Every divorce is different and no two cases are ever the same. Your neighbor or friend may have been through a divorce with similar situations, however, your circumstances on each aspect of the divorce, custody, support are unique. Further, high asset divorce cases necessitate a more thorough review and experienced representation. The following is an overview of some of the issues that may apply to your high net worth divorce case.
Child Support - Do The Guidelines Apply
The Pennsylvania child support guidelines define high-income cases as those in which the parties’ combined income exceeds $30,000.00 per month. This translates to $360,000.00 combined net income per year and approximately $500,000.00 combined gross income per year. The Melzer formula has been eliminated and so has the old definition of high-income cases, which was $20,000.00 per month combined net income.
Under Rule 1910.16-3.1, when the parties’ net income is above $30,000.00 per month, a three-step process shall be used to calculate the parties’ support obligation. First, a formula set forth in the Rule shall be applied in calculating the basic child support. For cases in which the parties’ combined net monthly income is above $30,000.00, the formula first applies a fixed percentage to calculate the amount of support. Second, the Court shall apply other factors, such as child care expenses, private school tuition, summer camp, extracurricular activities and/or mortgage adjustment to determine the total support.
Finally, the court shall consider the deviation factors, which may include unusual needs and unusual fixed obligations, other support obligations of the parties, other income in the household, ages of the children, relative assets and liabilities of the parties, medical expenses not covered by insurance, standard of living of the parties and children, and other relevant factors.
The rule is intended to bring all Pennsylvania child support cases under the guidelines and treat similarly situated parties similarly.
Some estate planning may also be necessary in order to protect the child support award. Parents may want to see that trust funds are established and funded for children and grandchildren as part of an agreement pertaining to child support and also placed in the marital settlement agreement. Requiring parents to obtain and maintain life insurance is another way parents can protect their children financially.
Child Custody
The court does not look at the assets of a parent to determine custody. The courts in Pennsylvania look at sixteen factors outlined in 23 Pa.C.S.A. section 5328 to determine the best interest of the child and not the means of each parent. The courts in Pennsylvania, as in many states, try to grant as much time to each parent as possible. However, geographical differences as well as work obligations and availability of each parent as well as the age of the children play a major role into whether joint physical or primary physical custody is in the child’s best interest.
If both parents in a high net worth divorce have demanding jobs and are required to be away from home for extended periods, the court will then look to each parent’s resources, including whether the children already have a nanny or au pair in order to take care of the children until one parent is available. There are also considerations of custody when the child attends a private school, summer camp, extracurricular activities that require domestic or international travel.
Child custody issues of high net worth parents may have special considerations and require more intensive analysis and negotiation than other child custody cases.
Property Division
One of the most important phases of a divorce, aside from custody, is division of the marital estate, i.e. property division.
§ TITLE 23 PA.C.S.A. 3502 sets for the following:
(a) General rule.--Upon the request of either party in an action for divorce or annulment, the court shall equitably divide, distribute or assign, in-kind or otherwise, the marital property between the parties without regard to marital misconduct in such percentages and in such manner as the court deems just after considering all relevant factors. The court may consider each marital asset or group of assets independently and apply a different percentage to each marital asset or group of assets. Factors which are relevant to the equitable division of marital property include the following:
(1) The length of the marriage.
(2) Any prior marriage of either party.
(3) The age, health, station, amount and sources of income, vocational skills, employability, estate, liabilities and needs of each of the parties.
(4) The contribution by one party to the education, training or increased earning power of the other party.
(5) The opportunity of each party for future acquisitions of capital assets and income.
(6) The sources of income of both parties, including, but not limited to, medical, retirement, insurance or other benefits.
(7) The contribution or dissipation of each party in the acquisition, preservation, depreciation or appreciation of the marital property, including the contribution of a party as homemaker.
(8) The value of the property set apart to each party.
(9) The standard of living of the parties established during the marriage.
(10) The economic circumstances of each party at the time the division of property is to become effective.
(10.1) The Federal, State and local tax ramifications associated with each asset to be divided, distributed or assigned, which ramifications need not be immediate and certain.
(10.2) The expense of sale, transfer or liquidation associated with a particular asset, which expense need not be immediate and certain.
(11) Whether the party will be serving as the custodian of the parties’ minor children.
The concept of separate property is very straightforward at first glance, but an issue arises when a party has taken separate property and co-mingled it with marital assets. For example, inherited monies were used to make improvements on the marital home. Truly separate property should remain with the party to whom it belongs, but co-mingling could mean that the separate property no longer is separate and could be included in the marital estate.
