Valuable Divorce Tips for High Net Worth Spouses and High Asset Cases
This is the must-read four step guide for large or complex marital estates
A high asset divorce is more nuanced and complex than you may realize
Divorce tips for high net worth individuals are uncommon. That is because many divorce lawyers lack the knowledge or experience of handling high asset or financially complex divorce cases.
Fortunately, we do not lack that knowledge and experience. Our family law firm, with offices throughout Southern California, has both with the representation of high net worth spouses and high asset divorce cases.
This article is not legal advice. It is not designed to answer your questions about your specific situation. For that, we offer an affordable strategy session.
Four Parts to Guide
The following are the four parts of this guide. You may click on each link below if you want to jump ahead.
"Planning" is the first step in high asset divorces
You know the cliche - failing to plan is planning to fail.
Divorce fits that cliche. This is especially true with a high asset or financially complex divorce.
Planning child custody issues in a high asset divorce
What unique child custody decisions do high net worth individuals face in a divorce?
Child custody cases go one of three ways:
- Smooth where both parents come up with a parenting plan;
- Some difficulty at the beginning, possibly even a court filing, but eventually a resolution that doesn't require a court hearing; or
- Significant litigation between the parents. This leaves the decision to the family law judge.
For high net worth individuals, divorce planning goes a long way to increase the chances of 1 and limit 3.
Absent high conflict cases, this is not only possible but probable.
High conflict divorces include those that involve divorcing a high conflict personality like divorcing a narcissist or sociopath.
There is rarely an instance where taking the decisions away from the parents and leaving them to the judge is a great idea unless one of the parents refuses to be reasonable.
Here are some essential child custody planning tips specific to divorce for high net worth individuals:
Be realistic about your work and travel schedule
If your schedule varies too much from week to week or month to month, then you will need flexibility for things like make-up time and maximizing time while you do have a fixed schedule. A good divorce lawyer can help you get a child custody order that takes that into consideration.
Be careful when deciding whether or not you want to move out
There are some advantages to moving out and some can be financial. But there could be disadvantages too.
Some parents are concerned about being falsely accused of domestic violence. Some parents are victims of domestic violence. Others just want their peace. And some are told to move out by their spouse.
Here is an article on the subject of divorce and moving out we think will put things into perspective.
Solely on the issue of child custody (disregarding any financial considerations), the main danger of moving out is then "chasing" the child custody issues. You are out of the house and trying to establish a child custody schedule once you do.
If your spouse is going to be difficult or intends to keep the kids from you, moving out makes that restrictive gatekeeping easier for your spouse.
Get a custody and visitation stipulation and order without delays
A stipulation and order is a written agreement in the proper format so it becomes an order. These are important early in your divorce.
Taking a negotiation posture that issues have to resolve together (child support, spousal support, property issues) or not at all may expose you to sanctions (fees ordered against you) with the family court.
Just as important, it gives your spouse the opportunity to use financial issues as leverage in child custody negotiations.
You are not helping yourself by doing this. You can separate the child custody issues from the rest of them and get that order.
If your spouse refuses to be reasonable, file a request for an order and get a hearing date. The family court has the power to make temporary orders.
Child and spousal support planning in a high net worth divorce
Child support should be simple. California child support laws rely on a computer program to figure it all out, right?
That is partially true but rarely are child support issues for high net worth individuals as easy as middle-income or upper-middle-income families who earn a regular traditional income.
As for alimony in a divorce, that too is often a computer program for temporary orders. But family law judges are not permitted to rely on computer programs for the final orders at the end of the case.
Let's look at three issues we often see come up in child support and alimony for high net worth individuals.
Income for support purposes
Your income may fall into a few categories especially if you are self-employed, operate your own business, or have investment or passive (capital gains) income.
"Base" income of most high net worth individuals
Let's assume the high net worth person operates his or her own business. In this situation, most high net worth individuals have a base income, either through periodic draws or an actual salary. This comes in different forms.
This base income is likely the most predictable part of the person's income and, regardless of fluctuations in profits, may be paid as often as bi-monthly or as few times as once per year.
Profit distribution versus bonuses, stocks or options
If the high net worth individual is self-employed, additional income is typically paid out through a profit distribution. This can be throughout the year or at specific intervals.
If the high net worth individual is not self-employed but rather a CEO, CFO, or in another executive position, the additional income is typically in the form of a bonus, stocks, options, or a combination.
This additional executive compensation is typically tied to individual and/or company performance or is part of the guaranteed contract between the company and executive.
