Unique Financial Issues to Consider in a High Net Worth Divorce

 Posted on May 11, 2021 in Divorce

The divorce process can be complicated regardless of a couple’s circumstances. Spouses may be involved in contentious disputes related to any or all of the issues that will need to be resolved before they can legally dissolve their marriage. Even if a couple agrees on most of the issues in their divorce and plans to avoid conflict wherever possible, they may still encounter difficulties related to their property, incomes, and finances. This is especially true in high net worth divorce cases where spouses own valuable assets or earn high incomes. In these cases, spouses will need to address a variety of unique financial concerns. It is crucial for spouses to secure representation by an attorney who is experienced in high asset divorce cases, and with the right lawyer on their side, they can make sure their legal and financial concerns will be addressed correctly.

Property Division Issues

All divorcing couples will need to decide how they will divide their marital property, which consists of all assets and debts they acquired during their marriage. This can be an especially complex process for couples who have a high net worth, since they are likely to own a wide variety of different types of physical property and financial assets. These may include:

• Real estate - In addition to their marital home, a couple may own vacation homes or other real estate property. These properties should be appraised to determine their value and the amount of equity the spouses own in each property. It may not be possible to equally divide these properties between the spouses, so it may be necessary to sell certain properties during divorce.

• Valuables - A couple may own multiple high-value items, including luxury vehicles, boats, artwork, jewelry, designer clothing, sports memorabilia or other collectibles, or high-end furniture. These items may need to be appraised to determine their full value and ensure that they can be divided fairly and equitably between the spouses.

• Financial accounts and investments - A couple may have an extensive investment portfolio that includes stock, bonds, and other financial instruments, as well as funds in multiple types of financial accounts. Spouses will need to have a complete picture of all of the financial assets they own while determining how these assets can be divided in a way that is financially beneficial for both parties.

• Executive compensation and benefits - If either spouse works as a corporate officer, they may receive multiple types of benefits in addition to their income. Bonuses, deferred compensation, profit sharing, stock options, or other forms of compensation may need to be considered as part of the income a person earns and the property owned by a couple.

Concerns for Business Owners and Entrepreneurs

When one or both spouses are business owners, they will need to determine how ownership of their business interests will be handled during their divorce. If a business was founded or acquired while the couple was married, it will be considered part of the marital estate that must be divided between the spouses. Even if a business was owned by a spouse before getting married, some business assets may be considered marital property if the business increased in value while the couple was married, or the business owner may be required to reimburse the other spouse for their contributions to the business.

A business valuation will need to be performed to determine the actual value of the business assets. One spouse may retain full ownership of the business while the other receives other marital assets of a similar value, or the business may be sold, allowing the spouses to divide the proceeds. If both spouses have been involved in operating the business, and they expect to be able to work together as business partners, they may be able to co-own the business together after getting divorced. However, they should be sure to have a partnership agreement in place that defines their roles and responsibilities, and they may wish to provide an option for one spouse to buy out the other spouse’s share of the business in the future.

Addressing Retirement Benefits

Spouses who have worked to save money for retirement during their marriage will want to make sure they will have the resources they need later in life. Funds in retirement accounts may be divided between spouses, although spouses will want to follow the right procedures when doing so to avoid penalties for early withdrawal before reaching retirement age. 

For qualified retirement plans such as a 401(k), a Qualified Domestic Relations Order (QDRO) should be used to withdraw funds and allocate them to the other spouse. For non-qualified retirement plans such as IRAs or SEPs, a “transfer incident to divorce” may be used to transfer funds to the other spouse. If the other spouse places the funds in their own retirement account, they will not be required to pay taxes at the time of the transfer. A QDRO may also be used to allocate pension benefits, and once a person retires, a certain percentage of the benefits will be paid to their ex-spouse.

Protecting Inheritances and Family Wealth

Spouses who have wealthy family members may be concerned about how the assets owned by their family or the inheritances they expect to receive will be handled during their divorce. If a spouse receives an inheritance during their marriage, this will be considered separate property that will not be divided between spouses during divorce. However, spouses should be sure to avoid commingling any inheritances they receive with other property, since doing so may cause these assets to be converted into marital property.

Those who come from wealthy families or who owned significant assets before getting married will want to take the right steps to protect family wealth. In many cases, asset protection trusts offer the best way of doing so. Assets held in a trust will be owned by the trust rather than by either spouse, so they may be protected from being divided in the case of divorce. However, if a trust is revocable, a person should understand that any terms of the trust related to their spouse, such as those naming their spouse as a successor trustee, may be revoked in the event of divorce.

