What do I need to consider in my high-net-worth divorce?
High-net-worth divorces, divorces involving couples with substantial assets and financial resources, present unique challenges and considerations that set them apart from divorces with lower financial stakes. If you are about to embark on a high-net-worth divorce, here are the issues you should pay special attention to and why.
In Massachusetts, alimony is based on the recipient’s need and the payor’s ability to pay. A court will aim to keep the lower earner at a lifestyle comparable to what they enjoyed during marriage. For high-net-worth couples, the alimony amount could be substantial.
While there is no specified minimum duration for alimony orders in a divorce, generally, the length of the marriage is a significant factor in whether alimony will be awarded and for how long. In addition, the court evaluates other elements, including the parties’ incomes, ages, health, future earning potential, and the assets they will each receive in the divorce. Among the factors considered by courts in alimony awards, the most significant typically are income disparity and marriage length.
The court or the parties involved may opt for an alternative approach in shorter marriages with a significant income gap. There are other types of alimony for shorter-term marriages that are geared toward helping a spouse transition from the marriage or to reimburse a spouse for certain contributions, for example. Also, instead of pursuing alimony, the parties might negotiate a disproportionate division of assets. For example, the lower-earning spouse might receive a slightly larger share of certain assets.
It is important to note that pre-marital cohabitation can influence the court’s assessment of the marriage’s duration. If the parties lived together for an extended period before marrying, the court may treat the union as having a longer duration. This can be crucial in determining whether alimony should be awarded and, if so, the duration of the alimony payments.
Massachusetts provides guidelines for calculating child support. However, since the calculation is only based on combined incomes of up to $400,000, judges can direct a portion of the couple’s income to supplement what would have been awarded solely by relying on the child support guidelines.
Also, as of November, 2023, MA courts require judges to assess the issue of alimony even in child support cases.
In a 2022 landmark decision, a Massachusetts court revolutionized how child support and alimony will be calculated in the Commonwealth. In the case of Cavanagh v. Cavanagh, the court introduced a novel approach for judges to follow in determining child support and alimony.
This decision, regarded by many in the family law community as groundbreaking, provided clear guidelines on the inclusion and exclusion of specific types of income in child support calculations. Notably, the SJC asserted that it was an abuse of discretion for a judge to calculate child support in a manner that would preclude alimony. The Court ruled that even in cases involving child support, judges must consider whether alimony is appropriate, and the Court provided guidance on how to approach the calculation.
The business valuation process during a divorce closely mirrors the valuation of other assets. The key distinction lies in the complexity inherent in businesses, even smaller ones, due to their numerous components. Obtaining a comprehensive evaluation involves accounting for each element, beginning with assessing the business’s assets and liabilities.
A business’s assets comprise both tangible and intangible possessions. Tangible assets, such as machinery, inventory, and monetary reserves, are relatively straightforward to quantify. Intangible assets, such as patents and client relationships, present a more significant challenge in terms of valuation.
Tangible or intangible, assets contribute to the company’s value, presently and in the future. Conversely, a business’s liabilities encompass factors that incur costs. These include employee wages, loans, and debts. Determining a business’s value involves aggregating its assets and deducting its liabilities.
Another perspective on business valuation involves evaluating income. Calculating net profit entails adding revenues and subtracting costs, with profits derived from sales and investments. Costs encompass various expenditures, including wages, equipment, and materials. Income, typically computed over quarters or years, provides insight into the business’s financial health.
Typical approaches business valuation professionals use in divorce cases include the market, income, and asset approaches. The market approach involves evaluating similar businesses that have been recently sold. The income approach focuses on the business’s earning potential, projecting future income based on historical data and other factors and calculating its present value. The asset approach centers on the value of the business’s assets, including property, equipment, cash, and other valuable items.
Beyond determining the business’s value, several additional factors come into play during a divorce. Each spouse’s entitlement to a portion of the business hinges on various considerations, including when the business interest was acquired (before or during the marriage) and the source of funds (separate or joint) used for the acquisition of business assets, among other relevant factors.
If the business interest predates the marriage or was acquired with separate funds, the owner spouse may receive credit for it. However, if joint funds were used, if the non-owning spouse contributed capital or labor to the business, or if there were other contributions during the marriage, the non-owner spouse may be entitled to a percentage of the business. The duration of the marriage and other pertinent factors also influence the outcome.
Yet another issue arising in the division of a business during divorce is “double-dipping.” This occurs when the same income stream is considered twice. The first instance arises when a spouse, for example, is granted a property interest based on the business’s future earning potential.
The second instance occurs when the same income source is used in determining the spouse’s alimony or child support awards. Essentially, the business, a single asset, is utilized to calculate two distinct sources of income. Although “double dipping” is technically not prohibited by law, judges strive to avoid double dipping by segregating the income used for asset division from that used for support calculations.
