7 Common High-Asset Divorce Mistakes to Avoid

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High-asset divorces are often far more complicated than the average domestic action. The larger a couple’s marital estate is, the more complicated it can be to divide the value in a fair and equitable way. When one spouse’s income comes from business ownership, trust disbursements, or generational wealth, it can lead to many common high-asset divorce mistakes that can leave one or both spouses unable to live the lifestyle to which they are accustomed.

Mistake #1: Ignoring Your Prenuptial Agreement

Wealthy individuals are more likely than others to have entered into a prenuptial agreement prior to their marriage. A well-negotiated premarital agreement can ensure that your pre-marital assets and interests are protected, while at the same time providing for your spouse, any children you or your spouse may have at the time of your marriage, and any future children. They are also intended to make your divorce easier. However, often one or both parties in a high-asset divorce will ignore the prenuptial agreement, asking the Michigan divorce court to award them more or different assets. This drives up the cost of divorce, which may or may not be worth it. In some cases, judges will enforce the prenuptial agreement according to its terms. However, in Michigan, a Trial Court can still “invade” property labeled as “separate” under a prenuptial agreement or otherwise reform the prenuptial agreement if the Trial Court finds it necessary to equitably provide for either spouse. But using the prenuptial agreement as a starting point, even if some modifications or negotiations are needed, can help streamline the process and reduce attorney fees.

Mistake #2: Not Considering Alternative Dispute Options

Wealthy individuals often have privacy concerns related to their wealth. But divorce litigation happens in open court. That means if your case goes to trial (or if either party files certain financial motions), your financial affairs could become part of the public record. To avoid this, many high-asset divorce actions are better resolved in “Alternative Dispute Resolution” processes, such as Collaborative Divorce or arbitration. These out-of-court alternatives can give you greater control over the procedures, outcome, and privacy versus publicity, making them a better option to traditional litigation.

Mistake #3: Not Considering Non-Cash Compensation for Executives and Business Owners

One thing that sets high-asset divorces apart from other cases is the way executives and business owners are compensated for the work they do. While most executives receive a salary, their base income is often only part of their full compensation package. Often, a wealthy family will have multiple income sources, including trust payments, multiple types of stock with varying vesting and disbursement schedules, and rental incomes, in addition to each spouse’s regular, earned wages. In addition, business owners have the financial advantage of writing off many expenses that, if they only earned W-2 wages, they would pay from post-tax income. Examples include: car allowances, health insurance, meals, travel that is part business/part pleasure; computers, gym memberships, and the like. When it comes to calculating child support and spousal support (sometimes called alimony), you need to ensure all the parties’ income sources and perquisites are on the table. One common high-asset divorce mistake is to overlook non-cash compensation when calculating support, which can all be added into the Michigan Child Support Formula to determine the parties’ true incomes to yield a child support amount and/or spousal support recommendation that leaves each party with a fair stream of income going forward after the divorce.

Mistake #4: Not Disclosing Assets

Often, if you have substantial assets, you may be highly invested in keeping them. You may not want your spouse to be awarded property you feel you and/or your family earned or deserve. To avoid this, you may consider hiding assets or failing to disclose all your property. However, this is almost sure to come back and bite you and puts the assets you’re worried you may have to share, at risk of being awarded to the other party.

First, it violates Michigan Court Rules and judges’ scheduling orders requiring the full disclosure of assets and debts. If that violation is discovered later it can result in financial penalties and even the surrender of the undisclosed assets.

Second, it drives up the cost of divorce litigation. Both parties are entitled to “discovery” about one another’s assets. If you fail to disclose some of your assets, your spouse will simply use subpoenas, requests for documents, depositions, and other discovery tools to uncover the information. They may also retain a forensic accountant to trace the funds you removed from the marital estate. If they are successful, it is highly likely that you will lose the concealed assets, and that you will be responsible for the costs they incurred to find them.

Third, once the asset is discovered, your credibility is shot, and the risk the other side and/or the Trial Court will disbelieve any other issues you raise in the case, is high.

