What Are the Biggest High Net Worth Divorce Mistakes?

What Are the Biggest High Net Worth Divorce Mistakes?

No divorce is easy because a divorce comes with strong emotions, whether it’s sadness, bitterness, or anxiety about the future, but when the financial stakes are high, so is the amount of contention during a divorce. Like the majority of states, Arizona requires divorcing spouses to divide their marital assets in a way that’s fair and equitable if not exactly 50/50. While this can be a straightforward process for spouses who rent a home and have few assets, or those with standard portfolios, for divorcing spouses with a high net worth and diverse assets, this process is challenging, painstaking, and often contentious.

A high-net-worth divorce is one in which spouses have one million dollars or more in marital assets such as real estate properties, bank accounts, investment accounts, businesses, retirement accounts, luxury vehicles, antiques, artwork, and other valuables. When there is a lot on the line, divorcing spouses sometimes make rash moves and other poor decisions that they later regret. Understanding from the beginning of the high-asset divorce process what mistakes to avoid helps minimize the risk of financial losses and increased adversarial feelings between divorcing spouses.

What Are the Biggest High Net Worth Divorce Mistakes?

Poor or Disorganized Record-Keeping

All divorces require a discovery period during which both spouses must submit full financial disclosures. Each spouse’s attorney makes record requests of the other and the law compels each party to respond to these requests. If your spouse’s attorney requests documentation of specific assets such as the title to a vehicle, deed to a property, or tax records for previous years and you don’t have that information at hand, it stalls the process. Poor record keeping and entering the process of a high-asset divorce without first locating and organizing all financial records is an all-too-common avoidable mistake that adds time, frustration, and anxiety to the divorce process.

Before you file for divorce or respond to your spouse’s divorce petition, it’s crucial to begin a file to collect and organize all relevant financial documentation. 

Going to Court Instead of Negotiating a Settlement Agreement

The biggest advantage of a prenuptial agreement is that it helps divorcing spouses avoid a lengthy, contentious divorce battle in court. However, even if you don’t have a prenup, it doesn’t mean you can’t negotiate a settlement agreement and avoid the expense, time, and acrimony of court disputes. In a high-asset divorce, it may take multiple mediation sessions and meetings in a neutral environment with your attorneys to negotiate terms, but by settling out of court, spouses keep control of their asset division rather than leaving it in the hands of an impartial judge who doesn’t know that one spouse may be willing to trade two rental properties for the marital home or the RV for the collection of valuable art. When spouses negotiate their own settlement agreement, they are far more likely to be satisfied with the results and go on to have less rancor toward their ex-spouse.

Settling too Quickly

While it’s always preferable to form a settlement agreement rather than taking the matter to court, it’s also not usually wise to settle too quickly. Some divorcing spouses may simply want the matter over with and behind them as quickly as possible signing a settlement agreement too hurriedly often results in one spouse missing out on assets they were entitled to keep or losing their portion of an asset they were entitled to share. It’s important to take time, have multiple negotiation meetings and/or mediation with a neutral party, and allow both attornies ample time to investigate before signing a divorce settlement agreement.

Attempting to Hide or Disperse Assets

Some divorcing spouses spend the early days of the divorce process deliberating over ways to hide, disguise, or disperse their assets so they don’t have to divide them with their spouse. However, by failing to fully disclose financial assets, a spouse is highly likely to suffer significant penalties. Judges react harshly to attempts to hide assets so often the other spouse will end up with a larger share of the marital assets than they otherwise would have. The other spouse’s attorney and/or the forensic accountant they hire are highly likely to discover the hidden assets or notify the judge if the other spouse is spending an excessive amount of money to dispose of assets. The result will be the court deciding to punish the misconduct by allocating more assets to the other spouse. Also If one spouse spends significant marital assets on another relationship during the divorce, this could impact child custody. At worst, hiding or disposing of assets may even result in criminal fraud charges.

Failing to Consider Tax Consequences

It’s sometimes tempting to rush into a settlement agreement to put the divorce in the past of demand the assets a spouse wishes to keep in court without considering the tax implications of the financial changes. For instance, quickly cashing out a retirement plan to give half to a spouse comes with considerable tax penalties that could be avoided by rolling the spouse’s portion into a new IRA or 401K account in their name. Alimony payments, assets moved from one spouse’s name to the other, and capital gains may end up costing a great deal in taxes. It’s best to hire an attorney with years of experience in navigating high-asset divorces and/or divorce financial experts to advise divorcing spouses on how to minimize tax penalties during the division and redistribution of their marital assets.

The timing of a divorce also impacts tax filings. If spouses divorce on December 31st, they have to file separately the next year even though they were married for the entire year minus one day.

Assuming the State’s Guidelines for Child Support and Alimony Apply in Your Case

Arizona and many other states use the “Income Shares Model” to determine the amount of child support one parent pays the other, but for divorcing spouses with high assets, this formula may not apply. For example, if one parent’s income is very high, it could result in far more child support than required to support the children, even in the lifestyle they were accustomed to during the marriage. In these cases, the judge has the discretion to make adjustments to the amount produced by the state’s formula for calculating child support. For spouses with large incomes and high assets, it’s best to negotiate a mutually acceptable agreement for an appropriate amount of child support.

Spousal support, or alimony, is typically awarded between spouses with a significant income disparity. In cases of high-asset divorces, whether or not one spouse is awarded spousal maintenance depends on the number of assets allocated to them and whether or not the assets generate enough income or rate of returns to meet the spouse’s needs. Consulting with a qualified Phoenix high-asset divorce attorney can help maximize your compensation and avoid these common mistakes.