COVID 19 is driving up divorce rates across the country and family law offices expect the numbers to keep surging over the coming months.
High net worth divorces are typically more complex than others, they often take longer and their outcomes can be unpredictable, particularly if you end up in court where the mechanical calculations that might occur in other types of cases do not apply. Where the family has enjoyed a very high standard of living, the needs of each party will be considered in a more generous way than in an ordinary divorce case. The court may determine a spouse ‘needs’ very large sums, which may run into many millions of dollars. Courts will also consider whether a party acquired much of their wealth prior to the marriage, or if it has been inherited by one of the parties during the marriage. All of these complicating factors and the uncertainty in these cases can make litigation risky and expensive.
If you are headed for a high net wealth divorce there will be a lot for you to consider financially. Many of your assets may be difficult to divide and it could take many months before valuations can be assessed and agreed. There will also be tax considerations that will apply to any agreement reached between the parties.
However, with thoughtfulness and planning, you can emerge from the process in sound financial condition. So how do you go about navigating the financial complexities of your divorce?
STEP 1. RALLY THE TROOPS Regardless of your professional profile and net worth, you will be making some of the most difficult and important financial decisions of your life during an emotionally chaotic time. It goes without saying that I am going to recommend you find yourself a good wealth manager, a good accountant and a good family lawyer as soon as possible. More often than not couples have shared the same advisers during their marriage. If a divorce is on the horizon you will need separate representation. Your advisory team will be invaluable in safeguarding your interests throughout the process. If you have one and not the others, ask the adviser you know for a recommendation. These professionals are used to working together for common clients and usually have solid networks they can refer you to.
As soon as you have your team in place, introduce them to each other and obtain quotations for the work they think will be necessary to get you through your divorce. You will need to get your head around the costs involved in the process.
STEP 2. ASSESS YOUR ASSETS
Make copies of all important financial records and draw up an inventory of HIS / HERS and JOINT assets and liabilities as soon as practically possible. Download account statements while you still have access. Include photos that have date-stamps. Make a note of any gaps in your joint finances or anything you are unsure of so that your team of advisers can investigate for them for you.
Start with:
Bank accounts
Superannuation funds
Any loans, including your mortgage, car or personal loans
Credit cards
Recent payslips
Executive compensation plans
Income tax returns (past three years)
Properties
Vehicles
Works of art, jewellery and collectibles
Share portfolios
Bonds
Businesses
Commercial real estate
Trusts
Hedge funds
Private equity funds
Commodity-based holdings
If you have led an international lifestyle, it will be important to note if any of these assets are held in other countries. They may be subject to different court jurisdictions. Additionally, it would be prudent to note whether each asset could be considered a matrimonial asset or a non-matrimonial asset. A property acquired before the marriage by one spouse that does not become the parties’ home will likely be classified as non-matrimonial. An asset acquired after the parties’ separation (but before divorce), may be considered non-matrimonial in character because it falls outside the time of the marriage.
In some cases, the wealth of high net worth individuals may derive in whole or in part from their family. The origin of the wealth in such cases can justify a departure from equality in a court decision, as such family wealth is likely to be characterised as non-matrimonial property.
3. REVIEW ANY TRUSTS
In high net worth divorce, assets are often held in complex structures like onshore and offshore trusts. Obtaining disclosure about trusts can be a difficult process. If the trust is located in Australia, a request can be made to the trustees to provide documentation about the trust, but the position becomes more complex if a trust is located offshore. Court applications may need to be made for disclosure in the Australian court or in an offshore jurisdiction’s court.
4. VALUE PRIVATELY OWNED BUSINESSES
Privately owned businesses are often the most significant asset in high net worth divorces and valuing them is a difficult process. The position can be further complicated if the business has assets around the world, all held in a complex web of inter-related onshore and offshore corporate and trust structures. You may need expert help in unravelling the opaque ownership structure of a company and in locating hidden company assets.
Businesses can also be difficult to distribute on divorce. It may not be possible to sell the shares or one party may want to retain the shares and continue to hold a controlling share in the business. In either case, the spouse who is to retain the shares may need to provide more of the parties’ liquid capital to the other spouse or raise the funds in another way. For example, if the business is cash rich, a special dividend could be paid out to fund the transaction.
Companies and trustees of trusts, which may form the business or hold shares in it, can apply to be joined to divorce proceedings so as to best protect their own interests. Obtaining disclosure from these parties and the role that they play if successfully joined to proceedings can complicate matters further.
5. BEWARE OF NON-DISCLOSURE
In high net worth divorces, the financial stakes are high. Sometimes spouses refuse to make full and frank disclosure of their financial position in an attempt to gain a financial advantage over the other spouse. They may transfer funds from their disclosed bank accounts into other non-disclosed bank accounts or in more extreme cases they may move their wealth overseas into a series of inter-linked corporate and trust structures.
When necessary, applications to court for emergency remedies can be made but keeping a detailed inventory of assets and a close eye on the movement of money, as early as you see warning signs for your marriage, may help prevent non-disclosure.
6. PREPARE A FINANCIAL FORECAST FOR THE FUTURE
When going into a divorce it's important to know what you are going to ‘need’ going forward. As soon as you know divorce is inevitable, begin tracking your household income and expenses, including household bills, food, clothing, entertainment, home maintenance, transportation, childcare and anything else that you spend money on. This will not only help build a budget post-divorce, but it is also crucial for your lawyer and later the judge in deciding how to split assets and debts, and whether to award spousal or child support.
Next, project future expenses. Look beyond the normal monthly expenses and include things like your holidays and replacing vehicles and household appliances over time. If you have children, you’ll transition from spending on child-care to spending on after-school activities and eventually car insurance and tertiary education.
A financial adviser will be able to assist you with financial modelling. Forecasting should account for both best and worst case scenarios and depending on your age and circumstances will need to calculate your needs through retirement.
7. PROTECT YOUR CAREER AND YOUR REPUTATION
As difficult as it was to navigate a demanding career and a family before, divorce will increase it exponentially. Focusing on the healthiest restructuring of your family while maintaining excellent performance at work is a winning strategy for both spouses. Keeping your reputation intact will also be a priority. Make sure you control the message and announcement of your new direction in the appropriate forums. Avoid serving legal papers at the office or over-sharing with your colleagues. If your divorce is likely to be classified as high profile, you may need to involve a public relations specialist to avoid unfavourable media coverage.
8. HIT THE RESET BUTTON
When your divorce is final and assets have been legally divided, it will be time to clean house and it is going to involve a fair bit of paperwork. You will need to change names on property titles, shares and investments and any other assets like cars or boats. You may need to close joint bank accounts and credit cards. Any insurance policies held jointly will need to be reviewed and updated. You may need to split self-managed super funds and create a new one. Remember to change the beneficiaries on your trusts, superannuation and life insurance policies and don’t forget to update your will.
Then finally, in order to optimise your fresh start you will need a new financial plan or wealth strategy, starting with the pool of assets you’ve acquired. It will be time to prepare a new budget and make investment decisions suited to your new lifestyle and priorities.
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As is evident from the list above, divorce isn’t easy, but our job is to SIMPLIFY the COMPLEX for our clients. Having a good team on board will ease your pain significantly through a divorce. The earlier you engage us, the sooner we can take the burdens off your plate and you can focus on looking after yourself and your family.
If you have financial complexity around your divorce or you are through to the other side and want to empower yourself with a forward thinking wealth strategy please call me or email me here. We work with high net wealth family or individuals for the long term. Everything is free until you decide you’d like to work with us.