High-asset divorces are characterized by the presence of substantial wealth and assets belonging to one or both parties, typically exceeding $1 million in net worth. But having a large account balance on your investment ledger or owning a luxury sports car isn’t what makes these divorces more complex.
Yes, they do involve significant assets to divide—but they also can bring complex tax implications, business valuations, property appraisals (including collectible items), premarital agreements, and much more to the table.
There are a lot of questions, a lot of documentation, and a lot of decisions to make.
What’s more, the moves you make early in your divorce negotiations can deeply impact your well-being for years to come.
That’s why it’s essential to be aware of the potential pitfalls that could hurt your case. These are the top four ways divorcing couples are jeopardizing their high-asset divorce.
1. Ignoring tax implications
Taxes can quickly become an afterthought in the emotional whirlwind of a divorce. But if you don’t consider the tax implications of your settlement agreement, you might face costly surprises down the road.
There are several areas to consider, including:
- Division of marital assets: Knowing the purchase price for assets and their appreciation during the marriage is crucial. Depending on how these assets are divided, and how they are taxed at the federal and state levels, one party may carry a greater tax burden than the other.
- Alimony payments: Spousal support payments are currently not tax-deductible for the paying spouse at the federal level but are potentially considered taxable income for the receiving party at the state level. Knowing the rules from your accountant is key. Armed with deeper knowledge, you can better negotiate a settlement that minimizes or takes into consideration the tax implications for you following your divorce.
- Retirement accounts: Division of assets like 401(k)s IRAs, and depending on the type, pensions and annuities, can require a Qualified Domestic Relations Order (QRDO)—a court order recognizing that an “alternate payee” can receive distributions of the earner’s retirement benefits. When mishandled, the division of retirement assets can lead to unexpected tax consequences or delay distributions to the non-contributing spouse. Working with a skilled legal professional to get your QDRO in place and protect both parties’ interests is best.
- Capital gains tax: If assets, such as stocks, real estate, and other investments, have appreciated over time, there may be a tax responsibility for the amount appreciated. For example, if you become the sole owner of a property during a divorce settlement, you could also be responsible for the capital gains tax on the property’s appreciated amount. Things like whether those gains are long-term, short-term, and whether there are harvested losses can affect overall distribution and monetary impact.
2. Forgetting to value certain assets
By their very nature, high-asset divorces typically have more assets to deal with—yet having more assets can make it harder to account for everything.
However, getting a fair and equitable distribution means you must have all the details about your marital assets.
Here are some assets that often get overlooked:
- Business interests: If either spouse owns a business, a skilled forensic accountant should provide an assessment to determine fair market value. Do not settle for using information provided by the other spouse when advocating for your fair share.
- Stock options and restricted stock units: These are valuable assets but come with vesting schedules. Familiarize yourself with these accounts, their distribution schedules, their tax treatments, and how deferred compensation plans and exercising stock options or receiving vested RSUs during a divorce might impact your taxes.
- Intellectual property (IP): Patents, copyrights, and trademarks developed during the marriage are valuable assets and should be included in negotiations. A forensic accountant can help determine ownership and assign a fair value.
Another consideration is marital debt. Liabilities like mortgages, car loans, and credit cards help provide a complete picture of a couple’s financial situation and are essential to equitable distribution.
When facing a high-asset divorce, your best course of action is to be proactive and gather all your financial records. The documents can help your attorney and forensic accountant to accurately assess your financial situation and provide the best counsel to secure your financial future.
3. Not accounting for all assets
While overlooking assets can be an honest mistake, it’s important to acknowledge that intentionally hiding or refusing to disclose assets is common in high-net-worth divorces. Your former partner might do things like:
- Set up a shell company
- Open offshore accounts
- Convert assets to cryptocurrency
- Create a bank account under a different name
- Report false business losses
Hidden assets can impact the fair division of assets and potential alimony and child support. If you suspect your ex is hiding assets, time is essential. Share your concerns with your attorney. They can help you develop a strategy for uncovering the full scope of marital assets by requesting documents, issuing subpoenas, tracing assets, and enlisting the help of a forensic accountant.
Role of forensic accountants in high-asset divorces
Knowledge is key to ensuring a fair and equitable distribution of assets. Your best first step is to conduct a comprehensive asset and liability inventory with the help of a skilled valuation expert or forensic accountant.
As noted, they can help uncover hidden assets, but that’s not all. They can objectively assess business and IP values and fair market values of any unique assets like family heirlooms or jewelry.
4. Not hiring a seasoned high-asset divorce attorney
It might be tempting to get things over with quickly by handling your divorce on your own or signing with the first attorney you speak with.
The short-term relief of just getting things over can lead to long-term struggles, though.
Without an experienced attorney at your side, you can run into problems like:
- Ineffective negotiation: Without a seasoned attorney, you might agree to a settlement that undervalues your share, such as accepting fewer stock options or retirement accounts.
- Legal missteps: High-asset divorce often involves intricate laws, like how to handle family trusts. An inexperienced attorney might mishandle these, leading to costly mistakes or unfavorable rulings by the court following a trial.
- Incomplete financial analysis: For instance, not correctly assessing the tax implications of asset division could result in unexpected liabilities. An experienced attorney would collaborate with financial experts to ensure everything is accurately valued, or has a team of experts to rely upon to help figure out the nuances.
- Prolonged legal battles: With a detailed understanding of the factors at play in a high asset divorce, an experienced attorney can help move your divorce along more efficiently. For example, they might collaborate with financial experts to streamline complex asset evaluations or negotiate creative solutions, such as staggered payouts or asset swaps, to help resolve disputes while protecting your interests.
Don’t settle for less when going through a high-asset divorce. You deserve an attorney who understands the layers of complexity and can fight to protect your fair share.
At Jacobs Berger, LLC, our dedicated marital asset division attorneys prioritize open communication, collaboration, and a commitment to understanding the unique situation of every client we meet.
Contact us to schedule a strategy session with our team. We will be here for you every step of the way.
