How to Protect Your Assets and Net-Worth During Divorce

Considering divorce is never easy. But considering divorce as an individual with a high-net-worth and considerable assets in California can come with added stress and costs. The magnitude of your estate may push your case into the exceptions of most general advice on divorce and can even leave a talented family attorney with years of “normal” divorce experience at a loss.

Without the right guidance, high-net-worth individuals initiating divorces often contend with superfluous litigation that painfully prolongs the divorce proceedings and fails to protect their separate property interests. This may leave them unhappy, overwhelmed, and on tenuous financial footing.

That’s why we created this premium guide to divorce, specifically for high-net-worth individuals.

In this guide, we will explore the legal and financial processes high-earners face during divorce in California and give advice on crucial topics like:

• The best practices for initiating your divorce
• How to leverage your support team and network of advisors
• Tips for protecting your most valuable assets
• Preparing for the financial reality of life after a high-asset divorce

We’ll also discuss common pitfalls to avoid to ensure your divorce is as streamlined, low- stress, and non-inflammatory as possible.

Where To Start

Many of our clients considering a high-asset divorce don’t know where to begin. The thought of mountains of paperwork, tense meetings, and stressful court proceedings can be paralyzing. That’s why we always recommend our clients focus forward and begin by forming a strategic asset protection plan with the help of an experienced family law attorney.

Whether you’ve been a diligent investor, built a successful sports or entertainment career, inherited your family’s estate, or amassed a commendable real estate portfolio, you need a plan to ensure the fruits of your labor are well-protected during your divorce.

Creating an asset protection plan is the key to minimizing conflict and avoiding needlessly drawn-out proceedings during a high-asset divorce. By proactively gathering all pertinent financial documents, reviewing premarital agreements, examining wills and trusts, and analyzing business and property valuations, you can prepare a plan forward.

Which Documents Will I Need?

California law requires spouses to share all material facts regarding their assets, debts, income, and expenses during the early stage of divorce. Gathering the required documents for your disclosures can be time-consuming, so we recommend that our clients seek a clear picture of their assets as early as possible when considering a high-asset divorce.

Gathering the documents listed below will allow your legal and advisory team to begin building an informed and in-depth asset protection strategy.

• Business and Personal Tax Returns
• Copyrights and other Intellectual Property Documentation
• Professional Sport Pension Plans
• Financial Account & Credit Statements
• Inheritance
• Documents Business Valuations
• Real Estate Documents
• Stocks, Bonds, and RSU Documents
• 401(k) and Pension Information
• Any Pre/Post Marital Agreements or Transmutation Agreements
• Wills and Trusts

Whom to Meet With When Considering a High-Asset Divorce

Arranging meetings with a list of trusted advisors can help high-net-worth individuals find clarity and peace of mind as they prepare for their high-asset divorce. Begin by partnering with a tenacious family law firm, like Cage & Miles, that specializes in providing counsel to high-net-worth individuals.

We also recommend creating a list of each individual or team with information, documentation, or insights that may be helpful regarding your estate. We recommend that our clients reach out to (at least) their:

• CPAs
• Business Advisors/Managers
• Sports/Entertainment Managers
• Financial and Investment Advisors
• Family Estate Planning Attorneys
• Real Estate Portfolio Managers

Each high-net-worth individual will have a unique combination of advisors and teams they should contact. Failing to gather all pertinent documents and disclosures could unnecessarily prolong or complicate your divorce proceedings. If you aren’t sure whom to speak with, consider consulting your family law attorney for guidance.

Protecting Your Biggest Assets

High-net-worth divorces require extensive review, documentation, and eventually division of a wide variety of assets, including premarital assets, 401(k) and retirement accounts, athlete pension plans, intellectual property, goodwill, inheritances, real estate and property trusts, stock and bond portfolios, and businesses.

It’s important to remember that failing to carry out your due diligence while disclosing assets can significantly complicate your divorce. Assets that aren’t disclosed, also known as “hidden assets,” often lead to additional compensation to the other spouse and carry the potential legal penalty of perjury.

As a community property state, California law states that property acquired during the marriage (except by gift, bequest, or devise) will be divided 50/50. That may sound simple enough, but the reality of dividing assets (especially assets with sentimental value) is often far more complex. Many divorces become more complicated and contentious when it’s time to divide assets like:

• Retirement Accounts and Pensions
• The Marital Residence
• Family Vacation Homes
• Artwork and Antiques
• Intellectual Property
• Jewelry
• Vehicles, boats, planes, etc.

Fortunately, a skilled family law attorney with experience counseling high-net-worth individuals will be able to help create a divorce settlement offer that maximizes the protection of your interests. The best family law attorneys do so without seeking to defame your spouse or unreasonably impact their standard of living.

