Common Mistakes in High Net Worth Divorces

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 marriages.

Some of the common marital problems that affect high-net-worth couples include:

  • Alcoholism,
  • 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 in court. 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.