There is also an issue of property brought into the marriage that could have an increase in value and thus, the increase in value is also part of the marital estate. Any such calculations to determine the value of comingled assets and/or assets with an increase in value would be performed by an expert, such as a forensic accountant.
Business Issues and Forensic Accounting
High asset divorce cases may involve a business, a small family business, or a closely held business. An experienced, local business evaluator will need to perform an evaluation. Typically a forensic accountant’s services will also be needed. A close review of income tax returns is mandatory. The discovery of all assets is essential. Many small businesses may compensate their employees in ways other than just writing them a paycheck. Automobiles, electronics, and other valuable items may be purchased and used in the business, but they are really forms of compensation. Many high earning employees may have stock options, bonuses, and commission pay schemes that will need to be evaluated and reviewed for calculating true income. A careful review will be needed to determine the proper and appropriate level of gross income available to the parent/spouse to satisfy all support obligations.
Property and Investments
Real estate holdings are another item that need analysis. Wealthier couples will have a home that is the primary marital residence; they are also likely to have a mountain retreat or a beach or lake house. It is not as simple to just agree or grant one spouse one house and the other home to the other spouse. One spouse may not want the vacation home or it may not be convenient for one spouse or the children. There may also be other issues of equitable distribution that would mandate the sale of the secondary home and obtain the proceeds rather than liquidate a pension or other investment account.
High net worth couples may also have more invested in personal property. In many divorce cases there is not a lot of wrangling over the furniture or other household items. However, couples with money may have valuable antiques, airplanes, expensive watches and jewelry, boats, yachts, horses, classic cars, and fine art. Expert appraisers need to be hired to perform evaluations. And, there will likely be extensive stock and investment portfolios. The parties may own annuities, IRA’s, CD’s, and high death benefit insurance policies. A careful inventory and appraisal of all assets will be needed. Full disclosure of assets will be required. Pension evaluations will be needed; current face value is not the proper way to start a division of future monies.
In Pennsylvania, equitable does not mean equal. The court will look at the above enumerated factors to make a decision on how best to divide the marital estate. Shrewd negotiating and knowledge of what a court may or may not do is crucial in helping the client maintain her or her best financial position when dividing the marital assets.
Alimony/Spousal Support
Lastly, there is the issue of spousal support/alimony. There may be no need to address alimony if both parties in a high income case make substantial incomes. However, still in many instances and especially in long term marriages, there was one primary earner and one spouse who remained at home to care for the house and the children.
In Pennsylvania, alimony refers to the financial support paid from one ex-spouse to another once their marriage ends and divorce is final. It is supposed to be based on the receiving ex-spouse's true financial need going forward, so alimony awards can vary greatly in amount and length of time they must be paid. Alimony is awarded purely at the discretion of the courts, which use seventeen factors to aid in making their decision. Despite all the factors laid out to simplify alimony award decisions made by courts, Pennsylvania laws do not automatically entitle either party to alimony.
Pennsylvania Statute 23 Pa.C.S.A. 3701 states that
Where a divorce decree has been entered, courts may allow "reasonable" alimony to either party if it finds the alimony is necessary. Courts will consider all "relevant" factors to establish if alimony is necessary and to determine the:
• nature;
• amount;
• duration; and
• manner of alimony payments.
Courts must state the reason for their denial or award of alimony and the amount of any award given. For purposes of receiving alimony, some forms of cohabitation subsequent to the divorce will result in a bar on the award.
If the court approves an agreement for alimony payment voluntarily entered into by the parties it will constitute an order of the court for enforcement purposes.
The relevant factors include:
• relative earnings and earning capacities;
• the ages and mental, physical, and emotional conditions of the parties;
• sources of income;
• marriage duration;
• marital misconduct of either party;
• diminishment of earnings due to custody of a minor child and contributions as a homemaker;
• assets, liabilities, and property brought to the marriage by either party; and
• the relative needs of the parties and standard of living during the marriage.
In high asset cases, long term alimony may be an issue as well, especially if there is substantial disparity in income and long duration in the marriage. A spouse’s health is also a factor. The court shall exercise its discretion in determining the amount, duration, and manner of payment of alimony.
The consequences of divorce are numerous and serious, especially in high asset cases. It is essential that consideration is given to the factors discussed in this article and that you have knowledgeable and experienced attorneys representing you during the entire process.
Contact the Law Office of Robin J. Gray for a strategy session about your possible or pending divorce case.
