Understanding High Net Worth Divorces
High Net worth divorces usually involve multiple homes, a business or a large amount of cash and/or investments. The division of the assets is the same as any other divorce but there can be special considerations. I have seen this especially when one spouse has not really handled the finances and is not as conversant with the assets as the other spouse. In general community property is all property accumulated during the marriage and it is divided 50-50. Sole and separate property is defined as property owned prior to marriage or property inherited or received as a gift. Odds and ends: And remember, Arizona is a no fault state so there is no relevance to any wrong doing such as an affair. If you have a prenuptial agreement, a postnuptial agreement or a separation agreement, let your attorney know at the very beginning.
Marital Property: Community and Sole and Separate
It does not matter how property such as accounts and vehicles are titled if they were accumulated during the marriage. Houses are another matter. It is extremely important to know the deed ownership of real estate. The name on a real estate deed determines the owner, even if one spouse might be able to claim an equitable lien on the property since it was accumulated during the marriage.
Business
The same idea holds true for a business. One person might be the owner of the business and the other spouse might have a lien on the value of the business, if it was owned prior to marriage or purchased with separate funds, the other spouse still might be entitled to an equitable lien. If it was founded during marriage, it is community property and must be divided equally. that is the key…and it is really most helpful to do this in a mediation. One typical way to resolve this issue is to hire a joint expert to conduct a business valuation and then the so-called “owner” spouse pays the other spouse in cash, other assets or through payments that are amortized.Separate Financial Advisor: It might be a good idea for each spouse to retain a separate financial advisor. The advisor can help formulate a plan for the division of accounts to make sure you will financially understand what is going on and what you have to live on once all assets are divided. Arizona law provides that each spouse gets 50% of the assets that were accumulated from the date of marriage to the date of service of the petition when the community is severed. The actual division of the accounts can be divided by the financial advisors or a Qualified Domestic Relations Order might be necessary to divide the deferred compensation accounts. These include 401Ks, defined benefit plans, Roths, stock options (vested and unvested).
Retirement Assets There are usually 3 primary categories of retirement assets, either an IRA, 401(k) and pension assets. As IRA can be divided by opening a second account and then splitting the accounts 50-50 into each spouse’s account. A QDRO is necessary to avoid tax consequences. Also, while we mention taxes, each spouse should retain their own accountant when going through a high net worth divorce.
We do not prepare QDROs but we refer our clients to attorneys with special expertise to draft them so they are done right. Most QDRO attorneys have experience in most plans throughout Maricopa County and have dealt with all major companies. We recommend that one QDRO attorney be retained who will follow the orders drafted in the negotiations for the divorce. The agreed upon draft stipulation is then signed by the parties and sent to the court for a signature so it becomes an order. That order is then sent to the “plan” who will divide the assets accordingly. This creates a tax free division of the divorce assets, and of course, verify all of this with your accountant. You might want to know about gains and losses if there are any from the date of the agreement to the date of the actual division. The QDRO attorney determines that amount as well. What if a spouse worked for the company before the marriage and after the marriage? A math calculation is used to determine what portion of the total was accumulated during the marriage and then that portion is divided in half. For purposes of illustration, let’s assuming that Husband Wife worked for an a company with a 401(k) plan) for 10 years (120 months) and that she was married for 8 of those years. Here is the calculation: 96/120 will be the community portion/ratio of the retirement asset. Thus, 80% of the retirement account belongs to the community and each party is entitled to one-half (½)of that benefit, or 40% of the value. The remaining 20% is Wife’s separate property. Therefore, Husband will receive 40% of the value while Wife is entitled to 60% – her one half of the community portion (40%) and her separate property portion (30%).
Separate Tax Advisors: It is important for each spouse to consider having their own separate tax advisor to guide them through the process. We do not provide tax advice and strongly encourage clients to consider obtaining their own tax advisor when going through a divorce. This just prevents any hiccups down the road.
Real Estate
If you litigate who gets the house, the Judge will usually order it to be split and the net equity split 50-50. This is usually not what anyone wants. In a negotiation such as a mediation the parties can work toward a win win solution. If there are multiple homes or land, the parties might choose to appraise them and then do a horse swap. If one party wants to refinance and buy out the other party, there can even be a liquidated damages clause to encourage performance and avoid going back to court to enforce the agreement. This is only used in somewhat contentious divorces or if time is of the essence for some reason. If one spouse owned real estate prior to marriage, there is math formula that we follow to determine if the non owner spouse is entitled to any payment from the real estate, depending on the market and length of marriage.
Mediation
High New worth divorces are usually resolved in mediation. Why? Because they are complex, the parties understand the value of keeping control of their lives, and things can become very creative in a mediation to meet the needs of the spouses. Want to trade the cabin and a house for the business? Done. Want to negotiate spousal maintenance for the rental property and income? Done. Want to trade a boat and 3 vehicles for a Rolex collection? Done. Mediation is the best bet to do it your way. Give it some serious consideration and give us a call to discuss.
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