In divorce cases, the family home often becomes a point of contention, generally over occupancy and property value. This is not surprising since the home’s value as an asset is crucial, especially when one spouse buys out the other.
Consider the following example. If the marital home is $700,000 with a $300,000 mortgage, it has $400,000 in equity. An equal split without offsets would require one spouse to buy out the other for half the equity, or $200,000. Disagreements can arise over the home’s actual worth, with the retaining spouse preferring a lower value and the one seeking a buyout aiming for a higher one.
As the real estate market in Massachusetts is constantly changing, the current value may differ from the purchase price or the valuation at the last refinancing. In the interest of fairness, divorcing couples can commission an objective third-party appraisal company to determine the home’s value.
Appraisers evaluate the home against recently sold properties, conducting financial analyses to determine a precise market value.
Ideally, the parties can select cooperate on a joint appraisal. Here, they jointly select an appraiser, and this impartial figure offers both parties a valuation that aligns with current market conditions.
Despite objectivity, appraisals may yield unexpected figures due to market trends or individual perceptions and expectations.
If the parties aren’t comfortable with a joint appraisal, they can each invest in one. If the appraisers arrive at different opinions, the judge will judge the credibility of each to determine a value.
Though emotions surrounding the family home may not align with market reality, appraisals remain the most reliable approach for divorce-related property valuation.
Investment and Retirement Accounts
Investment and retirement accounts should be treated differently due to their tax implications. Typically, transfers of retirement funds like 401(k) during a divorce are non-taxable events. Despite the initial non-taxable nature of these transfers, it is also important to note that standard tax and penalty rules apply to any subsequent withdrawals or payments from the account post-transfer.
For instance, if a spouse starts collecting monthly payments from a pension received from the divorce, they must pay federal and state income taxes on those payments. Similarly, withdrawals from a 401(k) by the receiving spouse are subject to income taxes, and if done before age 59 1/2, a 10 percent penalty would also be applicable in addition to the taxes.
During a divorce, the fate of retirement accounts is thus a crucial consideration. The complexity of these considerations is influenced by the type of retirement plan and the timing of contributions — whether they were made before or during the marriage. In Massachusetts, where assets are distributed equitably, the marital portion of retirement accounts is typically included in asset division, with factors such as the length of the marriage and the income, health, and financial needs of each spouse influencing the allocation.
Defined benefit plans, or pensions, present unique considerations as the marital portion is divided when the pension holder retires. Survivor benefits can likewise be challenging to navigate due to their complexity. For defined contribution plans categorized as 401(k), 403(b), and IRA, the portion added during the marriage, along with gains and losses, is usually divided at the time of divorce.
Negotiating offsets is an option, allowing parties to adjust their share of retirement accounts based on preferences or contributions. This approach can involve trading retirement assets for other assets like the family home. Careful consideration of the pre-tax nature of contributions and long-term financial implications is crucial when exploring offsetting strategies.
On all retirement accounts besides IRAs, a Qualified Domestic Relations Order (QDRO) is often required for proper division. A QDRO outlines how and when benefits are to be divided. Due to its time-consuming nature, initiating the QDRO process promptly after divorce is recommended.
If you are trying to navigate the division of stock options in a divorce, especially unvested ones, the Baccanti formula is a key consideration. Originating from a 2001 Massachusetts Supreme Judicial Court case (Baccanti v. Morton), this formula treats unvested stock options as marital assets during divorce proceedings.
In the Baccanti case, the court ruled that unvested stock options are divisible marital assets. The decision clarified that the extent of vesting reached at the time of divorce determines the share of the stock option award considered a marital asset and what is available for distribution between the divorcing spouses:
“… in those cases in which the division of options is contested, in order to determine whether and to what extent stock options may be included in the marital estate, the judge must determine if the options were given for efforts expended before, during, or after the marriage. This requires a finding as to the reason (or reasons) for which the options were given (i.e., for past, present, or future services).” A Massachusetts family law attorney can help apply the ruling to your case.
Contributions for Legal Fees
Divorces that involve more assets and income tend to incur more significant costs due to the increased complexity of sorting through the financial intricacies. In such cases, the spouse possessing more assets and a higher income may be mandated by the court to transfer funds to the other spouse to cover legal fees.
This provision is designed to allow both parties to have adequate representation. However, it is important to note that the amount transferred for legal expenses may be credited to the transferring party upon final property division, aligning with the overarching goal of equitable distribution in the divorce process.
A prenuptial agreement provides the most thorough protection for high-net-worth couples. However, actively preventing the co-mingling of assets and pursuing divorce as soon as you know it is imminent can positively impact property division.
Find a Massachusetts family law attorney for your high-net-worth divorce.
Navigating a high-net-worth divorce is often demanding, emotionally taxing, and potentially expensive. Proactively safeguarding your wealth can alleviate some of the stress. At Farias Family Law, one of our skilled and experienced Massachusetts family law attorneys can provide guidance. Contact us today.