High Net Worth Divorce
In some situations, a divorce has more at stake for one or both spouses than normal. This is considered to be a high net worth divorce. A divorce falls under this category if it involves a number of legal qualifications. One such qualification is if the wealth that is involved in the process is related to a business or business interests of some sort. It can also be in this category if the financial history of the couple is so complex and convoluted that an intricate, professional tracing must be carried out to see which aspects of the property belong to which spouse. Furthermore, the divorce may be considered high net worth if investment interests are located either in another state or another country or if there is significant financial spousal maintenance or there is a risk of exposure for either spouse.
One of the main areas that must be dealt with in such a unique divorce is a spouse’s investments. A person who is considered to be high net worth may use a number of different types of investments that the average individual would not have access to. These investments can cause a great deal of difficulty in the divorce process because they require an alternate form of legal handling. Some of these investments include tax shelters, venture capital funds, and angel investments.
One way that wealthy individuals invest their money is by using tax shelters. As the name indicates, these investments are designed to reduce the person’s annual tax liability. A common type of tax shelter is called a limited partnership, which is a passive investment. The idea behind this move was to be able to report losses and therefore reduce their taxable income. However, these tax shelters may complicate matters, especially if they existed prior to 1986 when President Reagan passed the Tax Reform Act that made it more difficult to use a limited partnership as a tax shelter. One of the main difficulties lies in the ability to determine the current value of the partnership.
Venture capital funds may also come into play. These funds originally were limited to pension funds and exceptionally high net worth individuals. However venture capital funds have recently been opened to normal high net worth people as well as some smaller investors. When it is a professional venture capital fund, money is pooled from a number of investors and then managed by a group of professionals. When this situation is involved in a divorce, it is viewed as a mutual fund investment with, of course, much more risk. It is very difficult to divide the assets of such an investment in order to determine what percentage should be given to the other spouse.
Angel investments are also made by high net worth individuals. These are very similar to venture capital investments. In this situation, an investment is made directly to a company that is seeking funds. An angel investment has a similar level of risk to the venture capital but it can last longer. This type of investment becomes tricky because it may or may not be a not be a part of the asset evaluation in a divorce case.
QUESTIONS TO ASK IN A HIGH NET WORTH DIVORCE
In order to appropriately divide a couple’s property, assets, and liabilities, the couple and the courts must have all the information concerning both spouses’ financial endeavors. However, gathering information for a high net worth individual is difficult predominantly because of the staggering amount of material that must be uncovered. When assembling all of the information surrounding this individual’s assets and investments, there are a series of questions you must ask. These include:
- What is the type of investment
- What is the level of risk involved in the investment
- What was the original amount of money that was invested
- What percentage of the investment does the individual actually own
- What distribution did the individual receive
- What future obligations will be expected of the individual
- What is the time frame for the liquidity be achieved
- What is the expected return on the investment
- What restrictions exist on the transferability of ownership
- What are the exit strategies
These questions all play an important role when deciding how to deal with such a divorce. Investments have a major impact on how property and financial resources will be divided among the husband and wife. One possible way that an investment can be distributed is called the “in-kind” option. This can happen if the asset can actually be divided, the nature of and risk surrounding the investment is understood, and the client has the ability to relinquish liquidity. Another way that it can be divided is the “buy-out” option where distribution is based on the investment’s current value.
FACING A DIFFICULT DIVORCE?
Money complicates everything. The more money involved, the more problematic everything becomes. The most important thing you can do if you are facing a high net worth divorce is stay on top of both you and your spouse’s financial records. Leave no stone unturned when investigating business enterprises. If it is revealed at a later date that something was hidden from the courts, you and your spouse will find yourselves back in court, rehashing every decision that had been previously made. No one wants to go through the divorce process twice.