When high-net-worth couples divorce, they often argue over how to split 401(k) accounts, houses, cars, jewelry and some cash. It basically comes down to “can you divide by two,” said attorney Zac Potter. Fighting in court is generally a bad investment, even for spouses with $3 million to $5 million estates, because attorney fees cancel out any gains, he said.
“That is not remotely true when it’s a super-high-net-worth case,” said Potter, a partner with Fisher Potter Hodas, a West Palm Beach, Fla.-based law firm that focuses on complex, high-stakes divorce cases involving corporate executives, closely held business owners, professional athletes, celebrities and wealthy families.
“There’s no magic number where complexity creeps into a case,” said Potter, although divorces do get increasingly complex for estates valued at $10 million and above. The “add-ins” that accompany big-ticket divorces may include closely-held businesses, valuation disputes over art and other assets, funds stashed in overseas accounts and potential risks to the health of a business or to a spouse’s position or career, he said.
For example, if a person getting divorced runs a hedge fund, the fund’s investors, other officers and board of directors could be called upon to provide information during a lawsuit’s discovery period, said Potter. Reputation and crisis management may also need to be considered, he said, particularly now during the #MeToo era.
A spouse who owns and runs a closely held business may be overly optimistic about its value when applying for financing or speaking to investors in the months leading up to a divorce, he said, and then get pinned down to pay off the “optimistic value” in a divorce settlement. On the other hand, said Potter, the spouse might hide the business’s assets or say things to try to devalue the business.
He encourages financial advisors to talk to their business-owner clients about preparing a postnuptial agreement to address what’ll happen to the business in the event of death or divorce. The best protection, he said, is to get both spouses to sign off on a valuation methodology for the business. Deciding this outside the context of adversarial litigation could mitigate many risks that accompany the divorce process, he said.
Clients with a minority interest in a business could also get hurt if a business partner has a catastrophic divorce, noted Potter. All the stakeholders—including spouses who don’t participate in the business—can be asked to sign agreements that, in the context of a divorce, limit their ability to disrupt the business or to impose a valuation process that carries a lot of variance and risk, he said. “It’s not guaranteed that those [agreements] will be upheld in court, but it’s a significant start,” he said.
Meanwhile, many spouses who are financially dependent and often have never managed their money “find themselves on a very uneven playing field where they lack access to information, access to good lawyers and access to forensic accountants,” said Potter. “It’s a recipe for being railroaded.”
In his experience, non-moneyed spouses don’t consult independent financial advisors until they’re in a bad situation. However, the first thing they should do is hire a lawyer or an accountant to help them think through the risk of the divorce process and how to protect themselves, he said.
The most successful non-moneyed spouses he’s seen asked their spouses to provide them with security when their marriages were good. As a result, some of his clients have real estate and investment accounts in their name. Having access to liquidity and money means they can feel secure during the divorce process.