Last Updated on February 26, 2023 by Benson Varghese
What is a high net worth divorce?
A high net worth divorce case is one in which the divorcing couple has significant assets, property, and income to divide. These cases often involve complex property division and alimony arrangements. Generally, this means at least a million dollars in assets that need to be divided.
Divorce can be especially complex for high net worth individuals, requiring in-depth negotiations and property division arrangements. In such cases where significant assets are at stake, it’s essential to consider the possibility of hidden or undisclosed funds by either party – often a difficult task as cash is notoriously hard to trace.
The most common form of hidden asset is, in fact, cash and it also the most difficult one to trace. This may come to light when you see someone has unexpected assets sales without an accounting of the proceeds, but there are many more red flags we will cover in this article. During a divorce, you need to have an accounting of all the bank accounts, charge cards, credit cards, electronic funds transfers, any savings accounts, any brokerage accounts etc, and you look for transfers or with cash withdrawals that do not have an adequate explanation.
- Investments: Some people will try to put money into private investments where they don’t think they’re going to get a 1099 at the end of the year.
- Gifts: Sometimes they will just deliver money to their friends.
- International Travel and Transfer: Keep an eye out for international travel. Certain Caribbean islands are notorious havens for hidden money, and if there’s an unusual amount of cash withdrawn from your estate without explanation it could be indicative of funds fleeing overseas. So stay vigilant – global travel might just mean they’re taking money with them!
- Transferring Assets to Another Person: Trying to prevent their soon-to-be ex from getting ahold of them, some spouses may gift assets to friends or family members in an attempt at concealment.
- Underreporting Income: A spouse may underreport their income to make it appear as though they have less money than they actually do.
- Overstating Debts: A spouse may overstate their debts to make it appear as though they have less money than they actually do.
- Delaying Receipt of Bonuses or Stock Options: A spouse may delay receiving bonuses or stock options until after the divorce is finalized.
- Creating Fake Debt: A spouse may create fake debt by borrowing money from a friend or family member and then repaying it after the divorce is finalized.
- Hiding Cash: A divorcing spouse may try to protect their assets by concealing them in a variety of places, like a safety deposit box, an off-the-books account or even under the mattress.
- Overpaying Taxes: A spouse may overpay their taxes in an attempt to receive a larger refund after the divorce is finalized.
- Selling Assets for Less than Market Value: A spouse may sell assets to a friend or family member for less than they are worth in an attempt to conceal their true value.
- Using Cryptocurrency: A spouse may use cryptocurrency to transfer assets, as it is often difficult to trace.
How do you find hidden assets in a divorce?
Finding hidden assets in a divorce can be a challenging process, but there are several steps that you can take to uncover them. We go through a three step process.
- Preliminary Review: I have my clients go over financials with me and we review all of the financial statements, including bank records, securities transactions, credit card activity, and cash withdrawals. Together we assess anything that may raise suspicion or questions of possible wrongdoing that require further clarification or investigation.
- Reviewing Suspicious Activity: If our suspicions and evidence warrant it, I’d recommend bringing in a highly qualified forensic accountant to track the financials. This individual will generally be a certified public accountant with fraud investigation expertise – ready to uncover any potential wrongdoings.
- Hiring a Forensic Accountant: A forensic accountant will carefully review all financial documents, including tax returns, bank statements, and investment account statements. They will look for any unexplained transactions or discrepancies that could indicate hidden assets. They may conduct a lifestyle analysis to compare a spouse’s reported income to their expenses and assets. If their lifestyle seems to exceed their reported income, they may be hiding assets. They can also search for offshore bank accounts that may be used to hide assets. Forensic accountants can also use specialized software to trace money transfers and identify any foreign accounts. If a spouse owns a business, a forensic accountant may examine the company’s financial records to determine if any assets are being hidden or undervalued.
When it comes to allocating valuable assets, the court has a wealth of options and methods. While liquid accounts can be divided using straightforward percentages, other types of possessions present unique challenges due to their variable value or because they are difficult to properly evaluate. An art collection would be a good example. Depending on the type of art we are looking at, there may be very few people in the country qualified to appraise it. The key to getting a fair division is getting a reliable appraisal. Appraisals come up with all kinds of property that carries value – silverware, china, artwork, and certainly business assets.
