Divorce can already be incredibly messy, but sorting out finances and rebuilding is often “heavy” and complicated. Especially for the wealthy Divorce is something many have valued having a financial planner to coach and advise them.
For high-net-worth individuals (HNWIs), the stakes are even higher. They are likely to spend much time settling disputes over the separation of assets with their former spouse. While this is often necessary there are lots more things to plan for and to start working around.
This guide walks you through the various aspects of divorce and finances with valuable insights and takeaways.
What is a High-Net-Worth Divorce?
A high-net-worth divorce is the legal process of ending a marriage for couples with significant financial wealth, typically north of $1 million in assets.
These assets include substantial income, real estate holdings, investments, business interests, valuable personal property, and other assets. Due to the enormous financial assets involved, high-net-worth divorces introduce added complexity compared to average ones.
Factors like asset valuation, property division, tax ramifications, and spousal support arrangements often require specialized expertise from professionals who handle high-value marital estates. The following sections explore those complexities and discuss strategies to navigate them effectively.
The Challenges of High-Net-Worth Divorces
Going through a divorce with a lot of money involved can be overwhelming because of these challenges:
Asset division
Dividing assets in a high-net-worth divorce can be highly controversial, especially if both spouses are actively involved in shared business interests. If that is the case, determining how to fairly divide ownership or compensate one spouse for their share of business interests requires expert valuation and negotiation.
International assets add another layer of complexity. Because of location, there may be different jurisdictions with varying laws. Working with legal experts familiar with international law can help you progress cautiously.
Asset valuation
Valuing assets accurately can be tricky. The dilemma rings true if you’re talking about real estate, investments, businesses, and luxury items like art or collectibles, as these assets require specialized appraisers or financial professionals to determine their true worth.
It’s highly advisable to monitor this part of the divorce process closely. Discrepancies in valuation can lead to disputes during negotiations or litigation.
Asset dissipation
Dissipation of assets refers to situations where one spouse intentionally wastes or depletes marital assets to reduce the other spouse’s share during divorce proceedings. The erring spouse may resort to extravagant spending, transfer assets to third parties, or conceal them.
Proving dissipation requires thorough investigation and may involve forensic accountants or legal experts to make sense of the couple’s financial records.
Tax management
High-net-worth divorces often come with significant tax implications—the higher the value of the asset, the higher the tax. Asset transfers, property division, alimony, and child support payments can all have tax consequences that need careful consideration.
Privacy concerns
HNWIs have heightened privacy concerns because of their public profiles or sensitive business dealings.
Protecting financial information, trade secrets, and personal details from public exposure or media scrutiny is of the utmost importance to them and requires proactive measures. These may include confidentiality agreements, restricted court filings, or alternative dispute resolution methods to maintain privacy.
Child support and alimony
Determining child support and alimony in high-net-worth divorces involves complex calculations and assessments. Attorneys specializing in this department typically consider the standard of living during the marriage, the earning capacities of both spouses, childcare needs, and other underlying factors.
Lengthy litigation
Due to the intricacies of asset division, business interests, and financial disclosures, high-net-worth divorces often involve prolonged litigation. Lengthy court proceedings increase legal costs and emotional stress and may prolong the final resolution. To expedite the process, you can explore alternative dispute resolution methods like mediation or arbitration. However, it’s not uncommon for a former spouse to have unreasonable expectations, therefore litigation is sometimes necessary, unfortunately.
The Common Pitfalls of High-Net-Worth Divorces
High-net-worth divorces require careful navigation to avoid complicating the process and delaying the resolution. Watch out for these pitfalls:
Accepting a settlement offer hastily
If you’re not one to get into disputes, accepting a settlement quickly might sound like the better option. But rushing into it without fully understanding the implications or considering all aspects of the agreement can do more damage than provide convenience.
Ask any divorce attorney, making significant adjustments to a divorce decree that has been signed, is full of complexity. So be certain you sign your name to an arrangement you intend to live with for some time.
You may receive less than you’re entitled to. It’s also possible to accept provisions that are not in your best long-term interests. Take the time to review all financial and legal aspects of the settlement, consult with professionals, and ensure the agreement is fair and equitable.
Going through litigation before mediation
Starting with mediation allows couples to work together with a neutral mediator in finding mutually acceptable solutions—potentially saving time, money, and emotional stress —unlike if you went straight to court.
Opting for litigation before attempting mediation can be a costly and adversarial approach. Mediation offers a more collaborative and less confrontational way to reach agreements on various divorce matters—including asset division, child custody, and support.
