You have likely heard the adage “money can’t buy happiness.” For couples going through a high net worth divorce, this statement proves very true. Despite having plenty of money and lots of assets, some couples simply learn they are not a great match and decide to divorce. For these couples, divorce becomes more complicated and the division of their assets becomes more complex as they try to ensure a fair settlement and avoid significant tax implications. While not required, the assistance of a Colorado divorce attorney may benefit couples dealing with high net worth divorces. If you would like to speak with one of our experienced attorneys, call Johnson Law Group at (720) 744-3513 to schedule a complimentary 15-minute consultation to review your case and learn how we may be able to assist you.
What Is a High Net Worth Divorce?
A high net worth divorce is like other divorces in that it is a married couple who no longer desires to remain married to each other. Where high net worth divorces differ from other divorces is in the value of the assets the couple has. One or both spouses have a significant amount of assets, which can include retirement accounts, property, businesses, investments, and other assets, including international investments, accounts, and other assets.
The precise number that shifts a divorce from a typical divorce to a high net worth one is not entirely clear. Most people agree that a high net worth would be at least $1 million in liquid assets, but generally, high net worth divorces are between couples who are typically worth several million dollars.
What Makes High Net Worth Divorces Different?
There may be many things that may contribute to making high net worth divorces different. However, there are three specific aspects of a high net worth divorce that makes it different than a typical divorce. The higher net worth makes the divorce higher stakes, more complex, and often involves power and influence.
Higher Stakes
The higher net worth of the couple leads to higher stakes in their divorce. The more assets they have, the more they each have to lose. The understanding that they will lose in certain respects can cause divorcing spouses to cling to what they want, whether that is a particular asset or child custody. More importantly, the higher net worth of a high net worth divorce means that every decision can have a significant impact on the spouses’ futures. In particular, the receipt of certain assets may have tax implications that ultimately create an unfair settlement.
More Complexity
High net worth divorces come with a larger number of assets, an increased value of each individual asset as well as the the value of all assets, and a more complicated division of those assets. There are often disagreements over whether an asset is a marital asset or separate property and in some cases, one spouse may attempt to hide assets from the other. Dividing these assets is more complicated as C.R.S. §14-10-113 requires the equitable distribution of marital property, defined as all property acquired by either spouse during the marriage, except for property excluded by a prenuptial or postnuptial agreement (prenup or postnup), property acquired after a legal separation decree, or property acquired via gift, bequest, devise, or descent. The equitable distribution of assets can be more difficult in a high net worth divorce as the assets are typically valued more highly, but may also have extreme variations between how much assets are worth.
Power and Influence
In many high net worth divorces, one or both spouses are also people with great power and influence. People with significant power and influence are typically used to getting what they want, so this can make the divorce process more difficult. The spouses may find it more difficult to reach a settlement agreement, particularly if there is no prenup or postnup.
Additionally, these divorces also often require at eam of experts to divide the assets. These experts may include accountants, appraisers, and business valuators. When one or both spouses has significant power or influence, they may hire experts who will favor them, which can draw the process out even more as the court tries to determine the truth about the value of the assets.
Preparing for a High Net Worth Divorce
There are some steps individuals can take to prepare for a high net worth divorce and the potential tax implications the division of assets can have. Taking these steps can help an individual fully understand how different divisions of the marital assets may impact them and help them avoid a tax burden they are not prepared for.
Ensure a Clear Understanding of Your Finances
While understanding the marital finances is important in any divorce, it can be particularly critical in a high net worth divorce. These are the divorces where a spouse may be more likely to try to hide or undervalue assets. Individuals should financially prepare for divorce by ensuring they have a thorough understanding of the marital finances, as well as their individual finances.
This should include gathering and reviewing tax returns, bank statements, investment records, and all other assets and liabilities. If there are questions regarding their finances, individuals should seek the advice of an expert, such as an accountant, attorney, or appraiser. If there is any uncertainty about the clarity of which assets are marital and which ones are separate, the individual may wish to speak with an attorney regarding how to clear the matter up, including the possibility of hiring a forensic accountant to trace the property and clarify ownership.
Have Clarity Regarding Your Divorce Goals
When asked, many people will say their divorce goals are to be divorced. While this may be an appropriate answer for a couple who is young with few assets, in a high net worth divorce, spouses should be clear about their divorce goals beyond being divorced. Consider the answers to questions such as what do you want to achieve and what is your ideal outcome?
For example, one spouse’s ideal outcome may include receiving a certain asset because it has sentimental value to them, while the other spouse’s ideal outcome includes receiving a different specific asset due to its monetary value. If both spouses understand that these are their goals, it can make negotiation easier as they can be more flexible about letting go of other assets in exchange for what they want. Additionally, having an understanding of what their divorce goals are allows the spouses to express these goals to their attorney, and get a better understanding of the tax implications of those goals. If the tax burden associated with a particular goal is more than the spouse may be able to handle, they can be made aware of this early and reconsider their goals.
Hire an Attorney Who Is Experienced in High Net Worth Divorces
Colorado does not require divorcing couples to hire an attorney. However, it is typically recommended for high net worth divorces as there is so much at stake. While there are plenty of divorce lawyers to choose from in the Denver area, individuals engaged in a high net worth divorce should seek out ones who have extensive experience with these types of divorce. The attorneys at Johnson Law Group have this experience and will use our experience and knowledge of Colorado divorce laws to protect the rights of our clients, including making sure our clients understand the tax implications of any property division settlement before they agree to it.
Have Your Financial Documents Prepared and Ready for Disclosure
Colorado law requires a number of financial mandatory disclosures. The Colorado Courts provide a comprehensive list of the documents required for this disclosure. Individuals should begin gathering and preparing these documents prior to disclosure. This will not only assist in understanding their own financial situation, but also speed up the process as they are not searching for these documents when they are needed. Additionally, it can serve as a checklist to assist in ensuring that all assets and liabilities are accounted for.