Separate property in Texas is anything that you owned prior to marriage or that you acquired while married by inheritance or gift. Everything on the day of divorce in Texas is presumed to be community property. There is no presumption that you own property before your marriage or that you actually received a gift. If you cannot trace it or prove exactly how you got the property, then the court is going to treat it as community property and divided as community property.
In Texas, the burden is upon the party claiming that their property is separate. To prove it, not by the normal civil standard of preponderance of the evidence, but they’ve got to prove it by clear and convincing evidence. To establish proof by clear and convincing evidence in a divorce case, there has to be documentary evidence to point to. This generally means evidence prepared by an accountant, forensic accountant, or other expert who analyzes the asset, how it was purchased, and can trace it back to either the inheritance, the gift, or that you owned it prior to marriage. If you cannot trace it by clear and convincing evidence, then the court at the time of the divorce is going to treat it as community property and divide it.
Forensic accountants can be helpful in uncovering hidden assets. In some cases, it may be necessary to hire a forensic accountant to help uncover hidden assets or to value complex assets such as businesses. A forensic accountant is a certified public accountant with experience in auditing and fraud investigation, and they can help identify irregularities in financial records that may indicate the presence of hidden assets.
If someone has a substantial inheritance or received a substantial gift, the court cannot take that away from the party. It is not subject to division by the court.
If a couple acquired or developed or built up a business while they’re married, then it is considered community property and it is subject to division by the court. As a practical matter, many businesses are really not subject to division. How do you divide a dental clinic? How do you divide a doctor’s practice? How do you divide a software business? Things like that are hard to divide in kind. In those cases, the courts then and the attorneys expect to get some type of business evaluation done. This will value the assets of the business, look at the income of the business, look at the nature of the business, the regulatory environment that the business operates in, and we will get a professional opinion as to what a professional thinks that business is worth. Then the court will typically award that business to one party. It’s usually the one that has operated it or been more substantially involved. They will assign a value when they award that to that party, and then they will give the other party what is called an equalizing judgment. For example, if a business is worth a million dollar and the wife runs it, a judge may award the business to her with an equalizing judgment for $500,000 to the other, with a lien on the business for $10,000 a month until that $500,000 is paid off.
Other businesses might lend themselves to being divided – such as multiple store locations.
When dividing a business in a divorce, a court will typically consider various factors to determine an equitable division. Some of the factors that a court may consider include:
- The type of business – Some types of businesses, such as professional practices, may be harder to divide than others.
- The value of the business – A business valuation expert may be brought in to help determine the value of the business.
- The contributions of each spouse to the business – This may include financial contributions, as well as contributions such as labor, expertise, or contacts.
- The future earning potential of the business – This may take into account factors such as market trends and competition.
- The tax implications of dividing the business. When a business is divided in a divorce, there can be significant tax implications for both parties involved. A court may take into account these tax consequences when deciding how to divide the business assets. For example, if a business has a high value but low liquidity, the court may decide to award one spouse a larger percentage of the liquid assets to avoid having to sell the business and incur significant tax liabilities. Additionally, the transfer of business assets between spouses as part of a divorce settlement can trigger tax obligations. The transfer of assets may be considered a taxable event and could result in capital gains taxes for the receiving spouse if the asset has appreciated in value since it was acquired. However, there are some exceptions to these tax liabilities. For example, if the transfer is made as part of a divorce settlement and meets certain requirements, it may be considered a tax-free transfer. Furthermore, there may be tax implications for the ongoing operation of the business after the divorce is finalized. If the business is owned by both spouses, they may need to restructure the business to avoid running afoul of certain tax laws. For example, if the business is a pass-through entity like a partnership or LLC, the spouses may need to restructure the business to ensure that it meets the criteria for being taxed as a partnership or LLC.
- The financial needs and resources of each spouse – The court may consider each spouse’s financial situation and how the division of the business will impact their future financial stability. When dividing a business, the court may consider how the division will affect each spouse’s future financial stability. For example, if one spouse is the primary income earner and the other has been a stay-at-home parent, the court may be more likely to award the business to the income earner in order to ensure they have the means to support themselves and their children. On the other hand, if both spouses are able to support themselves without the business, the court may be more likely to divide it equally or award it to the spouse who has been most involved in its management.