You may be asking, "what about commissions?" Commissions are treated like bonuses in that they are not always predictable and may be tied to performance.
Car allowance, expense allowance, or other forms of perquisites may also be part of a high net worth individual's income.
The term income here is tricky.
These can sometimes be untaxed income (which falls into a different group for support purposes), taxed income, or a combination of the two. Untaxed income is an oxymoron but is more common than you may think - but that does not mean it is lawful.
Many people who run their own businesses run personal expenses through the business. If those personal expenses are "added back" to their income, since they did not pay taxes on it, it is arguably non-taxed income for support purposes.
One of the challenges a divorce may cause is that what was normal and accepted during the marriage becomes contested when spouses find themselves at odds in divorce litigation.
That is why the issue of perquisites and their status as untaxed or taxed income becomes an issue in most support cases.
Interest or passive income
Interest income can come from investment accounts, publicly traded stocks, and bonds.
Passive income comes from many sources including rental income.
Their taxability and consideration for support purposes can get complicated because the gross income has more complex tax consequences.
For example, take rental income of $2,500.00 per month from a rental property. But the high net worth individual may have a mortgage, most definitely has property taxes, insurance, and other maintenance on the property. Does that mean he or she pockets the $2,500.00? No.
However, should the family court should deduct those expenses when determining income available for support? That is a question whose answer depends on the case's specific facts. Fortunately, our family law attorneys know the law in this area well and we assist our clients to figure out how it should work in their case.
Phantom income sounds like a made-up word but it is very real with certain high-income spouses or those who are shareholders in corporations or principals in other companies.
Phantom income is income that is not really received by the high net worth individual even though it is "paid."
What often happens is the income appears on the tax return but the spouse never received it.
You may see this in a situation where a shareholder in a corporation is required to receive dividends but instead of receiving it, the company rolls that dividend payout over into the next year and keeps the money for ongoing retained earnings. Thus, the spouse must report the income he or she did not receive and still be taxed on it. There are other examples.
In most situations, this unreceived phantom income is not part of the income available for support.
Be careful when relying on computer programs to calculate support
Don't assume the computer program lawyers and judges use to calculate child support or temporary spousal support should apply to you.
It is possible your income is so high that the program creates a support order that is beyond what a child needs or even (on a temporary basis) what your spouse needs to maintain the status quo.
This is a complicated area so contact us for a consultation to learn more.
You can also check out our article on child support for extraordinarily high-income earners.
Beware of the sudden pre-divorce spending spree
One important tip we have for high net worth individuals who are the breadwinners and are about to go through a divorce is to watch out for the sudden pre-divorce spending spree.
We have seen it happen and we caution our own clients about it. Spouses in this situation sometimes wonder why their spouse is suddenly spending more than he or she ever did or causing unnecessary expenses on lavish items that are even beyond their lifestyle.
There is no one answer that fits all to this but the common (and misguided) reasons we have seen are:
- A belief that such spending during the marriage and shortly before separation can artificially increase the entire marital lifestyle and therefore increase support;
- A "hoarding" mentality that buying luxury items means keeping these items; or
- An insecurity that you, as the breadwinner, will lie about your income, play games during the divorce, and try to deprive your spouse of the marital lifestyle to which he or she has become accustomed.
Taking reasonable but firm steps, with the advice of a family law attorney, to curb unnecessary spending not only keeps debts in check but also helps to budget for unavoidable expenses that come with a divorce.
Calculation of child support and alimony in a divorce for high net worth individuals
We suggest you read our California child support law page for information on the calculation of child support.
We have an accompanying page on alimony laws in California that goes into comprehensive detail about just about everything you want to know about this topic.
They are well worth the read if you are hungry for information.
Consider reading our article on Gavron Warnings in California to better understand what Gavron Warnings are and how they are applied.
They are sometimes an important part of spousal support orders when the lower-earning (or non-earning) spouse needs to be more motivated to take steps to become self-supporting.
Property and asset division issues during a divorce for high net worth individuals
The typical high net worth and asset divorce case include:
- A primary residence that may be valued at millions of dollars.
- Rental property, residential or commercial properties, or land.
- Vehicles including cars, watercraft, etc.
- Traditional bank accounts but also stock or brokerage accounts.
- A business or businesses some of which may be actively operated by the high net worth individual while others are operated as a passive investment.
- 401K, IRA, or pensions although these are less common with private business owners and far more common for executives of larger companies.
- Life insurance policies, term and universal.
- Trademarks, patents, and copyrights, otherwise known as intellectual property.
- In some cases, investment opportunities that have not yet come to fruition.