Ignoring tax consequences
Divorce can have major tax implications, including changes in filing status, asset transfers, alimony payments, and capital gains taxes. Disregarding these tax consequences can lead to unexpected financial burdens and missed opportunities for tax optimization. Make sure you are really clear on what the tax implications are for your side of the arrangement.
Acting on emotions
Divorce is an emotionally challenging process that can inevitably affect your well-being. However, acting solely based on emotions without considering practical and legal factors can lead to impaired judgment and regrettable decisions.
Be careful not to let emotions like anger, resentment, or sadness cloud your judgment, resulting in impulsive and unfavorable choices. It’s essential to acknowledge and process emotions while approaching divorce decisions rationally.
Not consulting a professional
Divorce is often uncharted territory and may be challenging to navigate without expert guidance. Family law attorneys, financial advisors, tax experts, and therapists can provide invaluable support and advice. The goal is not to overlook critical legal considerations, financial consequences, or emotional needs in divorce proceedings.
How Are Properties Divided During a Divorce?
States broadly categorize divorce law into two frameworks when dividing assets and debts accumulated during a marriage: community property and marital property.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states upholding the principle that both spouses jointly own all assets and debts acquired during the marriage, regardless of individual contributions or sources of income.
Conversely, marital property states, including Utah, approach property division through equitable distribution. Utah’s marital property laws prioritize fairness over equal division during divorce proceedings.
This means that while assets acquired during the marriage are considered marital property, the division of assets is not automatically a 50/50 split. Instead, a fair distribution should prevail.
Under Utah’s marital property framework, assets subject to division during divorce include
- Real estate – This encompasses family homes, vacation properties, investment properties, and any jointly owned real estate acquired during the marriage.
- Vehicles – Cars, boats, motorcycles, and other vehicles acquired during the marriage fall under marital assets.
- Income – Both earned and passive income generated during the marriage are part of marital assets.
- Debts – Debts incurred during the marriage, such as mortgages, loans, credit card debts, and medical bills, are marital liabilities.
- Family businesses – Any business interests or ownership stakes acquired during the marriage are marital assets subject to division.
- Investment portfolios – Stocks, bonds, mutual funds, and other investment accounts accumulated during the marriage are part of marital assets.
- Trusts – Assets held in trusts established during the marriage fall under marital property discussions.
- Retirement funds – These include pensions, 401(k) accounts, IRAs, and other retirement savings accumulated during the marriage.
- Inheritance and estate issues – Inheritances received during the marriage may be considered separate property unless commingled with marital assets.
- Intellectual property – Patents, copyrights, trademarks, and royalties obtained during the marriage are marital assets.
- Offshore accounts – Any offshore accounts or assets jointly held during the marriage are part of marital property discussions.
Equitable distribution in Utah looks into the length of the marriage, each spouse’s financial contributions and needs, child custody arrangements, future financial prospects, and other similar factors. This holistic approach aims to achieve a fair outcome rather than a strictly equal division of assets and debts.
3 Asset Protection Strategies for High-Net-Worth Divorces
These asset protection strategies safeguard wealth in high-net-worth divorces:
1. Prenuptial and postnuptial agreements
Prenuptial agreements typically outline how assets, debts, and income will be divided in case of divorce or death, helping to protect assets brought into the marriage and establish financial responsibilities.
On the other hand, postnuptial agreements allow couples to address new financial circumstances, modify existing agreements, or clarify financial expectations during the marriage.
I wish to share a story. There was a physician in Idaho that got divorced, divided his assets in his late 50’s and started over. This physician was remarried but despite his financial advisor’s advice he did not sign a prenup. He was divorced within a few short years. After his second marriage his wealth was split in half again. It was devastating to watch. It was devastating for him to restructure his financial affairs and get to a place he could retire. After all the emotional fatigue and the burnout he was living by his late 50’s, he was filled with regret and tired. Very tired.
Not enough people look that far down the road, but it comes never-the-less.
To have your loved one sign or not sign a pre- or post-nup is a question that is full of a host of various factors – we get that. However, we also are really clear on the financial devastation that comes in the wake of multiple divorces. Our word of caution – be careful and don’t forget….you get what you set up.
2. Separate property agreements
Separate property agreements define assets that partners consider as discrete and not subject to division in divorce: assets owned before marriage, inheritances, gifts, and assets specified as separate in legal agreements. These agreements protect financial interests in a divorce by ensuring each spouse retains individual property.