By presenting a fair settlement offer early in the proceedings, you can also protect yourself from incurring costly legal fees. If the court makes orders materially similar to your refused proposal, you’re less likely to be saddled with additional attorney and court fees incurred by your spouse.

401(k) & Retirement Accounts

Many high-asset individuals have concerns about their spouse’s access to 401(k) and other retirement accounts during their divorce proceedings. They’ve heard horror stories of spouses preemptively moving retirement funds to better position themselves before the divorce and want to ensure their hard-earned retirement is protected.

Fortunately, initiating a divorce in California activates an Automatic Temporary Restraining Order (ATRO). An ATRO is a mutual Order that takes effect on the Petitioner upon filing and on the Respondent upon service. 

This means the only way for either party to withdraw funds from these accounts is through a prejudgement agreement (signed by all parties) or a court order granting permission for a withdrawal. While this lack of access may seem frustrating to high-earning spouses, they often find the peace of mind granted by ATROs becomes invaluable during their court proceedings.

Although the law provides that financial assets should be protected during divorce proceedings, that may not stop an unscrupulous spouse from breaking these rules. Further steps should be taken to ensure all relevant financial entities are aware of the ongoing divorce and assist in the preservation of community assets.

Inheritance

Many high-asset individuals considering divorce worry about the security of their inheritances. They reach out with questions like:

• Can my inheritance become community property?
• Is my spouse entitled to any of my inheritance?

These are all understandable and reasonable concerns. Inheritances frequently represent more than their monetary value and often include familial legacies that would be emotionally damaging to lose during the division of assets.

Fortunately, California Family Code 770 states that the separate property of a married person includes “(2) all property acquired by the person after marriage by gift, bequest, devise, or descent. (3) The rents, issues, and profits of the property described in this section.” This means that under most circumstances, your inheritance (and any income or property generated therefrom) is safe, regardless of whether you received it before, during, or after your marriage.

The only remaining issue that may arise regarding inheritances is the tracing requirement of inherited funds. If the separate inheritance funds have become commingled, transmuted, or were gifted to your spouse, your claim may be challenged in court.

Premarital Assets & Agreements

Unfortunately, even the most iron-clad premarital agreement can be (and often is) challenged during high-asset divorces. Even if prenuptial agreements include fee provisions to discourage litigation, it’s not uncommon for spouses to attempt to challenge the validity or enforceability of premarital agreements during the divorce.

These challenges typically hinge on your disclosure of assets and waiting period requirements for entering into a prenuptial agreement. If you’ve failed to adhere to your agreed-upon waiting period or your premarital disclosure is found to be inaccurate, your premarital agreement could be deemed invalid and unenforceable.

Even if your prenuptial is upheld, the process of challenging and verifying its enforceability can add thousands to court fees. That’s why we always recommend including carefully crafted, strategic fee provisions in premarital agreements.

The right fee provisions can entirely eliminate the headaches, costs, and potential asset losses created by unfair or malicious premarital agreement challenges.

Real Estate & Property

As we mentioned above, apart from separate property, all real property acquired during the marriage are subject to a 50/50 division under California’s community property laws. And while properties owned before entering into the marriage are technically protected as separate property by the California Family Code, they can become vulnerable to reimbursement claims or division following a variety of common occurrences.

Even an act as ordinary as paying down the mortgage principal on a separate real estate property with your own earnings during the marriage will impact your ability to preserve your separate property interests. Earnings during marriage are considered community property and either partner paying down a principal balance with community earnings may subject the separate property estate to a reimbursement claim.

If you’ve been married for more than a few years, the “community” (you and your spouse) has likely acquired a sizable portion of equity in the separate property. Separate property can also become community property following a transmutation of character. The most common transmutation of separate property to a community asset is execution of an Interspousal Grant Deed.

Fortunately, spouses that contributed separate assets to community property (and have the paper trail to prove it) are entitled to reimbursement. This means if you contributed a sizable portion of the down payment using separate assets (like an inheritance or premarital savings) you will be able to recoup that contribution.

Stocks, Bonds, Options, and Restricted Stock Units

Investment portfolios that include stocks, bonds, options, and restricted stock units (RSUs) acquired while married are also subject to California’s community property laws.

RSUs that are granted and vested during your marriage will more than likely be classified as community property. But RSUs granted before the marriage that vested over several years before and during the marriage, should be classified as a combination of community and separate property. Similarly, RSUs granted during marriage that vested post-separation are also likely a combination of community and separate property.

A skilled family law attorney with experience counseling high-asset individuals

will be able to help you:

• Review Your RSU Package, Grant Documents, and Vesting Schedule
• Calculate the community and separate property components of each RSU
• Address tax implications and concerns

Business Valuations

Like most assets in California, a business started during a marriage will be considered community property.

The courts will use a current business valuation to determine the value of your spouse’s interest in your business. Generally, the business-owner spouse will then buy out their spouse to retain control and gain full ownership of their business.