- The length of the marriage – The length of the marriage may be a factor in how the business is divided. If the couple has been married for a long time, the business assets may be considered community property, regardless of whether one or both spouses are involved in the business. The court may view the business as a joint effort of the couple and thus, may divide it equally. On the other hand, if the marriage is short-lived, the court may view the business as separate property of the spouse who initially started it, especially if the other spouse had no significant contributions in building the business.
- Any prenuptial or postnuptial agreements – If there is a prenuptial or postnuptial agreement in place that addresses the division of the business, the court may take it into consideration.
- The ability of each spouse to manage the business – The court may consider which spouse is better equipped to manage the business going forward.
- The best interests of any children involved – If there are children who rely on the business for financial support, the court may consider the impact of the division on their well-being.
- Any other relevant factors – The court may consider any other factors that it deems relevant to the particular case.
Some assets actually have hidden value that the parties are not typically aware of and the attorney needs to be on the look out for this to bring in experts where needed. This type of problem highlights why you need an attorney who is experienced in handling high net worth divorces.
When the business was developed duing the course of the marriage, the court is almost certainly going to award that business to the one that has been most active in the business, particularly as long as that individual is a responsible individual that seems to be running the business with a degree of integrity during the divorce process, then they will grant a compensating judgment. We will have experts value of the business. Sometimes we get two or three experts to actually value the business, and then the court will decide how much the other spouse is to be compensated. They usually start with a percentage, 50% on up to sometimes up to 60% of the value of the business. Then the spouse that has awarded the business is ordered to pay the non-owning partner or spouse their share over some stated time, usually the shortest time that the court thinks that they can order a party to pay it.
We like to get an evaluator in early in the case. It increases the chances that our evaluation will stand and the other side won’t even go through the trouble or expense of getting a valuation. The court is not going to do any of the evaluation work itself. They are going to listen to the testimony of the evaluator(s). They will also listen to the testimony of the parties because sometimes these parties have a lot of insight into the business and the industry. They will also take into account what I call the intangible value or hard-to-measure value of owning a business such as belonging to a country club, buying cars, being able to entertain freely, and being able to travel to places that are very comfortable or enjoyable to travel to. They’ll take all of this into account and they will pick their own figure from the evidence they’ve heard.
In Texas, the law states that an equitable and just division of assets should be made in consideration of rights held by both spouses as well as any children from their marriage. This is generally referred to as the “just and right” standard. The law says, “the court shall divide the estate of the parties in a manner the court deems just and right having due regard for the rights of the parties and any children of the marriage.” The court will take into account any fault in the breakup of the marriage, any disparity in income between the parties, any disparity in education between the parties, any disparity between the parties of future business opportunities, any property that a spouse may have inherited.
The court will take into account the children, any illness of a party, and almost any other thing that the court thinks is an equitable factor that it should weigh in deciding how much of the value it should give to each spouse. If everything is equal, the court in Texas is going to go 50/50. As more factors begin to favor one person, for example, if you have a low-income spouse or a person that has not been in the job market for a number of years and they also do not have any formal education and they also have some health problems, then the court is going to award that spouse an equitable division that goes up to generally 60%. And the spouse that is the high-income earner is healthy and well-educated, they’re going to award that spouse typically 40%. The courts normally operate in a 40 to 60 range with 50 being normal if everything is equal.
If one spouse was a stay-at-home spouse and earns substantially less than the other spouse or nothing at all, that would be part of the equation. In many cases, the stay-at-home spouse is a stay-at-home spouse because of the children. Now, the court’s also weigh who gets custody of the children in the factor, but the court will definitely consider the fact that one person stayed at home. In Texas, we view that as being very supportive of the spouse that was able to go out and move into the job market or the profession and earn lots of income. So, we want to justly compensate the spouse that kept the home front up.
No, they do not have to share their income. Texas looks upon education as being somewhat of a personal trait. The court is not going to impose upon their future income any type of burden. They’re free to take their income earning ability with them.
The court determines the value, 403(b)s being the savings account that occurs when you work for a nonprofit, 401(k)s being the ones that you get when you work for profit company and pensions. The court will determine a present value on the date of divorce, and then they will divide the accounts at that time. They enter what is called a qualified domestic relations order, which is a separate order signed by the judge that awards a spouse that is not working for the company or the institution. A portion of the account or the amount, it may be 50%, maybe up to 60%. Pensions get a little bit trickier because frequently an employee is continuing to contribute to the pension and the estimate that you get from the company or the employer is predicated upon the fact that that person is going to remain in employment for the next, say 10 years.