Planning for attorney's fees and costs in high asset divorces
Just because you have a high asset base and face a divorce doesn't mean you don't plan and budget for attorney fees.
You have made money. I assume you didn't do that by foolishly spending it. Now you are about to start a divorce or maybe it has already started.
Do you intend to give your lawyer an open checkbook? To do whatever he or she wants? Do not do that. You have to be actively involved in your divorce and know what issues are worth litigating and what is not.
Your divorce lawyer's job is not to "scorch the heart", "make" your spouse's "life hell", "outspend" your spouse or any one of the other dumb things I have actually heard lawyers say and their clients believe.
If your divorce lawyer is doing the "rah-rah" thing and acting like a cheerleader, he or she is probably playing to your emotions. The best divorce lawyers do not do that. They analyze your facts, tell you about the law and help you build reasonable expectations.
That is one of the reasons I am so proud of our family law firm. I don't care whether you make $50,000 per year or $5 million.
We plan, budget, and strategize on every case.
Planning for divorce's sometimes complex emotions
Does divorce turn logic into emotion, calm into frustration, and common sense into everything but? That can happen.
It happens to the best of people. And the fact you have a high net worth or income doesn't make you immune to any of it.
To walk into divorce with the thought you will be cool and focused at all times may be unrealistic.
The children's best interest comes first
That means you become child-focused, not self-focused. That is how the Court will rule on the case if it goes that far so you might as well get used to it.
Keeping the emphasis on your kids' needs and best interest will also keep you from becoming absorbed in what your spouse "said", "did", "wants" or "claims" when those things have the potential to upset and distract you.
Keep financial decisions focused on cost versus benefit
I have often said and written that only a dummy spends $9 on a $10 dispute.
The net in your pocket matters, not the one in your lawyer's pocket.
But a similar dummy gives away $50 when he is right on the law and facts and would spend $5 to advance his position in Court.
Add a bunch of zeros and you get the point.
Treat financial issues without emotion and you make smart financial decisions. This is true in life and divorce is no exception.
Move it forward. It's not a race but it's not a standoff either
Get your disclosures done. Listen to your divorce lawyer (hopefully you picked a good one). Don't ever lie.
Honesty is not only the best policy, it's mandatory by law.
When you have the facts, make settlement offers. Be reasonable and if you must go to Court, take it seriously.
Preparation is important and that requires a time investment on your part and that of your lawyer.
You will need expert advice independent of your divorce lawyer
As someone with a high net worth going through a divorce, I will bet your family law lawyer is not the first attorney or professional you have come across.
That is because as income and assets increase, so does the need for sound advice on the management of it.
Divorce is no different and the same types of experts with whom you may have consulted during the marriage become important in the divorce.
Let's go over those.
Estate planning expert
Divorce is often seen as the marriage's end. It is more. It is a life's new beginning.
"50% of my assets will go to my spouse" I hear the income-earning spouses sometimes say.
First, that is often an exaggeration. Community property doesn't mean one takes a cleaver to it and severs half of everything acquired during the marriage.
Our family code is more complicated than that. Regardless of how assets, property, and debts are divided, an estate planning expert can advise you on what changes need to be made to your will, living trust, and what other "planning" you should do going forward.
Since we are divorce lawyers and family law is all we do, we don't advise you on such things but we will have excellent referrals for you.
Business or corporate lawyer for the high net worth individual
If you are a business owner, you may have come across a business lawyer at some point.
You may know what these lawyers do.
- Handle business transactions and contracts,
- Formation and compliance help regarding the corporation, LLC or partnership,
- Helping with employment law issues that may arise,
- Handling intellectual property issues,
- Defending against or prosecuting civil actions against or for your company,
- Being a trusted advisor and consultant.
That same attorney and advisor is someone you may need during the divorce. And if you do not have one, we can give you great referrals.
Real Estate professionals
If you have a piece of real estate of significant value (such as a home), a real estate professional's advice is helpful.
If you are a high net worth individual going through a divorce and own residential, rental, land, and/or commercial property, that same advice is critical.
Your local real estate broker? I suppose that's a start but you may need more - an appraiser (especially when dealing with land and commercial property), mortgage broker (if refinancing is necessary), and a real estate lawyer if there are complex transactional issues.
Tax professionals range in skill and necessity.
There are certified public accounts (CPAs), tax lawyers and certain tax professional that are specialists in specific areas of taxation.
Tax issues in divorce cases vary and the more complex the estate, the more complex tax issues may become.
