While the new tax plan has generated a great deal of attention, it seems that the direct impact these new policies could have on high net worth couples who are considering a divorce has been generally overlooked.
Much of the commentary has focused on the impending elimination of the alimony tax deduction, but this tool historically has been much more useful in maximizing the after-tax cash flow available to a family that is struggling to now support two households with the modest wage income that had previously supported only one. In the case of high net worth families with larger lifestyles, both the payor and recipient are likely to be in the same tax bracket. Consequently, they will most certainly find the repeal of the alimony deduction as a nonevent.
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But there are many other elements that have the potential to impact and even possibly encourage more divorce filings among wealthy spouses. For example, greater tax-free income through certain pass through entities will likely create higher valuations, which could motivate the non-titled spouse to file for divorce. Also, the new tax law is receiving credit for the increased values of stocks and equities. Should that continue throughout the year (while possibly putting some damper on the residential real estate market), this increase in liquidity and perception of wealth will not only have an impact on the ways in which assets are divided during a divorce, but it also can make the process a little easier and less acrimonious for both spouses.
As affluent people begin to feel even wealthier, there is a greater willingness to purchase freedom…even if at a higher price.
As affluent people begin to feel even wealthier and more hopeful about their futures and prospects, there is a greater willingness to purchase freedom (or a perception of freedom), even if at a higher price. Having the means in hand and a more magnanimous attitude often translates into a divorce process that becomes less contentious and less drawn out. This more positive outlook is further supported by higher valuations of businesses and holdings, and by the simple fact that even if the gross income remains the same, the net income could increase substantially due to the new tax policy.
So, with all this in mind, any high net worth individual who is considering a divorce or believes a spouse might move forward with filing should be taking a number of steps this year as soon as possible. This process begins by gathering as many key documents as humanly possible. Key paperwork needs to be collected and organized, including: tax returns, bank statements, credit card statements, credit applications, board approval packages for cooperative apartment purchases, submissions for club memberships and brokerage statements. Careful thought also must be placed to thoroughly evaluating assets and their overall value.
Almost every single legal document should be reviewed and updated. Real consideration should be given to changing the death beneficiary on instruments that might possibly trigger an instant windfall to a soon-to-be former spouse in the event of death. If the current will provides the estranged spouse with more than he or she would receive if a death occurs without a will, then it might be high time to consider revoking the will. If the estranged spouse has been given a health care proxy and a durable power of attorney, that would need to be revoked, as well. Time is of the essence with these actions, because once a divorce commences, they could all be restricted.
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It is also essential to reevaluate any cash and credit needs for the subsequent six-to-12-month time period. It can be a very rude awakening to learn that many states, including New York, impose certain automatic financial restraining orders on the parties immediately upon the filing of a divorce proceeding. These automatic orders can immediately freeze many assets and bar the involved parties from changing names on bank accounts and changing insurance policy beneficiaries, among a variety of other actions. Getting relief from these restraining orders can be time-consuming, difficult and costly. A second look should be given to debt and joint credit lines in order to consider if it would be worthwhile to pay down debt and close access to joint credit lines. Also, the titled spouse needs to be aware that any offers to purchase the business will now be discoverable.
Consider living situations, as well. Think about the short- and long-term living arrangement for the entire family. This is essential if there are children who require assistance in getting from one parent to the other. Also consider the logistics of moving the children around with respect to schools and activities. Revisit social media accounts and the overall internet presence for the family. Change passwords and possibly modify profiles on social and business media websites, while taking screenshots of applicable internet and social media postings from the estranged spouse.
Given the many factors that seem ready to encourage an increase in divorce filings in the new tax plan, it would certainly not be a surprise to see an increase in those filings among high net worth couples throughout this year. Although divorce is always a challenge, it can be less difficult when there is more to divide among the spouses, or at the very least, when there is a shared hopeful outlook that will be more to divide in the near future.
Michael Stutman is a founding partner at Manhattan-based Stutman Stutman & Lichtenstein and is a past president of the New York state chapter of the American Academy of Matrimonial Lawyers.