I’m Diana Shepherd, the Editorial Director of Family Lawyer Magazine. The topic for today’s Roundtable is top strategies for agreeing on financial matters with high-asset divorce settlements.
This is Part Three of a three-part series hosted by divorce financial expert Sharon Klein, who began her career as a trusts & estates attorney and now has more than 25 years of experience in the wealth advisory arena.
Our Roundtable members are AAML past presidents Alton Abramovitz, Marlene Eskind Moses, and John Slowiaczek. All three are 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. – and they have decades of knowledge to share with us today.
Without further ado, here’s your host, Sharon Klein.
Sharon Klein: Marlene, let me turn to you for our third topic and ask you a very important question: in your view, what’s the best way to agree on financial matters during a high-asset divorce?
Marlene Eskind Moses: The best way is to prepare immediately when your client walks through the door. It’s important to ascertain what the assets and the liabilities are and to have some clear notion about what will need to be done in the divorce case, then clearly communicate that information to the trier of fact, the mediator, or the arbitrator.
Once you’re gathering that information, you need to determine what team you need to assemble for the client to get the maximum result. That team needs to have a financial person; it could be a forensic accountant or somebody who clearly understands the financial assets, how they increase or decrease, and how assets should be divided.
You may need a business valuator as well as a financial expert. The financial expert needs to have tax capabilities and understanding because businesses are dealing with taxes and people are dealing with taxes. It’s important to understand the consequences of the tax impact; even if an asset’s not being sold, the businesses and the people are paying taxes yearly, and you need to know the status of those.
It’s also important that you have an estate planner, someone who can prepare the trust, such as what you did, Sharon, which was terrific, in the divorce case. Or you need someone who can help analyze the trusts and understand the trust’s purpose, who the trustee is, and who the beneficiary is.
Questions to consider are:
- How can you unravel the trust if you need to?
- Is it revocable? Is it irrevocable?
- What do you need to do now?
- Does the trust need to be divided?
There could be foundations that need to be handled or charitable vehicles that you need to understand how to deal with. So it’s critical to gather the right team.
If the divorce involves children, you may or may not need a mental health expert or a custody evaluator. Those decisions need to be discussed and addressed on the front end; the sooner you get these people on your team, and as part of the process, the stronger your case gets developed and the stronger your presentation will be to whomever you’re presenting it.
You also have to be careful about attorney-client privilege because whatever you send to your team may be subpoenaed. That’s tricky because you have to be cautious about the information you disclose to these folks knowing it could be subpoenaed. But working with them, giving them information, and keeping them up-to-date about the information will help when you present your case. You will have what you need, and you’ll be strong, and it will not be able to be refuted because you’ve done your homework.
The question then becomes, what’s the best way to get a settlement? Be prepared and strong in your work, and have your experts up to speed and clear about their numbers so you’re advocating for your clients from a position of strength. That’s the best way to do it.
Another thing to consider is what the other side is doing, what they want, and what their needs are. Think about how you’re packaging the settlement and how you can get the most for your client. Then sell your desired outcome so that it’s reasonable or advantageous to the other side.
Think about dividing an orange: you cut it in half and each side takes their half. In a situation where you have to be creative, it could be that one side wants the outside of the orange for potpourri, and the other wants the inside of the orange to eat. That’s how you could enlarge the marital pie. As you’re getting into settlement conferences, it’s essential to understand and think through how you can enlarge the pie to make settlement more likely.
Sharon: I love that orange story, Marlene, because each person ends up with 100% of what they want, so you really get 200% instead of dividing something in half. It’s music to my ears when I hear you underscore the importance of surrounding the client with the right multidisciplinary team from the outset – which, as you mentioned, is the family lawyer, a financial advisor, a trust and estates lawyer, an accountant, and maybe other professionals at every stage. Then when the divorce is pending, that same multidisciplinary team can work together to run sophisticated financial projections that back up your claims; maneuver through complicated valuation, tax, and planning issues, and perhaps explore creative financing options if one spouse has to buy another out of an illiquid asset, like a business; update estate planning documents; make sure tax filings are correctly positioned; and then, post-divorce, invest the settlement proceeds in a way that will sustain a desired lifestyle. Marlene, I agree with you: it’s all about the team.
Marlene: I would like to add that when hiring these professionals, they may not be the same professionals that the couple worked with before the divorce. Those people may have a conflict if they represented both parties, and you may need to hire other experts to work with the former experts. Sometimes, the former experts are necessary and important, but they may not be the advisors you need for the divorce situation.
Sharon: John, let me turn to you and see if you have any tips about the best way to agree on financial matters with a high net-worth divorcing couple.
John Slowiaczek: All the things Marlene said are so accurate. One of the bigger problems is when people start cherry-picking the assets they want because it shifts the whole focus to risk and reward. There may be a problem when one spouse wants to keep the family home because they have an emotional attachment to it. Meanwhile, the other spouse may have the same emotional attachment but is willing to move on. We have to deal with transaction costs, and when you’re taking this cherry-picking approach, the courts are generally not going to factor in transaction costs – either the cost of the sale of the business or the real estate commissions – unless the deal is imminent. It can have substantial tax implications when people look at the value we’ve established somewhere, and then they don’t realize the impact of the taxes on that value as they start cherry-picking and filling up their bucket to get to their supposed 50-50 split of the assets.