Our family law firm does not give tax advice but we can refer you to a tax professional.
The synergy between your family law firm and other professionals
The good news is this.
Experienced divorce lawyers like those at our firm work well with your other retained professionals.
Such professionals are better retained early in the case but sometimes their need isn't apparent until an issue arises.
For example, you may not know you need a real estate appraisal until you know the property will have to be valued or sold.
Retaining an experienced forensic accountant is step two in high asset divorces
What do forensic accountants do in a high asset divorce?
We have written articles in the past about finding the right forensic accountant for your divorce.
Forensic accountants serve several purposes in a divorce case. As a high-net-worth individual with a high asset divorce, it's important that you understand them. The following three are the most common:
Controllable cash flow and income for support purposes
Chances are pretty good you are not a W2 employee who has a steady and predictable paycheck.
Your income depends on profit distribution and passive income, more than it does a salary and bonuses.
That is where the word controllable cash flow for support purposes comes in. Here is an article we have written about the subject of what is income for child support purposes.
Look at controllable cash flow as the amount of money truly available for child and spousal support purposes.
For small to mid-sized businesses and self-employed high net worth individuals, this may be as simple as looking at the business income minus the business expenses and you get the business profits.
But not all businesses have such a simple formula to determine cash flow.
That is where a forensic accountant comes in handy and can help dissect such issues so you don't overpay support.
If you own a business, it should have value. Value is not only tied to profitability but also factors such as a business' goodwill.
How is the value calculated? That depends on the type of business, your role in it, and how long it has been around (and its success). Is it complicated? That also depends on the business.
As a high net worth individual who is self-employed, you know how much time, money, sweat, and stress you invested to build the business and make it profitable.
You had sleepless nights and you made sacrifices, including spending less time with your family.
Now comes the time where your spouse may claim the business you worked hard to build is community property and your spouse may be right - at least in part. If the business is community property in whole or in part, how is a business divided? You can't just cut a business in half and say "here you go, good luck," right?
Step one is placing value on the business. That is what a forensic CPA does.
Check out one of our popular articles on business valuation in divorces so you can learn more.
Tracing of separate property interests
Separate property is generally defined by the California Family Code as the following:
Family Code 770
(a) Separate property of a married person includes all of the following:
(1) All property owned by the person before marriage.
(2) All property acquired by the person after marriage by gift, bequest, devise, or descent.
(3) The rents, issues, and profits of the property described in this section.
(b) A married person may, without the consent of the person's spouse, convey the person's separate property.
Family Code 771
(a) The earnings and accumulations of a spouse and the minor children living with, or in the custody of, the spouse, after the date of separation of the spouses, are the separate property of the spouse.
(b) Notwithstanding subdivision (a), the earnings and accumulations of an unemancipated minor child related to a contract of a type described in Section 6750 shall remain the sole legal property of the minor child.
But property is not always community property or separate property. Sometimes it may have a mixed characterization.
There may also have been contributions made to a community asset with separate property funds or visa versa. In such situations, a "tracing" from a fund or asset to a fund or asset may be necessary to find the community or separate property contribution's source.
Which is best? A jointly retained forensic accountant or your own?
Forensic accountants in divorce can be appointed in two ways. The first is your retained expert which means the forensic accountant works for you and your lawyer.
The second is a court-appointed expert.
Which is best? The answer is "it depends" but we are not fans of the jointly retained forensic accountant. We like to have our own because it gives us greater flexibility in communication and strategy.
Jointly retained forensic accountants may be preferable for smaller estates where cost is a bigger issue.
Disclosures and settlement offers are the third step in high asset divorces
The preliminary declaration of disclosure
It is exactly what it sounds like - a declaration that discloses but discloses what?
It includes various forms, the two most important of which are a schedule of assets and debts and an income and expense declaration.
For a high net worth individual or a high asset divorce, the preliminary declaration of disclosure is often the first step toward the settlement process.
That is because if your spouse has a smart lawyer, he or she will want to see the disclosures (signed by you under penalty of perjury) before discussing how assets and debts should be divided.
For these and other reasons, you should take care when you complete your preliminary declaration of disclosure.
Remember again - Honesty is not only the best policy, it's the law.
Lying or concealing information is foolish and never worth it.
Our divorce lawyers consider this a non-negotiable issue and you should too. The penalties and sanctions for misrepresentations or concealment can be serious and even punitive.
The settlement offer
Are you concerned your spouse will be unreasonable?
Has your spouse said or done things that have you concerned he or she thinks emotionally, not logically, and holds a lot of anger or resentment about the divorce?