Potential Tax Implications of High Net Worth Divorces
Divorcing partners can transfer assets between them without tax implications, but that changes after the divorce is final. While the transfer is without implications during the divorce, it can aslo create higher tax burdens for one partner post-divorce. Additionally, tax codes frequently change, which means the strategies for minimizing tax liability also frequently change. This all makes dividing assets in a high net worth divorce, as both partners will typically want to minimize their own post-divorce tax burden while also receiving specific assets.
Divorcing partners should also understand that they remain liable for mistakes or omissions on any joint tax returns the couple filed. This means that if the Internal Revenue Service (IRS) audits any tax returns that were filed during the marriage, both spouses may be responsible for any additional taxes, penalties, fines, or fees owed. However, if it can be proven that only one spouse knew about the mistakes or omissions, it may be possible to get a separation of liability and avoid having to pay any of those additional monies owed, per the IRS.
Post-Divorce Tax Implications
Dividing, selling, and transferring property can all have tax implications. This means selling the marital home, dividing retirement accounts without a Qualified Domestic Relations Order (QDRO) as indicated by the United States Department of Labor, selling rental properties, and selling stocks and bonds all can change an individual’s tax situation. This is important because if a spouse receives an asset as part of the property division but then must sell it because they cannot afford to maintain it, this could trigger a larger tax burden for them.
Additionally, understanding these implications is important because in some cases, a court must issue the appropriate documents. For example, without a QRDO, the division of a retirement account or one spouse’s Restricted Stock Units (RSU) may trigger taxes and additional penalties. Individuals may wish to consult with a high net worth divorce attorney to learn more about how these assets may affect their taxes and what must be done to limit any impact.
Divorce Timing
Another potential tax implication to be concerned about is the timing of the divorce. If a couple’s divorce is granted on or before December 31, their tax filing status for that year will be single, according to the IRS. However, most people would have had their tax withholding from their income and other situations as married. This means that those individuals would likely end up owing additional taxes for that tax year as a result of their new filing status.
In some cases, the spouses may be proactive, knowing early in the year that they plan to divorce, and change their withholding to reflect this. They may also set aside additional money in anticipation of owing the additional taxes. However, many people do not do this. In these instances, they may want to discuss the timing of their divorce with an attorney or accountant to learn more about how it affects their taxes and what options are available to reduce their tax burden as a result of the divorce.
How You Can Protect Yourself Against the Tax Implications
While it may not be possible to completely eliminate any tax implications resulting from the division of property in a high net worth divorce, there are some things divorcing partners can do to protect themselves against those implications. However, individuals should consider consulting with an attorney before taking any actions to ensure that they are taking the actions that are right for their circumstances.
Consult With Tax Professionals
Spouses involved in high net worth divorces should seek out the assistance of tax professional who specialize in divorce-related financial matters to learn more about the tax implications of the various asset division options. Learning that a particular asset may cost the individual more in taxes may change their mind about wanting that asset. This can also ensure that any tax burden the individual may take on as a result of their divorce settlement is not a surprise and the individual is prepared for it.
Focus on the After-Tax Value of Assets
At face value, many assets are very appealing on paper. However, once their after-tax value has been calculated, they may not be quite as attractive. If an asset comes with significant tax obligations that reduces its actual worth, an individual may decide they do not particularly want that asset after all, particularly if their intention was to sell or otherwise transfer the asset.
Be Proactive About Calculating Taxes on Settlement Options
Individuals must be proactive about understanding how taxes will impact their divorce settlement. By educating themselves on how certain assets will affect their tax liability, they can plan for long-term financial stability and negotiate more effectively. Individuals can work with a tax professional to learn the tax implications of various settlement options and prepare a settlement that minimizes their tax burden to present to their spouse. While the spouse may reject the proposed settlement, it may offer a starting point for negotiations.
Think about Future Financial Needs
Often when attempting to negotiate the division of marital assets, divorcing partners focus on securing specific assets without considering the future implications of owning those assets. Later, if ongoing maintenance, taxes, or other financial requirements of owning the asset strains the individual’s finances, they may be forced to sell the asset. This can trigger significant tax implications. While individuals may be determined to get specific assets, they should think about their future financial needs and how owning that asset may affect those needs. This can be particularly important for individuals who will now need to support themselves and their children on their income alone, particularly if those children are not from this marriage and would not be eligible for child support.
Consider Any Prenuptial or Postnuptial Agreements
Both prenuptial and postnuptial agreements are enforceable contracts that can outline how assets are divided and who bears the tax burden for those assets. Depending on the length of the marriage, individuals may have forgotten such an agreement exists or the precise details of the agreement. However, these agreements can have a consequential impact on any division of assets.
Additionally, individuals should remember that while they can create and sign a postnuptial agreement at any time in Colorado, it cannot be done in anticipation of getting divorced. Therefore, if an individual’s spouse is pressuring them to sign such an agreement before moving forward with the divorce, the individual should consider seeking legal counsel to protect their rights.
How a Colorado Divorce Attorney Can Assist You
In a high net worth divorce, the stakes are high and the tax implications could be even higher. You do not want to get the divorce settlement you wanted only to find that it will cost you a fortune. A Denver, Colorado divorce attorney with Johnson Law Group may be able to assist you in finding experts to assist with appraising assets and understanding the tax liability you will face if you are given various assets in the division of property. We can also assist you in tracing separate property to prove it is not marital property, locating hidden assets, and negotiating a fair divorce settlement. Call (720) 744-3513 for a complimentary consultation where we may answer all your questions regarding high net worth divorces and how they may impact your taxes.
