I’m Diana Shepherd, the Editorial Director of Family Lawyer Magazine. It is my absolute pleasure to introduce the participants in today’s Roundtable on how the Wealth Shock generated by volatile stock & real estate markets can impact high-asset divorce settlements.
This is Part 1 of a three-part series, and our host is financial expert Sharon Klein. Sharon is an esteemed member of Family Lawyer Magazine‘s advisory board, and she heads Wilmington Trust’s National Matrimonial Advisory Practice.
The three experienced family lawyers participating in this Roundtable – Alton Abramowitz, Marlene Eskind Moses, and John Slowiaczek – are all past presidents of the American Academy of Matrimonial Lawyers and Diplomates of the American College of Family Trial Lawyers – a select group of 100 of the top family law trial lawyers from across the U.S.
Let’s get started. Take it away, Sharon!
Sharon Klein: Thanks so much, Diana, for that very kind introduction! It’s my pleasure to be here with my three esteemed guests. John, I’d like to start with you for my first question about the so-called wealth shock, which is how the very volatile stock market and real estate market can impact property division in high asset divorces.
There was an article in Bloomberg recently where Evan Spiegel, the billionaire co-founder of the messaging app Snapchat, lost 30% of his fortune in one day – and Mark Zuckerberg of Meta at one point was reportedly down $5.7 billion. These are very high-profile and exaggerated examples of the swings that can occur in someone’s net-worth.
When you’re trying to divide assets in a divorce, which can include security accounts, retirement accounts, homes, and other assets, how does wealth shock impact property division?
John Slowiaczek: When clients initially come to see us, their first reactions are generally fear, apprehension, and uncertainty about the system. We talk to them about time and time commitments. A normal divorce in most communities takes approximately a year or more. Not only are they dealing with the valuation issues at the time of the divorce – when it’s filed or when it’s instituted – but they also have to deal with the evidence presented to the court. The real estate market is sometimes the most volatile in the beginning because someone usually has to move. In today’s market, people are having difficulty with rent and some are moving out of the family home into another property. If they’re going to purchase a home, they don’t have the equity portion they may have had to buy a new home in the past. If they’re looking to rent, they’re looking at a loss of inventory in many of the communities and finding problems with the costs.
The initial shock when it comes to the whole process deals with the family home. Who will live there, and how long are they going to stay? Then they start looking at their assets, and they look at the business and property valuations – including the history of the finances and the income for the company. But the spikes that are occurring today do throw things out of whack for the people trying to do the business valuations.
Wealthier people generally have a better understanding of their cash flow and stock portfolios because they’re more used to riding out the storms than those who are less wealthy. But the wealthier people are more troubled by fundamental issues, including whether they will be paying their divorce obligations with today’s dollars or tomorrow’s dollars.
As lawyers, our responsibility is to try first to determine what constitutes the marital estate, then to value and then divide the marital estate. If it were a simple process where everything was divided equally, then the risk would be the same for everyone. In divorce, people start cherry-picking assets, taking high-value or tax-free assets, and trying to give the other party the short end of the stick.
When people come to us, our responsibility is to manage their expectations, explain the difficulties they will encounter during the process, and make them realize that the lawyers have very little control over the outcome. The courts want us to try to value assets as close to the trial date as possible, which takes a year from our first appointment with the client to when we ultimately present evidence to the court. That all comes back to building expectations or managing expectations for the client and discussing the individual assets. The housing market is continuously changing; what we do at the beginning of the divorce being filed might not translate to what we do at the end of the divorce.
Sharon: What you’ve said is so interesting, John, and it really underscores to me how important it is to run financial projections when someone is getting divorced. Working at a financial advisory organization, this is something that I see helping clients every day.
How do you project different scenarios? How are things going to play out in the future? Including cash flow projections and risk assessments, which are so important for two reasons: one is to give family lawyers ammunition at the negotiating table, and two, after the divorce is final, to be able to invest the assets in a way that’s going to sustain a desired lifestyle. The wealth shock you were talking about makes those analytics even more important because you could build additional layers of risk-to-stress test outcomes and see how they hold up to those shocks. There’s also the question of what would happen to model cash flows or assets, like privately held businesses that might have been affected by the wealth shock, or generally creating different scenarios so clients can make informed decisions.
In our initial discussions, you mentioned that the court would typically not take into account the after-tax value of assets unless a potential sale is imminent. It’s important to calculate the after-tax value of assets, and if you have an asset like a business or a home that’s going to be sold at some point, you probably want to analyze the impact of capital gains taxes and sales costs so you can see what your client is actually going to receive at the end of the divorce. You can’t do that analysis without sophisticated analytics.
