Excerpt: Soon-to-be Ex by Jacqueline Newman
High Net Worth Divorce: A Different Set of Rules
When it comes to money issues in divorce, the laws are drafted to target those with simple financial lives and make it cost efficient so they do not have to spend tons of money litigating in Court. However, a high-net-worth divorce can present many issues that differ from divorces involving fewer financial assets.
The greater concern for those with significant incomes is that there are less “rules” for courts to follow. Therefore, judges have a huge amount of discretion in deciding how to interpret these laws to apply to high-net-worth cases.
It is like squeezing a square peg into a round hole. While it may seem like a high-net-worth divorce could be easier to settle because it is apparent that no one is going to go hungry, you must also remember that when there is more to divide there is more to fight about!
At the Mercy of a Judge
An example of how high-net-worth cases do not fit into the current statutory paradigm is as follows. In New York, the statute that governs child support is currently only set to consider the parties’ combined parental income up to $143,000 when applying the stated formula.
If the combined parental income exceeds $143,000, then the court looks to numerous subjective factors to determine the appropriate amount of child support. When a client earns income in the millions, I feel that the statute is of little use to a court.
The obvious thought was that most people in the whole state of New York probably do not earn much more than $143,000 per year so the formula should be easy to apply to those with lower incomes and thus the needs to spend money on litigation is less.
However, for those who live on the upper east side of New York City, those income levels speak to their part-time nannies, so these statutes are of little use.
If I am advising clients who fall in these income levels on what his or her child support obligation may be, it is very challenging because a judge has a lot of latitude in going above the cap.
Once a judge determines that the $143,000 is not appropriate, then the court will look to the child’s “needs” to determine child support, and that is when the games begin. Does that child “need” to keep the fourth vacation home in Aruba? Does the child “need” a private yacht? Maybe yes—maybe no.
Of course, there are some cases that have been previously decided by other judges that deal with high-net-worth cases.
Here, there are a few guidelines to follow. The problem with attempting to apply caselaw is that most high-net-worth divorces settle out of court and even those that are litigated to reach a decision often do not involve publicly-broadcast terms. Therefore, there are inadequate amounts of legal guidance and precedent for clients to consult.
The biggest child support awards I have heard of are Eddie Murphy, who had to pay almost $60,000 per month for one child, Russell Simmons who allegedly paid $40,000 per month for two children, Sean P. Diddy Combs paid almost $42,000 per month for two children, billionaire Francois-Henri Pinault paid $46,000 per month in child support for one child, and Charlie Sheen originally paid $55,000 per month in child support to each of his wives (but has since had it lowered to $25,000 per month per wife).
Most of these cases were ultimately settled, so this is based on tabloid reporting but when it comes to real courtroom decisions, when dealing with significant incomes and extraordinary lifestyles, judges can basically do whatever they want.
Complexity of Assets
The other possible challenge for high-net-worth cases has to do with the complexity of the assets that are being divided. There are some people who have millions of dollars in cash sitting in a bank account (or filling a mattress)—but those are very rare.
Typically, those that fall in the high-net-worth space hold complex assets, whether it be brokerage accounts, private equity investments, real estate, or business interests.
There could be an entirely separate book written dealing with the variances that exist when valuing and dividing complex assets, which we discussed a little bit in Chapter Eleven on Asset Distribution.
The problem with many high-net-worth cases is that many of the assets are typically illiquid (except for those with the fluffy mattresses), so some assets cannot be split and therefore there are numerous valuations involved, which are also subjective, and involve creative methods of pay-outs. Many of these assets are embedded with capital gains or have other cost consequences if they were to be liquidated.
It is not a simple “you take half of the checking account and I will take the other half” situation.
The other issue that comes into play in high-net-worth cases has to do with the way that these complex assets are divided. Many states (like New York) are equitable states, not equal states.
This means that you are not looking at an automatic 50/50 split of assets. Even in some of the cases that claim to do an equal division of assets, there may be different ways of valuing certain assets that do not make the split as easy as cutting it down the middle.
For example, in New York, business interests are rarely divided equally even if the rest of the assets are. The level of asset division can be different based on the nature of the asset.
Even issues such as who pays for counsel fees can be different in high-net-worth cases. Typically, the monied-spouse would be responsible for the majority of the counsel fees. However, when the non-monied spouse is receiving $20 million in assets, a court may very well say that the spouse can afford to pay his or her own legal fees.
In many high-net-worth cases, you need to also consider outside factors beyond the income and assets to be divided. Many people who fall into the high-net-worth space have great concerns about information being leaked about their businesses and also may be in the public eye with an image to protect.
When dealing with celebrity clients, this becomes a huge factor in a divorce negotiation. It is even worse when you have one person who is a household name and the other who is not, but who obviously wants to be and is willing to use the details of the parties’ divorce to get there.
If you are representing CEOs of public companies, it is often imperative that the public not know that his or her marriage is in trouble, the combination of a gossip hungry public and a juicy divorce could cause the stock to plummet. That is when you need to factor in confidentiality agreements and manage how the media is provided its information. And if you need to file a gag order – be ready.
The Right Attorney
The abovementioned factors are why it imperative that the attorney selected in a high-net-worth divorce has knowledge of operating within the high-net-worth space so that their experience allows them to predict how a judge may rule and what pitfalls they need to avoid.
You need someone who is fully familiar with the variations of complex financial assets, compensation packages, knows the appropriate valuations that need to be done, and has creativity when dividing up illiquid assets.
On a positive note, high incomes matter very little when it comes to child custody. The law is the same whether you earn $10,000 per year or $10,000,000 per year. Custody standards remain as the “best interest of the child”, which we discuss more in Chapter 15.
This dictates that the court will consider the same factors regardless of income levels or assets when determining who shall be awarded custody of the children.
Before going to court in a high-net-worth divorce, I always ask my client, “How much do you like to gamble?” Remember, anytime you enter a courtroom you are gambling on the actions of a judge.
There is an inherent risk (albeit an educated risk if you have a savvy attorney) and the outcomes can be as unpredictable as rolling the dice in a game of craps. You may get a judge who does not believe that having the fourth home in Aruba is a necessity for your daughter in an effort to retain her lifestyle.
On the other hand, you may encounter a judge who feels that if this is what the child is used to having, then it should be continued. I remind clients that litigation is often a luxury few can afford because no matter how wealthy you may be, you do not want to spend hundreds of thousands of dollars—sometimes even millions—on endless and uncertain litigation regarding your financial future.