How to Protect Assets in a High Net Worth Divorce

save money and a gavel

When it comes to an equitable division of property among couples who are divorcing, knowing the details before making a decision of what you want is critical. The details become even more important with high-net-worth couples going through a divorce. This includes knowing the true value of:

a. Each spouse’s gross and net monthly earnings;

b. All assets of the family that need to be divided;

c. Each spouse’s retirement accounts;

d. Each spouse’s securities that are not in a retirement account;

e. Each spouse’s right to a future pension benefit;

f. Each spouse’s individual debt; and

g. All jointly titled debt.

Take the time and discuss with your attorney a thorough asset and debt inventory. This will enable your attorney to help you secure the monthly support and division of assets and debt you deserve whether you are the family’s primary wage earner or the stay-at-home parent. During this discussion, ask about the effect of each spouse’s age, the length of the marriage, the professional achievements of each spouse, the spending of each spouse for the prior few years before the divorce, and what your financial outlook may be when the divorce is over.

At the moment, one particular age group is experiencing a dramatic rise in marital breakdowns – baby boomers. If you Google “gray divorce”, you will read a number of articles talking about an increasing number of people more than 50 years old are ending their marriage. According to the National Center for Family and Marriage Research, “[t]he divorce rate among adults ages 50 and older doubled between 1990 and 2010.” This trend has continued into 2021, and approximately one of every four individuals going through a divorce is age 50 or older.

Whether you are age 50 and older or have accumulated wealth before age 50, finances are the focal point of the high-net-worth divorce. Below are some practical tips for those individuals who fall into this category.

1. Tax liabilities

Will you have future capital gains that could become an issue years after you divorce? For example, when a home is sold during or after the divorce, the sale may be subject to a capital gains tax. If the home was the primary marital residence and you lived in the home for two of the preceding five years, you may be eligible to exclude up to $250,000.00 of the gain on the sale of the home. If both spouses meet the ownership and residence tests, the couple may be eligible to exclude up to $500,000.00 of the gain.

Another example, you receive a stock portfolio that is valued at $200,000.00. After divorce, decide to sell the stock. It’s valued at $200,000.00 but what is the cost basis? If it was $100,000.00 then you must pay capital gains tax on the $100,000.00 of gain. If you received this portfolio in exchange for equity in the marital home, you need to look at whether you are actually receiving the same amount of equity as your former spouse. If your former spouse sells the marital home but pays no capital gains tax because he qualified for the $250,000.00 exemption, then s/he received $200,000.00 net while you did not.

2. Retirement accounts

Retirement accounts are one of the most valuable assets that you own and it’s important for you as a divorcing spouse to know how much you will receive or lose from the division of each retirement account. Retirement accounts include pensions, 401(k)s, and IRAs. The court treats retirement plans the same as all other assets accrued during the marriage, meaning these plans are considered marital property and need to be divided at divorce.

3. Licenses

Some high-net-worth individuals have licenses, such as doctors, accountants, lawyers, and other professionals, as they need certifications and designations to be formally recognized by their respective industry. The license adds to the prestige of a professional profile and in most cases, requires continuing education credits to be maintained. As a result, the value of these licenses likely increased during the length of the marriage. Perhaps most importantly for high-net-worth individuals, it can represent stock ownership of a business.

For example, you get married 25 years ago and your spouse earns a CPA license five years into the marriage. As a CPA, he joins a firm that results in him becoming a partner. During divorce settlement negotiations, you need to determine the value of that license for purposes of current income and future income including any partnership equity that may payout after retirement.

Having an informed, qualified attorney in court or at the negotiating table is the best way to protect your interests in a high net worth divorce. Should you need the advice of a divorce attorney or have questions or concerns about your situation, know that we are here to help and discuss those issues with you.