If you and your family have achieved a high net worth in your lifetime, chances are it did not come easily...
You worked hard, put in long hours, traveled for work, educated yourself, encountered sleepless nights, and missed your kids’ baseball games. You made many sacrifices to build your wealth and needless to say, dividing up your estate during the divorce is no easy task.
On the other hand, if you are the spouse married to a high net worth individual, you likely stayed at home and sacrificed your own career to raise the children. This sacrifice made it possible for your spouse to dedicate their time to building the family wealth. For you, getting divorced not only is unpleasant but also threatens your literal survival. You are entitled to your portion of the marital assets, and the law states that you should be able to maintain a standard of living established during the marriage while you rebuild your own affairs and generate your own future earning capacity.
The larger the estate, the more complex the issues become. Careful and reasoned analysis is required prior to distributing marital assets. This also holds true regarding initial investment decisions once you are divorced and have received initial wealth distributions. Individual circumstances, the value and marketability of the assets and, of course, tax consequences must be carefully considered before each investment decision.
In many cases a forensic accountant will be brought in to ensure all assets are properly identified and valued. This is important to ensure accurate wealth distribution decisions are made. Formal court supervised discovery is one of the most important tools relied upon to identify, value and distribute the community assets. As a high net worth individual with diverse holdings across many asset classes, this task can take a significant amount of time and resources.
Be wary about assets that were purchased as tax shelters or tax deferral vehicles. There may be significant delayed tax liabilities associated with these assets. Such tax liability may be difficult to ascertain and may require an indemnification provisions in the dissolution agreement.
You many have investments where you receive a limited partnership interest and reduced risk. These investments can range from real estate to business investments to collectibles. As an investor, your return can vary greatly and will affect its present value. Value determinations may include consulting the secondary market which buys and sells limited partnership interests. Comparing transactions similar to yours may be a good indication of the fair market value of the limited partnership interest and how it should be structured within the context of a marital dissolution.
Other investments such as venture capital funds, angel investments and subordinated debt must also be valued. The value of each investment will depend on the risk and potential reward, including:
- Type and class of investment
- Amount invested originally and subsequent investments or distributions
- Ownership percentages
- Investment time horizon
- Projected returns both in IRR and cash-on-cash
- Future obligations or anticipated capital calls
- Probability of achieving expected returns
- Current status of project and time line to reach investment goal
- Rights of investor – does the investment include voting rights
- Ownership transfer restrictions
- Liquidity if compelled to sell investment immediately
- Status of government approvals, permits and authorizations
- Governing provisions of underlying partnership agreements
- Offers to buy or sell ownership interests in the entity
- Other investment exit strategies and deferred sale options
Once there is an understanding of the full investment picture and its value, you and your attorney and advisors must assess the available options to determine the appropriate liquidation and distribution methods that achieves the highest value for all parties. For most investments, an individual has two options when determining his or her future with the investment.
The in-kind approach distributes the investment based on equitable percentages and values. This option requires the actual ability to divide the asset, an intimate understanding of the investment and its risk as well as mutual confirmation that the parties have the financial strength to forego immediate liquidity.
The “buy-out” option distributes the investment based on its current value. This method requires a current valuation or appraisal. Valuation methodology, tax impacts and other factors are a material part of this process.
Each spouse’s election to distribute community assets based either on the buy-out or the in-kind distribution method should be carefully analyzed on a case-by-case basis. Our Scottsdale family law firm is well versed in providing clients with a variety of scenarios to choose the highest and best path toward community distribution which then allows the divorce decree to become final.
The more common approach is the buy-out option, which distributes the asset based on experts’ opinions of current market value. This option is often preferred by the court systems because it eliminates an ongoing relationship between you and your ex with regard to the asset, which decreases the chance of problems in the future. While the “buy-out” method may eliminate future disputes with that particular asset, it also generates new problems which need to be handled today in reaching resolution on that asset’s buy-out value today. The focus now becomes current market valuation and there is not always an easy way to determine the value of a private equity investment. In some instances, it may be inequitable to force a current buyout where the potential return on investment is high but too speculative to determine at that particular point in time.
While every situation is different, it is important to select attorneys who are both experienced and well-versed in high net worth dissolution matters. The attorneys at Edwards & Cherney Family Law have deep financial and business backgrounds which bring crucial skills to the negotiation table when dividing high value community assets during marriage dissolution. The choices you make today can and will affect you and your children’s security for years to come. Having an experience, informed and talented attorney at your side to advance your financial interests during your family law dispute is a critical first step in achieving your desired goals.