If you’re looking at a divorce from a 45-year-old woman that has been working with a company or a governmental institution for 20 years, she is probably to get the amount shown on the little statement they send you every January. She’s may have to stay there another 10-20 years to vest. You have to figure out what the present value is. That is generally obtained through a forensic accountant. Pensions are going to get handled through a qualified domestic relations order.
IRAs are much easier. They are often handled by a transfer letter or letter of transfer. Sometimes the institution that is holding the IRA will simply accept a letter that we prepare and have both parties sign. Occasionally a financial institution will have their own required forms. We will reach out to the IRA holder long before the divorce is nearing the final stage, and we obtain those forms and we go ahead and complete them so that the day the judge signed the final divorce decree, we can then serve that or send it out by certified mail to the holder of the IRA. As soon as the holder of the IRA gets that, they will divide the account into two separate accounts and make certain that neither spouse has any ability to see what the other spouse is doing with their separate IRAs now.
If you can trace it as your inherited property by clear and convincing evidence, then the court cannot take that away from you, and they must set it aside to you. If you cannot trace it by clear and convincing evidence, then the court is going to treat it as community property. I have found over the years that in order to trace a lot of separate property, you really have to use a forensic accountant. The calculations get very, very detailed. By way of example, in one case a forensic account had to prepare over 120 schedules going through looking at an account year by year by year, quarter by quarter by quarter, and determining what is separate property and what is community property. It does get very complex.
No. You cannot terminate a prenuptial agreement as such. In other words, once you sign a premarital agreement, you cannot send your spouse a letter that says, “I hereby terminated, I’m not going to live under it,” or cannot tell the court. What you can do is the court looks at whether or not the agreement is enforceable, and the court under limited circumstances can refuse to enforce an agreement. Generally, for court to find that they’re not going to enforce an agreement, they have to find that the agreement was unconscionable when it was written, and they look at the total circumstances surrounding the execution of the agreement. You also have to look at whether or not a party signing it was provided fair and reasonable disclosure of the financial obligations of the other party, or if they didn’t voluntarily waive it and waive in writing the right to get any additional financial information, or if they couldn’t possibly have gotten it. If you have someone who hid some assets in a foreign country and you could not ever locate those. In those cases, the court can refuse to enforce the agreement. A word of caution, because there are significant number of cases out that say signing a dumb agreement is not unconscionable and there’s no reason to avoid enforcing it.
Well, it is never too late to get a post-nuptial or postmarital agreement. It makes sense in many instances to separate the majority of financial affairs formally through a post-nuptial agreement. There appears to be one difficulty in Texas with postmarital agreements, and that is what to do about alimony or as we call it in Texas, spousal maintenance, and a prenuptial agreement, it is emphatically clear that you can waive your right to receive spousal maintenance. It is unclear at this time under Texas law whether or not you could do a post-marital agreement that will waive your right to receive spousal maintenance.
Yes. Texas is a community property state, and it always has been. Texas looks at all property acquired while married as being more or less partnership property. Many of the other states do not. The other states that do not have community property developed years and years ago the concept of alimony. In some states, it’s payable for life or it’s payable for a certain number of years. Their idea is that the working spouse typically gets all of the property that he or she earned while working. To be fair to the other spouse, they would’ve to pay in the years ahead, and particularly some of the eastern states are notorious for having a pretty onerous alimony.
Texas did not have any alimony, spousal support or maintenance, or anything until about 20 years ago. We have since created a form of it – that is available in very limited circumstances.
Spousal support, also known as spousal maintenance, is a form of financial support paid by one spouse to the other after a divorce. In Texas, spousal maintenance is not automatic and is only awarded in certain circumstances. To be eligible for spousal maintenance, the spouse seeking support must show that they lack sufficient property to provide for their reasonable needs and that they are unable to support themselves because of a physical or mental disability, or because they are the primary caretaker of a child who requires substantial care due to a disability. In addition, the spouse seeking maintenance must not have been convicted of family violence within two years of the divorce. If these conditions are met, the court may award spousal maintenance for a limited time period. The amount of spousal maintenance is generally limited to the lesser of $5,000 per month or 20% of the paying spouse’s average monthly gross income.