I also wanted to add to Marlene’s comments about getting a team together. It is important to get qualified people who are respected in the community and who respect other professionals. The last thing you want to do is have a person on your team who looks at some of the work products of different professionals involved and starts picking it apart and pointing out problems that are personal in nature and not necessarily professional in nature. You want to get people who understand the dynamics of working together to work for a solution for the parties, not just themselves.
Often, egos will step into the equation; the lawyer has to be mindful of this, so when they pick the team, it’s generally people they’ve worked with in the past. And they’re cautious in that regard and ensure that everyone is respectful of the others on the team because everyone approaches the problem differently based on their professional background. The tax lawyer may have a different thought process than the probate lawyer, and they may have a different thought process from the financial advisor, and their process may look different from the accountant who’s done the books. You have to make sure you can blend all of them and have people keeping track of where they are and their function or purpose.
Sharon: The team has to collaborate and communicate and work together in order for the client to be positioned well. You and Marlene both touched on the importance of understanding the taxes associated with different assets.
I want to add one thought to the case I referred to earlier with a potentially surprising tax result, mentioning that a trust creator can be liable to pay the taxes on trust distributions made to an ex-spouse forever. I want to make clear that it doesn’t only apply to trusts created as part of the divorce negotiations. It can apply to every trust created during a marriage, no matter when that trust was created. A trust could have been created five, 10, or even 20 years before a divorce, and if one spouse created it and the other spouse could benefit – and those types of trust are the staples of estate planning – if the parties later get divorced, you can have that lingering tax liability I described.
It’s key during the divorce process to have professionals on the team who can examine every trust created during the course of the marriage, and figure out ways to reduce and eliminate that surprising tax result before the divorce is final because once the divorce is final, you’re likely going to be stuck with that result.
Alton, what are your tips for facilitating an agreement on financial matters during a high-asset divorce?
Alton Abramovitz: The most important thing that a lawyer can do when a new client comes into their office in a high net-worth case – or the regular middle-class family case – is to treat the case as if you’re preparing for trial from day one, but have the ultimate goal of trying to get the case settled. Again, it’s about marshaling all the assets, liabilities, expenses, and looking at tax consequences, if an asset will be sold, and how you structure the division of assets and liabilities in such a way that you get the most out of it.
At the same time, you have to do a cost-benefit analysis. How much will your client have to spend on attorneys and experts to reach a fair and equitable result? To do that, you must look at all the factors in the marriage. Is it a short-term marriage? Is it a childless marriage? Is it a long-term marriage with kids ranging in age from elementary school up to college? Are there other people who are dependent on the two spouses involved, like parents or disabled siblings, or disabled adult children?
These factors should be part of one’s thinking on the short and long-term consequences of making a deal, and how you structure it to accommodate the needs of both spouses to get on with their lives in an independent fashion.
But at the same time, the lawyer must help couples must bury their resentment and hostility, which is a very difficult balancing act.
Treating high-net-worth individuals is unique in many ways. Several years ago, as we were going over a client’s assets, preparing for trial, and talking about the millions of dollars that she had, one of my richest clients, smiled and said, “The rich are different,” with a twinkle in her eye.
They are different, and lawyers have to be aware of that because the reality is many of our clients in our end of the practice – where we represent people with significant wealth – have much more at stake than we do in terms of our own economics. You have to view their lifestyle and where they’re going to be afterward when trying to set them up to live the best life possible after divorce.
Sharon: I want to discuss something Alton and Marlene both mentioned, which is the idea that high net-worth people often have trusts. A big issue I’ve encountered regarding the trust analysis is whether trust assets in an irrevocable trust are reachable in divorce.
A court will look at factors like:
- Who created the trust? Was it one of the married parties who created the trust and now says those trust assets are off the marital balance sheet?
- Who is the trustee? Is it an independent trustee, or is it someone’s buddy?
- Under what circumstances can trustees make distributions?
- Who has control powers like removing and replacing trustees or making distributions?
- What was the distribution history?
Courts will look at patterns and ask, “Did the couple rely on trust assets to support their lifestyle during their marriage?” If so, the trust assets might be vulnerable in a divorce.
After reading and being involved in many such cases, the moral is that legitimate estate planning – including transfers to irrevocable trusts – can, depending on state laws, successfully remove assets from the marital balance sheet.
But that’s not necessarily bulletproof because the family court is a court of equity and family lawyers will try to poke holes in the planning to tell a story, to convince a court of equity why trust assets should be considered. But the analysis has to start with a review of the trust documents because when all else fails, read the instructions and the trust document is the instructions.
I wanted to add my thoughts here because, in my experience, trusts are typically included in most high-net-worth divorces.
I would like to thank all three of my wonderful guests for a very engaging and spirited discussion!
John: Thank you.
Alton: Thanks for having us. We really appreciate it.
Marlene: Thank you very much. It was a pleasure to have this discussion.
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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