When high-net-worth spouses are dividing property in a divorce, there are numerous assets that must be considered. This can create a difficult and stressful divorce process. Pittsburgh family lawyer Brian Rosinski discusses the most common issues that may arise, particularly what can and cannot be divided – including when it comes to private practices, stocks, and inherited assets.
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Hosted by: Diana Shepherd, Editorial Director, Divorce Magazine
Guest speaker: Brian Rosinski, Family Lawyer at McCarthy, McDonald, Schulberg & Joy
Bio: Brian Rosinksi is an attorney at the Pittsburgh law firm McCarthy McDonald Schulberg & Joy. His practice is solely devoted to family law, including child and spousal support, property division, high-net-worth divorce and drafting prenuptial and postnuptial agreements.
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Read the Transcript of this Podcast Below.
What property is considered during valuation?
Property that would be considered for distribution incident to a divorce would be anything that is acquired regardless of title from the date of marriage to the date of your separation. The date of your separation is when you and your spouse confirm to one another that you are no longer holding yourselves out as a married entity. Anything that is acquired, if it’s in your spouse’s name or your name, individually is property that can be distributed incident to the divorce. Also, anything that is in joint names would also be considered as property that would be divided during the divorce.
There are some limited exceptions in terms of what would not be divided. Anything that you acquire during the divorce that you receive as an inheritance or a gift from a third party or anything that is precluded from agreement, like a prenuptial agreement, would be potentially set aside and not be divided when you get divorced.
You said that date of separation is the date that the parties agree that they are going to be getting a divorce. It doesn’t have to be that one person has moved out? That’s not counted as a date of separation?
That certainly could be the date of separation. Most commonly the date of separation is when one physically removes themselves from the marital residence. Sometimes due to circumstances, the parties will continue to live under the same roof while they’re going through their divorce. In those circumstances, you need to know specific facts about what occurred between the people. Did they have some type of incident where the two of them knew that they’re no longer “a married entity”? Did they segregate their finances? Did they stop sleeping together in the same bedroom? Circumstances like that would show and produce evidence that would show that there was a date of separation despite the fact that they were still living under the same roof together.
Is there any gain or loss on the transfer of assets to a spouse or a former spouse incident to a divorce? If so, what documentation or records are required to transfer the assets?
When considering the specific question, the court will take into account certain tax ramifications in consequences of distributing assets. It’s possible that when certain assets are distributed there could be a tax consequence in terms of liquidating an investment account or doing something of that nature. More broadly speaking, however, when you divide your marital estate from one party to the other, and you have to make a payment to the other spouse, that is a tax-free payment that you make from one spouse to the other. In that sense, you’re not being taxed on dividing your marital estate. The issue then is if it’s necessary to liquidate a specific asset to comply with a court order or to effectuate the settlement agreement that you end up having for the resolution of your divorce. There may be some instances where there might be a gain or a loss that would be taken into account incident to the divorce process.
As far as the specific documents or records that are required, that really depends on what type of asset we’re transferring. If we’re transferring real estate through the divorce process and you have a marital residence that’s titled in joint names, the lawyers would prepare a new deed, which would transfer it from joint names to an individual’s name who would be retaining that asset. If you’re transferring a retirement account, there are special court orders which are prepared that exempt the transfer of retirement assets from tax penalties or any other type of diminution of the account’s value. It can go from the person who holds the retirement account to the other spouse who doesn’t have that retirement account. They’re put on equal footing in that manner. There are a number of different specific documents or records that could potentially be in play with that, but those are two of the most common circumstances that we would run across.
Are there any tax considerations to be aware of during property division in a high-net-worth divorce?
Yes, I touched upon it just a little bit before. The Divorce Code in Pennsylvania always lists potential tax consequences as an issue in determining how the marital state will be divided. This most commonly comes into effect when we’re doing what’s called an offset of assets.
Let’s say, for example, a party has a retirement account and an investment account that’s invested in stocks and bonds. Those two types of assets are not in kind assets, they’re not like. That retirement account is bound and held in a little bit of a frozen state until somebody reaches retirement age, while on the other hand that investment account is available for use now. The issue then is you can’t just necessarily transfer one type of asset to the other because they’re not like kind assets.
If I’m giving somebody $100,000 from an investment account, that means I would have to liquidate that investment account, sell stocks, sell bonds, and take capital gains tax issues with that, and that’s really reducing the value of the account. In those types of circumstances, we would really look in value the specific asset and reduce the value of it not based on what it says on the front page of the statement, but after looking into it. If we’re going to segregate and distribute that asset, we’re going to take into account what type of tax consequences would result if we have to liquidate that account. That’s a circumstance that we would look at when giving advice and making recommendations on how to resolve a marital estate.
