Divorce Tips for High Net Worth Individuals and Entrepreneurs
Divorce tips for high net worth individuals best comes from an in person legal strategy session with a smart and experienced attorney who has a dedicated law practice to family law. It just so happens that's exactly what we are, except we are not one lawyer but several experienced attorneys as part of a respected family law firm in California. Our family law firm represents clients in each of the seven Southern California counties.
This article is not legal advice. It is not designed to answer your questions about your specific situation. No article can really do that. This article is a starting point for high net worth individuals and its focus is the sometimes common and often unique aspects of divorce for high income and asset divorce cases. We hope it provides you with a nice start toward planning for a strategy session with an experienced family law firm.
This is part 1 of a 3 part series regarding divorce for high net worth individuals. This article focuses on the "in-spouse" as it is sometimes called, referring to the high net worth spouse who is the primary income earner and in control of the finances. Just so the article flows easier and we don't have to keep switching genders, let's assume that higher income earner is the husband.
Part 2 will be written for the "out-spouse" which is typically the stay at home spouse or the one not in control of the finances.
Part 3 is a special feature on the most common mistakes we have seen high net worth individuals and entrepreneurs make during the divorce process and even after the final judgment.
Ready? Let's get started with Part 1.
Step one toward divorce advice for high net worth individuals and entrepreneurs - Planning
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 in the beginning, possibly even a court filing, but eventually a resolution that doesn't require a court hearing; or
- Litigation that 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, those that involve false allegations of abuse, parental gatekeeping or parental alienation, there is rarely an instance where taking the decisions away from the parents and leaving it to the judge is a great idea.
Here are a few child custody planning tips that are 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 a lot of flexibility for things like make up time and maximizing time while you do have a fixed schedule.
- Be careful when deciding whether or not you want to move out. There are sometimes 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 or are in danger. Others just want their peace. And some are told to move out and they have to decide what to do. 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 trying to establish a child custody schedule once you do. If your wife is going to be difficult or intends to keep the kids from you, moving out might make that easier.
- Get a custody and visitation stipulation and order (written agreement in the proper form that becomes an order) early in your divorce. Taking a negotiation posture that issues have to resolve globally (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.
- If you are in Orange County, California, definitely consult the Orange County Parenting Guidelines.
Child support and alimony planning in a divorce for high net worth individuals
Child support should be simple. After all, 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 families who earn a regular W2 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 that 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 or your income comes from several sources:
1. "Base" income of most high net worth individuals
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, is paid monthly and often bi-monthly similar to a paycheck.
2. Profit distribution versus bonuses
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 execution position, the additional income is typically in the form of a bonus. This bonus is typically tied to individual and/or company performance.
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.
3. Company Perquisites and their role in a divorce high net worth individuals
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 fall into a different group for support purposes), taxed income or a combination of the two. One of the challenges a divorce causes is that what was normal and accepted during the marriage becomes challenged when a husband and wife find themselves at odds in divorce litigation. The issue of perquisites and their status as untaxed or taxed income becomes an issue in most support cases.
4. Interest or passive income
Interest income can come from investment accounts, 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 is not always a fair game. 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. Contact us and we will explain how such situations are handled.
5. Phantom Income?
Phantom income is not common but it does exist. Phantom income is income that is not really received by the high net worth individual even though it is "paid." It is beyond the scope of this article to go into phantom income and its application is rare enough that if you find yourself with it, our experience will come in handy.
6. When the high income spouse makes too much money for the computer program on child support or temporary spousal support to apply
Don't assume the computer program lawyers and judges use (usually either dissomaster or x-spouse here in Orange County) 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.
The sudden pre-divorce spending spree
One important tip we have for high net worth individuals who are about to go through divorce is watch out for the sudden pre-divorce spending spree. We have seen it happen and we have cautioned the high net worth spouse about it. Husbands sometimes wonder why their wife is suddenly spending more than she ever did or causing unnecessary expenses on lavish items that are even beyond an upper income marital lifestyle.
There is no one answer 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 high net worth individual, will lie about your income, play games during the divorce and try to deprive your spouse of the marital lifestyle to which 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 budgeting 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 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 Californiato better understand what Gavron Warnings are and how they are applied. They are a sometimes 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 includes:
- A primary residence which 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 life.
- Trademarks, patents and copyrights, otherwise known as intellectual property
- In some cases, investment opportunities that have not yet come to fruition.
Divorce for high net worth individuals and planning for attorney fees and costs
Just because you are a high net worth individual going through 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. You intend to give your lawyer an open checkbook? To do whatever he or she wants? Don't be a fool.
