High net worth divorces are often financially complex, and errors can be costly. Here is how to avoid four common mistakes high net worth clients make in divorce cases.
By Diana Shepherd, CDFA®
Divorce is almost always a great deal more complicated for a high net worth client than it is for their middle-class counterpart because they have so much more to lose. You may have to deal with executive compensation, dividends, complex investments, multiple businesses and properties in North America and overseas; enhanced value of separate property that may be subject to division in your jurisdiction; there may be an outdated prenup or one so grossly unfair that it is unlikely to stand up in court; there may be trust funds or annuities with bonuses for not filing to modify child support; children and spouses from previous marriages to consider – the list goes on.
If you deal with high net worth clients you should have a solid understanding of tax and financial issues and/or a really superb team or forensic accounts, financial planners, and divorce financial analysts on speed dial – and it goes without saying that the best malpractice insurance money can buy is a must.
You may be struggling to find empathy with a client who rakes you over the coals because they are “only” going to get $50,000 a month in spousal support for the next ten years – “and who can live on such a paltry sum?!” Or your client may be playing fast and loose with the truth about what they’re really worth and running money through enough shell companies to make your head spin for the next decade.
You will face different challenges depending on whether your client is the “In” (monied) spouse or the “Out” (non-monied) spouse, but one thing you can count on is that it will be challenging. Let’s take a look at what could possibly go wrong.
Costly Mistakes High Net Worth Clients Make in Divorce Cases
You must do everything in your power to help your high net worth clients to avoid making mistakes that could cost them dearly – and not only because the ABA’s Model Rules of Professional Conduct require you to explain the practical implications of your clients’ rights, obligations, and choices. Your clients’ mistakes could end up being costly for you if you can’t prove that you warned and/or tried to dissuade them from a disastrous course of action. The more complex the case, the more opportunities your client has to make a mistake. Here are just four in a myriad of possibilities.
1. Attempting to Hide Assets.
Although it may seem like a great idea to your client, you should share all the reasons why hiding assets in a divorce case is definitely something that they should not do. Encourage your client to offer full financial disclosure of all income, property, and assets earned or acquired from the date of marriage to the date of separation. This list includes every asset that could be considered marital – in whole or in part. Unless opposing counsel is asleep at the switch, transferring assets to a family member or business partner in an attempt to hide and exclude it from property division is almost certainly bound to fail. A good forensic financial expert can discover most hidden or “forgotten” assets. The court frowns upon parties who engage in this fraudulent activity; the party and their lawyer may lose all credibility with the judge – and this could have a major impact on the final settlement.
2. Failing to Hire Qualified Financial Experts.
If your client is the “out” spouse in a high net worth marriage, they may not understand why they must hire their own forensic accountants, business valuators, executive compensation advisors, etc. If the only thing your client knows about their marital finances is that money never seems to be an issue, you could have a big problem on your hands. Rather than just taking their monied spouse’s Financial Statement and other documents at face value, a good family lawyer will explain the need for proper due diligence to ensure that all financial matters are fully investigated before reaching a financial settlement; as you know, a missing zero here or incorrectly placed decimal point there can make a significant impact on the outcome. It is worth advising your clients to have any property or business valuations conducted by an impartial third party to ensure they are valued correctly. Your clients should also be aware of the tax implications of the proposed settlement so they understand how much they’ll actually get to keep and how much will go to the IRS.
3. Rushing to Make Decisions without Weighing the Pros and Cons.
Divorce can be a trying and stressful time in a person’s life, so they may rush into making decisions without taking adequate time to consider the consequences. Clients often do this to reduce the amount of time that the divorce carries on for – to “just to get it over and done” – in hopes of relieving their stress and pain as quickly as possible. However, you must underline that any short-term gain could be more than offset by the long-term pain of making a decision without giving their legal and financial team enough time to ensure they have all the information they need – and that the information is complete and accurate. Make sure your clients understand that they may have more to gain – perhaps a lot more to gain – by slowing down and obtaining expert advice from experienced financial professionals.
4. Letting Emotions Dictate Financial Decisions.
Emotions often run high during high-stakes divorce, and making crucial decisions while you’re in the grip of fury or almost paralysed by fear or grief is almost always a very bad idea. amygdala
You should advise your clients to keep their emotions under control and not let them dictate decisions as they are likely to lose out from the divorce, and their former partner may receive much more than they are entitled to. Usually, there is one party who feels more responsible for the decision to divorce than the other, which can bring guilt into play, and the guilty party then feels they should give more financially then they are obliged to. The reasons behind the divorce have no bearing in regards to the financial settlement (although it is possible only in very specific circumstances) so it’s important to leave emotion out of the equation, which is often something you will have to do on behalf of your clients.
Kerry Smith has over 15 years experience in family law and is the Head of Family Law at K J Smith Solicitors, a specialist family law firm that deals with a wide range of issues, including divorce, domestic violence, civil partnerships, and prenuptial agreements.