It is challenging to show these complex calculations with an Excel spreadsheet, for example, because an Excel spreadsheet is static: it doesn’t account for different rates or potential changes in tax law. It’s vital for family lawyers and their clients to work with financial professionals who can provide that kind of analytical data.
John: You must set the stage on the very first day you meet with your client about the after-tax value of their assets. You don’t want them to make false assumptions about how their assets will be divided.
Sharon: Alton, let me turn to you now and ask for your thoughts on the impact of wealth shock on asset division in high net-worth divorces.
Alton Abramowitz: It has had a significant impact because the current economy is very uncertain; for instance, someone who had significant wealth in the form of cryptocurrency a year ago may have lost a substantial portion of that wealth today. I was sitting in a bankruptcy creditor’s hearing this week where our former client, the husband, lost $35 million in cryptocurrency; that’s significant, and it impacts his ability to comply with the settlement he worked out with his ex-wife.
Similarly, the price of real estate in the New York Metropolitan area where I practice is very uncertain. Residential real estate is increasing in value; retail real estate, on the other hand, is very difficult to value because of the impact of Amazon, which has hurt the retail industry terrifically. Also, not as many people are working in their offices in New York City as before. If you drive up Madison Avenue, where my offices are located, almost every block has vacant storefronts, and that impacts the value of that real estate in a very negative fashion.
Rental residential real estate has become inflated, and some clients face demands from their landlords asking for 40% or more in terms of increases in their lease renewal. When we start a matrimonial case in New York, we must identify all of the assets and liabilities as John indicated. We do that on a court form of the net-worth statement, which contains a balance sheet of assets and liabilities and a profit and loss statement. We have to work with financial professionals to try and predict different scenarios depending on what the markets will do not only today but also 10 years from now.
Sharon: It’s tricky business, but when you’re armed with the data, it makes it a little more understandable and concrete for clients. Marlene, is there anything you would like to say regarding the wealth shock topic?
Marlene Eskind Moses: It’s critical to ensure that you and your financial experts are getting the most up-to-date valuations at every important juncture because financial disclosures might be required.
In Tennessee, where I practice, financial disclosures are not required at the front end – but in some states, they might be. You may have a financial disclosure valuing assets and liabilities at one set of numbers, and then you might go to mediation and have a completely different set of numbers. And it’s crucial for practicing lawyers to know that these values are fluid, particularly on days that some businesses increase in value while others decrease, or some go out of business. Lawyers need to be prepared and flexible to work with their financial advisors at every juncture.
Whether it’s mediation or arbitration or a settlement conference or a trial, update the numbers and ensure you have the underlying documentation necessary to substantiate the differences at each juncture. Divorces can extend over months or years, and our markets are variable, flexible, and dynamic. It’s vital to ensure that we have the most current information possible during the divorce process.
Even if there’s a final resolution, either in a settlement situation or in a trial where a judge makes the call, it could still take a long time between when the trial occurs and when the judgment comes down – especially in a settlement with retirement accounts. It’s a lot of work.
A good practice tip would be to use percentages of accounts as opposed to using fixed numbers because thy’re going to vary from day to day. The percentages will also give you a more realistic picture of how the asset should be divided. As practitioners, we can ask the judge to divide by percentages instead of numbers.
Sharon: That’s great advice, Marlene. Often, that’s what’s done in estate planning documents: you don’t give someone a fixed number, you provide them with a percentage of the assets to account for fluctuations. Once you try a case and submit it to a judge for their ruling, you’ve all mentioned that you’re typically stuck with the numbers at trial. That you can’t revisit significant swings – which causes some people to come to an arrangement themselves so they won’t be subject to those fixed values. That underscores your point, Marlene, about being current with your numbers and the valuation of the assets.
Sharon Klein has been inducted into the Estate Planning Hall of Fame, featured as one of the Top 40 Women Wealth Advisors in the US by Forbes, and as one of the Most Notable Women in Financial Advice by Crain’s. She is Executive Vice President at Wilmington Trust in NYC. www.wilmingtontrust.com/divorce.
Alton Abramowitz practices matrimonial and family law in Manhattan. A partner at Schwartz Sladkus Reich Greenberg Atlas, he advocated for the reform of New York’s divorce laws via a no-fault divorce, and he helped to draft New York’s spousal maintenance guidelines statute. www.ssrga.com.
Marlene Eskind Moses is board certified as a family law trial specialist by the National Board of Trial Advocacy. The immediate Past President of the International Academy of Family Lawyers, Marlene is a partner at Gullet Sanford Robinson & Martin in Nashville, Tennessee. www.gsrm.com.
John Slowiaczek has devoted 48 years to the practice of family law. A respected trial lawyer and President of the American College of Family Trial Lawyers, John is a partner at Slowiaczek Albers in Omaha, Nebraska. www.saalawyers.com.
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