In other words, all assets are not created equal.
Correct, they’re not all created equal and it’s very important to understand what each specific type of asset is and how people are able to access it in terms of what their wealth truly consists of. If everybody’s tied up in just real estate, that obviously is not a liquid thing and it makes it more cumbersome and difficult to settle a marital estate, and potentially in those circumstances you might have to liquidate an asset, which again would imply that there could be potential tax consequences, capital gains in selling certain types of assets to meet obligations to pay a spouse and resolve in a divorce.
If a professional with a practice, a doctor or a dentist for example, is going through a divorce, isn’t a lot of the value of the company the doctor or dentist themselves?
Potentially, yes. This concept is called personal goodwill. When somebody has a private practice and that private practice was founded during the marriage and it’s a marital asset, we would hire an expert to value that business in terms of what it would be worth for the marital estate. In so doing that valuation process, we would look at that individual doctor or dentist and see how important they are to generating the revenue of that business. We try and create a hypothetical: if we remove that key person from the equation, what would a potential buyer look at and would that potential buyer pay the same amount? Would they pay less or would have no impact whatsoever in terms of what the fair market value of that professional practice would be?
When there is a lot of personal goodwill — that whole business is that person and that person only, they attract business only because of their high-end skill and their specific marketability — that business will be valued and discounted more so than, for instance, a franchise restaurant business, which has what’s called enterprise goodwill. You’re buying the name and you can fill in the employees and the key people and keep it running as is.
Circling back, the answer is yes. The value could potentially be very much dependent upon that specific professional person in terms of making a valuation assessment.
What steps can be taken to protect your accounts – including bank accounts, credit cards, and even email accounts – during divorce?
The first thing I would recommend to do would be to segregate any joint account. Split those in an equitable manner and open up your individual accounts and keep everything separate from the point that you separate with your spouse going forward. In certain circumstances, you can also ask the court to freeze accounts to make sure that nobody’s liquidating the marital estate, and that will ensure that everything is safely protected until the resolution of your divorce.
Does a premarital or prenuptial agreement override normal property division rules?
Yes, the sole reason somebody would enter into a prenuptial agreement would be to set their own rules, so to speak, in terms of how they would divide a marital estate. Those are valid and binding contracts, and so long as there’s a full and fair disclosure at the time that those agreements are made, however those agreements are written, those will carry the day at the point in time when somebody looks to get divorced.
For a high-net-worth person who’s coming into a potential marriage, it is often advisable when they have significant assets to enter into a prenuptial agreement.
If one spouse receives stock options at work, are those options considered marital assets to be divided during divorce? What if those options are partially vested at the time of divorce but can’t be touched for years?
If a spouse receives stock options before they separate during the marriage, those will be considered marital assets and they will be divided in some manner incident to the divorce process. The issue of options can become a little more complicated if they have invested at the time of the divorce and they can’t be touched. Those get treated similarly to maybe how a pension would be, and so what the court would do is there would be a potentially deferred distribution in terms of stock options, when that would be the case, and we would look and see what would happen to those options in the future despite the fact that the divorce may have already occurred. The rights of the spouse would still be preserved to determine what would or wouldn’t happen to those stock options down the road.
If that spouse will receive the option, was granted that option prior to the date that they separated from their spouses regardless of if it was divested or not, that will be the key in determining whether or not it’s a marital asset that would be divided at some point in the future.
If one spouse inherits significant money or a property during the marriage, what can be done to preserve that inheritance in the event of divorce?
The number one thing that can be done is make sure that you do not co-mingle any money that you received from an inheritance, from a trust, from a gift, from a third party. You keep it separate. You keep it in your sole individual name and that money will be non-marital money and cannot be divided. What could potentially be divided is any increase in value that you would receive on an inheritance.
For example, if you inherit $100,000 and you put it in your home in your sole name, you invested it and it grew to $200,000, that gain in Pennsylvania of $100,000 could potentially be an asset that would be divided. Circling back to the prenuptial agreement, that’s one of the reasons you would get a prenuptial agreement, to make sure that any gains on your non-marital assets would also not be included for division or distribution incident to a divorce.
What if a financially naive ex-spouse was misled about the value of property he or she received during divorce, like a worthless piece of land being assigned a fraudulent value of millions?
Similar to any type of fraud that would occur, the court would allow an aggrieved spouse to make a claim for fraud and you would have to show that the actual fraud did occur, but you would be able to go back and compensate for that loss and potentially reopen a divorce settlement to account for the fact that there was a prevailing fraud that was conducted by one spouse to another.