For most people,
divorce is not easy and breaking up isn’t always the most difficult part
of the process – it’s often dealing with child custody and
severing the financial ties. For high-net-worth individuals, the divorce
is even harder because so much is at stake. By its nature, divorce leaves
a lot of room for error and for wealthy couples this is more of a cause
for concern because they have so much to lose. From
child custody to spousal support to dividing assets to debts to retirement accounts
to businesses – a single bad decision can affect a wealthy spouse
for years to come.
Many people think that money would make a marriage easier, but that’s
hardly the case. High-net-worth individuals still have marital problems,
even if some of them are different than the issues that affect middle-class
Some of the common marital problems that affect high-net-worth couples include:
- Substance abuse, including prescription drug abuse,
Domestic violence (affects couples from all socioeconomic classes),
- Gambling addiction,
- Extreme differences in parenting styles,
- The couple simply “grew apart” over time,
- Spouses no longer attracted to each other,
- Spouses argue all the time,
- Disability or illness strains the marriage,
- Inability to have children,
- Adultery (same as other couples),
- The breadwinner works so much, they have little time to spend with their
spouse and family,
- Frequent travel, which makes it hard to stay connected to one’s spouse, and
- Successful business owners spend so much time on “the business,”
they don’t spend enough time on their marriages.
Like other marriages, high-net-worth couples don’t just divorce without
reason. Often, infidelity or a lack of trust led to the breakdown of the
marriage. When emotions run high; for example, when a wealthy physician,
business owner or CEO cheats on his wife of ten years, the couple can
let their emotions get the best of them. When there are significant assets,
such as business interests, real estate, large retirement accounts, investments,
and other assets on the line, emotional decisions made by embittered or
guilty spouses can wreak havoc on their divorce settlement, and the spouses’
assets after the divorce.
Guilt can be a huge factor in a high-net-worth divorce. For example, a guilty
wife, who was a stay-at-home mother can waive all of her rights to spousal
support. Or, a guilty husband can waive his rights to half the community
property and give his wife more than her fair share of the marital estate.
In other words, divorce can be an emotionally-charged event and often,
a spouse with a guilty conscience can feel so bad about their transgressions,
that he or she makes emotionally-based decisions; they’re not exactly
in the best frame of mind to make financial decisions about their divorce.
The guilty spouse can feel embarrassed, ashamed and heart-broken. They
may not even want the divorce. The party being divorced is in a vulnerable
state-of-mind and they can fall into the trap of signing papers prepared
by their spouse, or out of grief or apathy say something to the effect
of, “Give my spouse whatever they want.”
As Los Angeles divorce attorneys who represent couples in high-net-worth
divorces, we thought we’d list the top mistakes made by wealthy
couples during divorce. Fortunately, all of these mistakes can be avoided
with quality legal counsel.
1. Making Emotional Decisions: When it comes to divorce, one spouse often feels guilt. In effect, the
guilty spouse can make poor decisions based on emotions alone. For example,
an adulterous husband can give his innocent wife the house, double the
spousal support she’d normally receive, and more than half of the marital assets.
It may seem cold, but we must treat divorce like a business dissolution
and any associated decisions must be made with sound advice from divorce
and financial professionals.
2. Rushing Decisions Just to Get the Divorce Over With: We often hear spouses say, “I want a divorce as fast as possible!”
for one of two reasons: 1) because they cannot stand their spouse and
want to get the divorce finalized immediately, or 2) because they believe
they’ve met their soul mate and want to get away from their spouse
as fast as possible. In the absence of physical violence (which justifies
a speedy divorce), it’s not wise to divorce in a rush. When spouses
do this, they often make grave financial mistakes that cannot be corrected
after the divorce is finalized.
3. Hiding Assets: It’s not uncommon for spouses, especially the higher-earner, to hide
assets from their spouse to cheat them out of their fair share in the
divorce. Usually, they’ll transfer assets to a friend, a child from
a previous marriage, or a business partner. When spouses hide assets,
they’re generally set aside as fraudulent and in effect, the spouse
loses all creditability in court from that point forward. Believe us,
most hidden assets are found and it’s just not worth the risk.
4. Not Considering Tax Consequences: When you get a divorce, realize that many of the associated financial transactions
have tax consequences. For example, if you’re the receiving spouse
and you agree to a certain amount of spousal support, don’t forget
that you have to pay taxes on alimony. If you keep your 401(k) and you
plan on living off some of that money, don’t forget that withdrawals
are taxed as ordinary income and are subject to a 10% federal tax penalty
if they’re taken before age 59 ½.
5. Failing to Fully Understand the Assets: In most high-net-worth marriages, usually one of the spouses earns more
than the other, and the wealthier spouse often knows more about the assets
than the lower-earning spouse. If you’re the lower-earning spouse,
it’s important to invest money upfront in investigating whether
there are any assets or income you’re not aware of, but entitled
to (up to 50 percent) under California’s community property laws.
6. Comparing Your Divorce to Others: “My friend was married five years and she walked away with millions,”
or “My uncle didn’t pay his wife a dime.” You will hear
all kinds of divorce stories, but you cannot expect to get the same outcome
as a friend, family member or acquaintance. Every divorce is different
and you cannot compare yours to other people’s. Each case has unique
variables, factors and circumstances; therefore, you cannot expect that
yours will turn out like someone else’s.
7. Letting Anger Control Decisions: Did your wife leave you for your boss? Did your husband gamble away half
of your estate? Is your spouse living a secret life? Regardless of what
your spouse has done to you, you cannot let anger control your decisions.
You can’t key your spouse’s car; you shouldn’t max out
all of the joint credit cards; you should not stop paying the bills to
ruin their credit (and yours), and you should not assault their new boyfriend
or girlfriend. When you let anger get the best of you, it can lead to
financial ruin or even criminal charges.
8. Failing to Consider a Collaborative Divorce: Even though you can afford divorce litigation, that doesn’t mean
you should hire a shark divorce attorney and hash out your differences
Collaborative divorce is faster, cheaper, and a lot less stressful than divorce litigation.
Even high-net-worth individuals have a lot to gain from collaborative
divorces, including peace of mind! Remember, the goal is to preserve the
marital estate and get as much of the assets as possible. The best way
to accomplish this is through a collaborative divorce, not litigation.
If you are on the brink of divorce, consult an attorney ahead of time,
even before you discuss it with your spouse. At Claery & Hammond,
LLP, we can advise you of your rights and responsibilities and the possible
outcomes. We can help navigate you through the legal minefield so you
can make sound decisions, and look forward to a bright and financially-secure future.
Contact us today to get the conversation started.