3. Trusts
Trusts are legal arrangements where a trustee holds assets for the benefit of beneficiaries. In the context of asset protection during divorce, trusts can be:
- Revocable – A revocable trust, like a living trust, can be altered or canceled by the grantor during their lifetime. While it’s useful for estate planning and asset management, it generally doesn’t protect assets in divorce since they’re viewed as personal property.
- Irrevocable – Irrevocable trusts protect assets from divorce because they’re separate from marital property. Setting them up correctly and following legal rules is crucial to avoid issues.
- Asset protection – Asset protection trusts are irrevocable trusts created to shield assets from creditors, lawsuits, and divorces. Assets are transferred to the trust and managed by an independent trustee for beneficiaries, ensuring protection from creditors and ex-spouses during divorce.
How to Untangle Finances During a Divorce
Untangling finances during a divorce is a complex process entailing careful consideration and strategic planning. Thankfully, taking these essential steps and strategies can help you navigate the separation.
Conduct an inventory of all joint and individual assets and liabilities
HNWIs’ portfolios usually include real estate, investments, businesses, and valuable assets. During divorce proceedings, you’ll need a comprehensive inventory of these assets and liabilities to ensure equitable division and prevent overlooked or undervalued assets.
Separate bank accounts and credit cards
Naturally, you’ll have extensive financial ties with your spouse—including joint bank accounts and credit cards. Separating these accounts can help maintain financial autonomy and prevent disputes over expenses or liabilities while helping you manage finances independently post-divorce.
Break up joint debts
A clear delineation of who is responsible for which debts ensures fair distribution of financial obligations. This process may involve negotiations and legal agreements to avoid future financial entanglements.
Assess joint investments and properties
Joint investments and properties like stocks, bonds, real estate holdings, and business interests often need addressing during divorce. Get an expert to attain proper valuation and equitable distribution of these assets and ensure fair and equal resolution.
Adjust insurance policies
Divorce necessitates a review and adjustment of your life insurance, health insurance, and property insurance. Since insurance arrangements are typically tied to various assets and family members, you must update your beneficiaries and coverage once the marriage ends.
Update estate plans and wills
Estate planning is crucial for HNWIs, and divorce may warrant revisions to existing plans and wills. These may involve updating beneficiaries, trustees, and directives related to asset distribution. An updated will or estate plan lets you pass down wealth, reflecting your new status and priorities.
The Role of Financial Advisors Before, During, and After a Divorce
While divorce lawyers are pivotal in legal proceedings, their expertise alone may not cover the intricate financial aspects of divorce, especially for HNWIs. This section emphasizes the importance of consulting financial advisors alongside divorce lawyers.
Before a divorce
Financial advisors implement asset protection strategies to safeguard your wealth. They can assist in liquidity planning that ensures access to funds when needed and thoroughly review your financial position(s)—including assets, tax liabilities, income sources, and other expenses. There is no part of this that is an attempt to hide or deceive. At Tencap our brand values are integrity and trust, this step is not about being dishonest with assets – it is about making any needed adjustments that one or both parties are calling for. Should one wish to liquidate assets and another not wish to liquidate, it’s almost always possible to make adjustments to pacify the other party.
During a divorce
Divorce proceedings are more manageable when you have sound advice on asset division strategies from financial advisors. Their expertise in financial matters is instrumental in negotiating favorable outcomes and protecting your financial interests. It’s also helpful to get really clear on tax implications and pre and post tax accounting so that is all handled fairly.
After a divorce
After finalizing the divorce, you may need financial advisors to guide you through financial restructuring and management. The right advisors should assist in updating retirement accounts, revising estate plans, adjusting insurance policies, and making necessary tax filing changes to reflect your new financial status. Together, you create a new financial roadmap aligned with your goals to secure your future.
Tencap is Here to Help
Divorce is almost never an easy process. More than the emotional toll it brings, it can also disrupt your financial plan and delay arriving at financial independence. In addition divorce may also expose you to tax policy changes. So, consider consulting with a financial advisor to employ strategies suitable for your financial situation.
Tencap Wealth Coaching offers comprehensive financial advice to help you protect your valuable assets and make intelligent decisions. Schedule a no-cost consultation with us, today!
Nick Carrigan
Nick trains and develops families in creating, maintaining, and growing wealth. This includes educating clients on the science and academics of investing, comprehensive financial planning, and ongoing coaching to ensure discipline for a lifetime. Nick has seen this create incredible levels of freedom, fulfillment, and love for the families he works with.
