High Net Worth Divorce - Part 1

Couples with high net worth are defined as having one or more spouses with income over $250,000, owning valuable assets, or having significant family wealth. In a divorce situation, it is even more urgent for the parties to understand their assets and wealth so that they can better protect and preserve their financial interests for the future.

High net worth often means more complications in unwinding the financial assets due to their illiquidity, partnership nature, tax consequences and a myriad of other issues that are characteristic of being wealthy.

There are challenges that require possibly involving additional experts and professionals who can assist with the proper disposition of assets and wealth to be fair to both parties. These may include appraisers, accountants, estate planning attorneys, and tax attorneys for instance.

It will be most prudent for both spouses to gain a full understanding of the assets owned and other aspects of their financial situation before making any decisions on how to address issues related to property, income, trusts, and other financials. Being informed about all assets and liabilities as well as all sources of income and their projections gives parties a clear understanding of their current financial picture and helps with decisions about the division of assets for each party’s interests.

Agreements

If a prenuptial or postnuptial agreement is involved, it needs to be carefully reviewed to determine how it will affect the divorce and be sure to have it be applied correctly during the divorce process. These agreements typically govern what is considered separate property or marital property, how assets will be divided and whether support will be considered and if considered what constraints may apply.

Business or Practice

If a party or both have worked together (or individually) to build a business or professional practice, the ownership of the business entity will need to be determined going forward. A business valuation is usually the first step that will need to be taken, and it will ensure that you have a full understanding of the present and future value of business assets.  The disposition of the family business is a significant component of many high net worth divorces. The parties will need to determine whether one or both will own it going forward or whether it will be sold and proceeds divided. Other arrangement may also be relevant such as a buyout over time.

Real Estate

Property such as homes, vacation properties, timeshares, commercial properties and undeveloped land should be appraised to determine the financial value of these assets. Not only are the valuations important but the impact of changing local regulations and federal regulations should be considered.

Current and future expense associated with the property are critical to acknowledge in the valuation. These include any accumulated depreciation that will be recaptured in the future, trends in property taxes, cost basis of the property, and ongoing cost of ownership including taxes, HOA fees, and other ongoing expenses.

Finally, the future financial projections should be analyzed such as income potential and resale or tenant attractiveness,

Sources of Compensation

Retirement savings, deferred compensation, bonuses, equity compensation, and pensions can be significant for high net income individuals. These assets impact the current income flows for both parties, possibly affecting the obligation for support.

The impact of future employment, retirement age, and timing of the accessibility to these assets are key to future financial situations for each party.

Child Support

High income levels may also complicate decisions about child support. The income earned by both parents will be considered when determining each parent’s financial obligations toward their children.

Often, with high income earners, children have the privilege of many extra-curricular activities. These need to be considered and funded in addition to the typical child support which covers housing, food and clothing. Besides the financial cost of the activities, parents will need to develop an agreement about how they will as co-parents decide upon the activities and extra-curriculars their children might want to pursue.

High net worth individuals will likely not qualify for college financial aid. It makes sense to consider the cost of children’s college expenses during the divorce and set aside funds or make agreements regarding how to manage them. This may involve deciding how to fund college in the interim for divorces with minor children, or deciding how to pay for pre-college trips to campuses, moving expenses and return trips home.

Divorce can be a difficult process of unwinding financial situations. Navigating the complex financial issues that often arise during high net worth divorce cases is especially challenging. Careful consideration to many facets of each asset and liability is essential to ensure that the financial decisions will be prudent on many dimensions.

This article does NOT constitute tax or legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney and CPA.