As a high net worth individual, I am sure negotiations are one of your strong suits. But divorce is different. In some respects, you may be too close to the situation and need a skilled divorce lawyer to guide you through the process.
Here are some important tips.
When ready, make the offer
If you are clear on the nature and extent of community and separate property and have done your due diligence, then make the offer.
There is no sense in waiting for an offer if you have all of the information you need to present one.
Document the offer
Your lawyer will send the settlement offer with your input, review, and consent. Verbal settlement offers are okay so long as they are documented immediately.
Because if the offer is rejected and the court later makes orders that are the same or similar to what you offered, you stand a better chance to avoid attorney fees being awarded against you - typically awarded against the high-income individual because of your spouse's need and your ability to pay.
You may even be able to ask for lawyer's fees against your spouse if his or her refusal to settle was unreasonable. Those fees can come from your spouse's share of the community estate.
Be willing to compromise
Remember what we discussed earlier? Not spending $9 on a $10 dispute? That means be smart. When you make a settlement offer, it should be one without emotion and based on the facts and the law.
And if that sometimes means giving a bit more to get it done when you could be spending a lot of money on fees and far more than that extra you give, at least consider whether that is a good option.
Hey, that's why you have a business mind that can evaluate risk, cost, and benefit.
Litigating intelligently and responsibly is the fourth step of a high asset divorce
Narrow issues for litigation and trial
All or nothing has no place in divorce litigation.
If custody and child support can settle, then it should.
If certain property issues can be resolved but others cannot be, then resolve those that can be done.
The more you narrow the issues, the less you spend on lawyer's fees, and the greater chance you will resolve others.
Yes, some issues may have to be litigated. But an interesting thing happens when you resolve some issues - you create momentum for others to resolve. That is because the settlement of even minor issues builds trust and that trust can then grow.
Don't try to outspend your spouse
It's not smart. It can get you in serious trouble with the Court and the next thing you know, you are not just paying your lawyer's fees but your spouse's fees too.
Look, if your spouse doesn't work or there is a huge income disparity, a contribution of attorney's fees may be inevitable.
But add on top of that trying to outspend that same spouse and your status as a high net worth individual and being in control of the money and finances can result in a painful reality - the judge can punish you as a monetary sanction to pay even more of your spouse's fees.
Smart lawyers don't tell you to outspend your spouse or play games with the finances. We know the types that do say that, directly or indirectly. Stay away from them.
Smart lawyers tell you to attempt resolution, litigate when necessary, and then intelligently and if your spouse is unreasonable, seek fees against your spouse.
Don't let your spouse's lawyer churn the case
Is your spouse's lawyer unethical?
Is he or she getting in the way of resolution?
Has your spouse's lawyer become some cheerleading nightmare for your spouse and is fanning the emotional flames and lying to your spouse to cause more litigation?
It happens in family law. We have seen some of the worst out there - unscrupulous divorce lawyers who do the following:
- Take unreasonable and sometimes ridiculous legal positions.
- Litigate even the simplest issues, rejecting settlement offers along the way.
- Lying to their client and to the Court just to cause litigation or protract it.
- Seeking delays of hearings without good cause.
- Encouraging false allegations.
We know the type because we have gone up against enough of them. They see you as a meal ticket. They look at the estate and the divorce not as an opportunity to help two people restore peace back into their lives but as an opportunity to generate billable hours and get paid money through unnecessary litigation.
We won't go into it here. It would take too long. But we know exactly how to deal with lawyers and law firms like this (their reputation precedes them) and either get them out of the case early or, if they persist, set up the case for serious monetary sanctions against your spouse for allowing it to happen.
There are even circumstances you can seek attorney fees against the lawyer for such misconduct.
These types of lawyers may sell to your spouse the gloves are off, advocate overaggressive tactics, or even call themselves "pit bulls" (it is amazing the foolish things lawyers say or do), or use some other stupid moniker but when it comes to consequences, your spouse is the one who may pay dearly if he or she follows their advice.
The next smart choice for your high asset divorce starts with contacting us
An experienced attorney at our family law firm is one phone call away.
Our firm has offices in Orange County, Los Angeles, and San Diego.
We offer an initial and affordable legal strategy session. We will discuss your situation in detail, including answers to your questions, concerns, a strategy, and fees.
At the end of the meeting, we will provide you a quote for an hourly rate and retainer deposit tailored for the issues in your case, depending on their complexity.
Nothing we do here is "cookie cutter." From the moment you contact us, both you and your case get the personal time and attention they deserve.
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