Prenuptial agreements are another method of protecting assets from being divided during divorce. A prenup may state that all assets owned by one spouse will remain their property if they get divorced, or it may set aside certain assets to be given to children or other family members if the couple’s marriage ends. To be valid and enforceable, a prenuptial agreement will need to be executed properly, each spouse must either receive a full disclosure of the other spouse’s property and assets or waive their right to financial disclosure, and a spouse cannot pressure or coerce the other spouse into signing the agreement.

Uncovering and Addressing Hidden Assets

Since couples who have a high net worth may not be aware of the full extent of the property they own, one spouse may attempt to conceal certain assets in hopes that they will not have to divide these assets during their divorce. There are a variety of ways that spouses may attempt to hide assets, such as by purchasing valuable items and misreporting their value or by transferring funds to a family member or friend and claiming that they are paying debts that are owed.

If one spouse is a business owner, a business may be used to conceal assets. This may be done by paying income to a nonexistent employee, misreporting the value of business assets, delaying lucrative business deals until after the divorce is complete, or overpaying taxes with the intent of receiving a large refund after finalizing the divorce. Those who suspect that their spouse is concealing assets through their business or other means may be able to work with a forensic accountant to gain a full understanding of family and business finances and identify any instances where assets were hidden. By identifying and properly valuing all assets owned by a couple, spouses can ensure that they receive their fair share of the marital estate.

Financial Support for High Income Earners

While spousal support (which is commonly known as alimony but referred to as spousal maintenance under Illinois law) is not awarded in every divorce, it may be appropriate in a high net worth divorce where one spouse earns a much larger income. The purpose of spousal support is to ensure that both spouses can maintain the standard of living they were used to while married, and if one spouse earned the majority of the family’s income, the other spouse may need support to be able to meet their ongoing needs.

While Illinois law provides guidelines for calculating spousal maintenance based on the income earned by both parties, these guidelines only apply if spouses have a combined gross annual income that is below $500,000. For those who earn more than this amount, an appropriate amount of support will be determined based on the parties’ financial resources and needs. 

The amount that parents pay in child support may also be affected by high incomes. The guidelines used to calculate parents’ child support obligations in Illinois only apply for those who earn a combined gross monthly income of $30,000. For those who earn higher monthly incomes, an appropriate amount of support will be determined based on the children’s needs. Wealthy parents may also need to determine how they will share other child-related expenses, such as private school tuition, tutoring, college prep courses, and extracurricular activities or other non-academic expenses. Parents will also need to address how they will contribute to their children’s college expenses.

Understanding Tax Issues

Spouses will want to decide whether they will continue to file joint tax returns during the divorce process. While this may be financially advantageous in some cases, it will also make both spouses liable for any taxes, penalties, or interest that may be owed if they are audited. By working with an accountant to gain a full understanding of their family’s finances, a spouse can make sure the information is correct on their tax returns and avoid potential tax liabilities in the future.

Spouses will also want to be aware of any tax consequences of the decisions they make during their divorce. If they choose to sell certain property, such as real estate or investments, they may be required to pay capital gains taxes. Spouses should also be sure they fully understand the credits and deductions being claimed by a business owner, since these can affect the amount of a person’s income when calculating child support or spousal support. Decisions about child custody and parenting time may also affect the tax deductions and credits that each party can claim following their divorce.

Contact Our DuPage County High Net Worth Divorce Attorneys

Large incomes and valuable assets can affect nearly every aspect of the divorce process. Spouses who have a high net worth will want to have a strong legal advocate on their side who will fight for their interests and help them achieve a positive outcome to their case. At Weiss-Kunz & Oliver, LLC, we can protect your rights and advise you on the steps you can take to complete your divorce successfully. Contact our Elmhurst high asset divorce lawyers today by calling 312-605-4041.

Sources:

https://www.ilga.gov/legislation/ilcs/documents/075000050k503.htm

https://www.ilga.gov/legislation/ilcs/documents/075000050k504.htm

https://www.forbes.com/sites/heatherlocus/2019/01/10/what-jeff-and-mackenzie-bezos-and-all-high-net-worth-couples-need-to-do-to-avoid-a-messy-divorce/?sh=7b055b2d71bb

https://www.eisneramper.com/forensic-accountant-divorce-1015/