Finally, your lawyer would be wise to terminate your attorney-client relationship, and your contract for legal representation likely spells this out. An attorney’s reputation in the legal community is their stock in trade, and they cannot afford to be known as the attorney whose client tried to hide income or assets. This is not only because it tarnishes their reputation, but also because it puts them at risk for issues with the ethics board.

Mistake #5: Skipping Appraisals and Valuation of Assets

Many of the assets in a high-asset divorce are not liquid. Your wealth is likely tied up in: commercial and/or residential real estate, either domestic and/or foreign; business investments; and an array of other assets designed to accumulate value over time. You may also be entitled to receive substantial pension payments upon retirement. When a wealthy couple gets divorced, all those non-liquid assets are on the table for allocation. Unfortunately, many times, the parties assume they know the value of those assets based on their initial investments, or the annual pension statements they receive. But if you attempt to reduce costs by skipping appraisals and valuation of non-liquid assets, you are flying blind. Without a clear and accurate financial picture, your assumptions about the value of your properties could result in over- or underestimating the value of those, and which will leave you with an unfair result. And if you end up in trial, the Trial Court wants to see formal appraisals.

Mistake #6: Forgetting the Tax Effect on Retirement and Investment Assets

Any assets accumulated or that increased in value during your marriage may be divided by the Michigan divorce courts. If you have a great deal of wealth, it is likely that you and your financial advisor have worked hard to diversify your retirement and investment holdings to minimize threats to your nest egg. Even if you have a more typical estate consisting primarily of a single family home or condominium, a defined contribution plan, and a variety of bank and/or investment accounts, not all financial accounts are the same dollar-wise. Retirement portfolios often contain both pre-tax assets (like a 401(k), 403(b), 401(a), traditional or SEP IRA) and post-tax assets (like a Roth IRA). While the less common post-tax retirement accounts already had taxes paid on them, the more common pre-tax accounts are taxed when the money is withdrawn, and depending on the type of account and timing of the withdrawal, may incur penalties. It is important to “tax-effect” the pre-tax assets if pre-tax and post-tax assets are going to be equalized as one, or to “gross up” the post-tax assets if a single-source equalizing transfer is going to be paid from post-tax assets. But if pre-tax and post-tax assets are being equalized separately, this is not an issue.

Similarly, the transfer of investment assets can trigger unexpected or inequitable tax burdens depending on the basis of each individual asset that is transferred. If you get all the low-basis stock, for example, and your spouse gets all the high-basis stock, your tax consequences will be more burdensome than your spouses. Also be aware that if you plan to use a taxable asset after the divorce, for example, for a new home, a new car, your divorce attorney’s bill, credit card debt, a mortgage or home equity line of credit or loan balance, and you plan to use taxable asset to do so, you need to know how much the taxes are going to cost you, and increase your withdrawal accordingly. You and your high-asset divorce attorney need to be in close contact with your financial advisor and accountant to account for the tax effect of any proposed judgment or settlement offer.

Mistake #7: Not Hiring a High-Asset Divorce Lawyer

Maintaining a high net worth often depends on making smart choices about when and how to invest your money. However, some people try to cut corners, hiring a divorce lawyer with a flat fee or a low hourly rate. By now, it is clear that a high-asset divorce can bring with it expensive and complicated issues that may be outside the experience of many divorce lawyers. Take the time to determine if the attorney you hire has handled a marital estate of your size before. By working with a law firm that focuses on high-asset divorces, you can ensure that the firm has the resources, experience, and ability to address all aspects of your case.

The high-asset divorce lawyers at Nichols, Sacks, Slank, Sendelbach, Buiteweg & Solomon have a support structure in place to take on the highly complex issues that come with large marital estates. We will work with you to identify all your assets, income sources, and debts or financial obligations, to build a complete picture of your family’s financial situation and your top priorities. We will help you understand how the law applies to your assets, income, and interests. Call 724-994-3000 to schedule a consultation with one of our experienced Michigan divorce attorneys to discuss your financial situation and how any domestic agreement could affect them.

Categories: High Asset Divorces