The fact you are a high net worth individual does not mean you throw out common sense. A divorce is like any other lawsuit in California except you are dealing with specific laws tailored for husbands and wives and a specific, designated court and group of judges ("family court").
Your divorce lawyer's job is not to "scorch the heart", "make her life hell", "outspend" her or any one of the other dumb things I have actually heard lawyers say and clients believe.
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 and that is what you want.
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 us. 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. To believe that with the help of a talented lawyer, you can manage those emotions and make sure emotions don't make decisions for you is very realistic.
How? We have written an article on managing divorce's complex emotions. Check it out. It's a good article and a good start. Here are three of the best tips I can give you:
- The children's best interest comes first in any custody decisions. That means you become child focused, not self-focused. That is how the Court will judge 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 wife "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 yourpocket 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. You are a businessman outside of your divorce right? Be a good one within your divorce too.
- 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.
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 management of it.
Divorce is no different and the same types of experts with whom you may have consulted during the marriage becomes 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 wife" I hear husbands sometimes say. First, that is often an exaggeration. Community property doesn't mean one takes a King Solomon approach to life by severing in half 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 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. An attorney who handles business transactions and contracts, corporate or partnership formation and formalities, intellectual property, has defended or prosecuted civil actions against or for your company or is simply a trusted advisor is a valuable asset to your peace of mind. That same attorney and advisor may be needed for your divorce
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 professional 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, if you are a high net worth individual going through a divorce and believe you need such advice, we can refer you to a tax professional.
The synergy between your family law firm and other professionals
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 property will have to be valued or sold.
Step two toward divorce advice for high net worth individuals and entrepreneurs - Forensic accounting and separate property claims
Forensic accountants in a divorce for high net worth husbands.
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 networth individual, 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 and profits depend on profit distribution and passive income, more than it does a salary. 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.
Business valuations in a divorce for high net worth individuals
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 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 wife may claim that the business you worked hard to build is community property and she may be right - at least in part. If she is, 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 a value on the business. That is what a forensic CPA does.
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, while living
separate and apart from the other spouse, 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 separte 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.
The joint forensic accountant expert 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 and this can come in a few forms, the most common being per Evidence Code 730. That code section states in part:
When it appears to the court, at any time before or during the trial of an action, that expert evidence is or may be required by the court or by any party to the action, the court on its own motion or on motion of any party may appoint one or more experts to investigate, to render a report as may be ordered by the court, and to testify as an expert at the trial of the action relative to the fact or matter as to which the expert evidence is or may be required. The court may fix the compensation for these services, if any, rendered by any person appointed under this section, in addition to any service as a witness, at the amount as seems reasonable to the court.
Which is best for you? That depends on several factors you will discuss with your divorce lawyer.
Step three toward divorce advice for high net worth individuals - Disclosures and smart settlement offers
Preliminary declaration of disclosure
It is exactly what is 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, the preliminary declaration of disclosure is often step one toward the settlement process. That is because if your wife has a smart lawyer, he or she will want to see the disclosures (signed by your 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 nonnegotiable issue and you should too. The penalties and sanctions for misrepresentations or concealment can be serious and severe.
Document the settlement offer
Are you concerned your wife will be unreasonable? Has she said or done things that has you concerned 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 talented divorce lawyer to guide you through the process.
What are some important tips?
- 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. Why? 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 wife's need and your ability to pay). You may even be able to ask for lawyer's fees against your wife if her or her lawyer's refusal to settle was unreasonable. Those fees can come from her 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.
Step four toward divorce advice for high net worth individuals and entrepreneurs - litigate intelligently
Narrow issues for litigations and trial
All or noting 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, 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 a momentum for others to resolve. That is because 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 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 wife. Smart lawyers tell you to attempt resolution and if your wife is unreasonable, seek fees against her.
Don't let your spouse's lawyer churn the case
Is your wife's lawyer unethical? Is he or she getting in the way of resolution? Has your wife's lawyer become some cheerleading nightmare for your wife and is fanning the emotional flames and lying to her to cause more litigation? It happens in family law. We have seen some of the worst out there - unscrupulous divorce lawyers who:
- 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 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.
Divorce advice for high net worth individuals and entrepreneurs starts with one phone call
An experienced attorney at our family law firm is one phone call away. Our firm has offices in Orange County and Los Angeles. We offer an initial legal strategy session. We will discuss your situation in detail, including answers to your questions, concerns, a strategy and budget.
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.