Businesses that are separate property, but increased in value due to your efforts or investments while married, also typically entitle your spouse to an interest in its value. In cases where a separate property business increased in value without either spouse’s direct involvement, your spouse may not be entitled to any interest in its value.

These cases can be complex and often require an analysis of multiple historical valuations to determine community property and separate property apportionment.

Costly Financial Factors & Your New Future

Higher-earning spouses should prepare for long-term obligations like child support, spousal support, and QDROs, as well as complicated tax obligations. While not extremely common, hidden assets may also emerge after a settlement and upend your “settled” legal arrangements.

We always recommend that our high-net-worth clients enlist the support of a skilled family law attorney to gain a comprehensive understanding of the financial obligations they may face as a result of their divorce. Even if you’re unsure that you’ll move forward with the separation, taking the time to understand your positioning will help you avoid unnecessary stress and confrontation down the line.

Let’s break down some of the most common financial obligations high-asset, high-net-worth individuals face during and after a divorce.

QDRO (Qualified Domestic Relations Order)

A QDRO, or Qualified Domestic Relations Order, is a judgment, order, or decree for division of an individual’s retirement, pension, and possibly investment accounts. These sources may also be used for the payment of child support or spousal support.

A major benefit of QDROs for high-net-worth and high-asset individuals is their tax benefit. Higher-earning spouses can transfer the portion of awarded funds to their ex-spouse without incurring early withdrawal penalties or becoming liable for taxes. Instead, the spouse receiving the disbursement would become responsible for said taxes, often representing a major financial win for the higher-earning spouse.

While QDROs have to be qualified by the administrator of your retirement plan, a DRO can be used to divide additional assets without requiring addendums for qualification by third parties.

Hidden Assets

No one wants to imagine that their spouse would seek to unfairly or illegally hide assets, but it’s not uncommon in high-net-worth cases. Fortunately, skilled family law firms employ a variety of tactics, tools, and strategies to uncover hidden assets—whether their hiding was unintentional or deliberate.

At Cages & Miles, we are committed to ensuring a thorough and unobstructed discovery process and are willing to seek intervention with the court if we believe your spouse is attempting to unfairly devalue or hide assets.

If court-ordered compliance isn’t enough, we have the option of leveraging our long- standing partnerships with elite forensic accountants that specialize in high-net-worth cases. These forensic accounting specialists are experts at analyzing financial records to uncover hidden assets.

Penalties

As we’ve mentioned throughout this guide, there are serious legal penalties and sanctions on the table during a high-asset, high-net-worth divorce.

For example, per California Family Code 271, spouses that attempt to unreasonably, vindictively, or self-servingly prolong the divorce proceedings or engage in a pattern of behavior that drives up the litigation expenses may be found liable for both parties attorney’s fees and costs.

Additionally, individuals that are found to have egregiously breached their fiduciary duties during the disclosure process or have taken great strides to hide or devalue community property assets may see 100% of the asset’s value awarded to the injured spouse.

Spousal Support

Determining spousal support can quickly become a complex and exasperating task for high-net-worth individuals. An in-depth income analysis may be needed to gain an accurate picture of the standard of living you and your spouse are both accustomed to and entitled to.

Courts have a variety of methods for determining Marital Standard of Living (MSOL) but generally review the income and expenditures over the last three to five years of the marriage minus taxes and excluding non-recurring income and expenses.

After the court has reviewed your financials, they will divide your average monthly expenditure by two to determine each spouse’s respective MSOL. So, if for example, your financial records show average expenditures of $20,000 a month, the MSOL for each spouse will be set at or around $10,000 a month.

Tax Considerations

There are also a variety of tax considerations high net-worth individuals must make when considering divorce. Without careful planning, liquidating marital assets like RSUs, stocks, options, and real estate investments can lead to painful capital gains and tax obligations. Furthermore, spousal and child support payments are no longer tax deductible, increasing the impact of these financial burdens.

High-net-worth individuals should work with their family law attorneys to transfer assets according to their divorce settlement without incurring costly tax consequences or retirement account withdrawal penalties.

Attorney Fees and Costs

Under California Family Code section 2030, if there is a disparity in access to funds between the parties, the court may order you to contribute to the reasonable attorney fees and costs of your spouse. It is therefore important to evaluate not only the fees you will personally incur in a divorce proceeding, but also the fees you may be ordered to pay for your spouse.

Family Estate Planning

Because separate properties so often become transmuted during marriages, a careful review of your trusts and similar estate documents is a crucial step in identifying and protecting separate properties for which divorced spouses are not entitled compensation.

After your divorce, it’s important to update your trust and estate planning documents. For example, divorces have no impact on documents like Advance Healthcare Directives, so your recently divorced spouse will still be named. You’ll also want to update your family planning documents to reflect an updated account of assets and your revised beneficiaries.

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