accountant or other financial professional to work through and identify the tax implications of support payments and property distribution. Failure to do so could result in significant loss of opportunity for maximizing after-tax cash-flow and asset values.
High net worth individuals have a distinct divorce advantage over individuals with little net worth; they can afford the divorce. Lower and even middle income and lower net worth individuals struggle to find the funds to maintain two households, fund child support and alimony, provide for college and leave themselves something other than debt. High net worth litigants are able to get beyond subsistence planning during their divorce. They are not forced to incur legal and expert fees to merely survive financially. Therefore, there is almost always an opportunity to bend in settlement negotiations without financially jeopardizing your future or the future of your children.
An Asset Protection Trust can be used to protect against changes in control of a company that may arise from unexpected family dynamics, such as divorce or the introduction of a new spouse into a business. The trust itself places ownership of the business into a trust with the intent to keep it outside the scope of divorce litigation.
If your wealth is related to a business, or other personal assets that must be valued, an expert opinion is often needed. That expert is frequently a forensic accountant who will help to determine the value of a business. Sometimes the expert may be a specialty appraiser (such as art). The difference between achieving a satisfactory result or being led to an unreasonable settlement may come down to a battle of who has retained the most effective expert advisors to value and structure division of assets.
The issues facing high net worth divorcing families are often different from the issues faced by lower/middle income divorcing families. As such, they must be planned for and approached in a manner befitting the unique issues that need to be addressed.
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