Episode 129 - High Asset Divorces
When you are helping those who are going through a divorce, you quickly notice that every case is unique. Even within the uniqueness, however, you do find types of cases that have similarities. One of those groups presents its own set of challenges. We are talking about the high asset divorces. From support to equitable division, these kind of divorces require an extra level of examination. Tune in to hear Leh and Todd discuss the challenges and how they deal with them.
Leh Meriwether: So Todd.
Todd Orston: So Leh.
Leh Meriwether: I've got a question for you.
Todd Orston: If you stump me and embarrass me on air.
Leh Meriwether: Well my question is, does the amount of assets involved in a divorce complicate a divorce?
Todd Orston: The answer has to be yes. When we're talking about what we call a high asset divorce, the unfortunate answer is that it does make things a little bit more complicated. So unfortunately, as much as I would like to say no, it's handled just like any other divorce that's filed, there are absolutely going to be issues that come up when dealing with a high asset divorce that you might not have when dealing with a case where it's more modest earnings, more modest assets, and things of that nature.
Leh Meriwether: Well I'm glad I didn't stump you. Hey welcome everyone. I'm Leh Meriwether and with me is Todd Orston. Todd and I are partners at the law firm of Meriwether & Tharp and you are listening to the Meriwether & Tharp Show. Here you'll learn about divorce, family law, tips on how to save your marriage if it's in the middle of a crisis and from time to time even tips on how to take your marriage to the next level. If you want to read more about us you can always check us out online, atlantadivorceteam.com. Well if how we started didn't give you a clue, what we're going to talk about today-
Todd Orston: Juggling.
Leh Meriwether: Juggling, yes. Juggling too many things at the same time.
Todd Orston: That's right, too many issues.
Leh Meriwether: And the dangers of juggling chainsaws.
Todd Orston: I am intrigued. I don't know it that really translates well for radio but-
Leh Meriwether: No. It's too loud.
Todd Orston: All right.
Leh Meriwether: No, but what's not too loud is the challenges that high asset divorces present. And we're going to go through those today. I mean they're not so challenging that we can't deal with them. But they do present different factual and legal situations that we have to deal with. And so we're going to go through the four core areas of family law, child support, alimony, equitable division, and child custody, and talk about how high asset divorces can impact those four core areas.
Todd Orston: Great idea.
Leh Meriwether: Excellent. Let's start with child support.
Todd Orston: All right. Easy enough. Well what doesn't change, at least here in Georgia, and I would venture to say in most jurisdictions, what doesn't change is the basic calculation. So in Georgia it's what we call an income share model. You're going to take the income of both parties. That gets put into a calculator. We have an online calculator. So it's not like you have to worry about what form you're using, meaning is it the most updated calculator. Everything is online. But you have to put in basic information. Husband's income, wife's income, then there are places for other extraordinary expenses. Healthcare premiums, things like that. And it's going to spit out a number.
Todd Orston: Where it's gets interesting and a little bit more complex is when you're dealing with a high asset case, there are more issues that come up. There are higher expenses. There might be ... Instead of just a regular daycare, you might have and au pair, you might have a nanny, and that's a lot more money. Instead of a public school, you have private school tuition costs. Instead of little Johnny or little Mary just does like one or two activities and you're paying a very inexpensive relatively speaking activity cost, they might be doing something like equestrian. They might have ponies and have all the barn costs. And you have things that cost an immense amount of money, especially if you're traveling around the country. So these are things that come up and have to be taken into account when dealing with the issue of child support.
Leh Meriwether: Yeah so you might have a case where there's a moderate level of income, where when they were living together the children or the child was able to do the equestrian sports. But now that you're doubling their expenses because now there's two households, it may not be reasonable and depending on the income level of the parties for that to be continued. Or at least for a judge to order ... Let's say the mom's the primary. To order the dad have to pay for those extra expenses. That may not be reasonable. But when you've had a divorce where there's a high income and doubling the cost doesn't necessarily impact the parties, then the court's like, hey that's what you've been doing all along, I'm going to order that to stay. And that's only one of the problems. The other problem that complicates things, like you said, the law is the same. The child support law is the same, regardless of whether you make $10,000 a year or $10 million a year, the law's the same.
Leh Meriwether: Where the complication comes in is the basic child support obligation table. That is a table that was put together by the legislature. And I don't want to get too legal on it but, you were talking about the income sharing approach. And it caps out at $30,000 a month and for some people like wow, $30,000 a month, that's a lot. But there's a lot of people out there that make more than $30,000 a month and the table ends at that $30,000 per month. So that's where it opens the door for what's called discretion. So the court no longer has guidelines laid out by the statute. But because the parties make so much money, or at least one of them does, now the court says okay, I need to look at other factors for determining child support because arguably three or four thousand dollars a month may not be enough for this child in this set of circumstances. I know for some people that are making $50,000 a year, that sounds crazy. But the courts-
Todd Orston: Yeah. And on many levels it is crazy. But when you think of it in terms of that's their lifestyle. If you have a child who's spending $5,000 a month because the athletic activity they have participated in since they were very, very young, then a court's going to have to look at it through that lens. It's not through the lens of somebody who would never ever, ever think about putting a child in that activity because it costs way too much. This is something that is the norm for that family. And therefore the court's going to look at it through that lens and determine whether or not that norm should be continued, and whether or not the child should be allowed to continue. And you sometimes will have a party saying well now I'm maintaining my house and I'm also going to give alimony or pay alimony to the other party and do these things, I don't think I can afford that activity. It's just too much money. And that's where a lot of the conflict can arise where you have to do that deep analysis to figure out what the respective budgets look like, and is there enough money to allow the child to continue with an activity that they've participated in for years?
Leh Meriwether: And the other thing the court looks at is, we don't want one party ... Let's say the major breadwinner. We don't want them living in a palatial mansion and the other parent where the child goes to visit or spends half their time arguably, living in a cardboard box. And we have even seen cases where the father got primary custody, but the father made so much money that the court ordered the father to pay child support to the mother even though she only got to see the children ... I want to say there was maybe eight nights a week or something like that. But the court's point was, hey look, we don't want the child living in squalor when the child sees mom. And in this situation it is in the child's best interest to see mom on a regular basis.
Todd Orston: Now this goes into what we talked about. We did a show once where we focused on some celebrity divorces and support issues. And I think there is a line. At some point, you get to a point where if somebody is saying, "Well I need $40,000 a month in child support so I can live in a mansion." Hey you're laughing and we had a whole show where there were-
Leh Meriwether: That argument's made all the time.
Todd Orston: It is made all the time, and I think it's insane. But your point is well taken, and I agree with. If you're talking about that kind of money, should the child live in a hovel? Should the child live in a shack when with that parent? No. But should it be the other parent's obligation to prop them up in a secondary mansion? Personally, I don't think so.
Leh Meriwether: But I think it's going to depend on what county you live in too. So a judge in south Georgia is going to have a much different ruling than a judge in San Francisco for instance.
Todd Orston: Absolutely. They're very similar areas. No?
Leh Meriwether: Let's stick with Georgia okay. A judge in downtown Atlanta might have a different ruling than a judge in south Georgia.
Todd Orston: Well because every judge, even though they are supposed to come in unbiased and hear the facts of a particular case and make determinations based on not the baggage that they brought into the courtroom with them, but on just the facts that are presented, it's inevitable. If you're dealing with a judge who deals with people day in day out that are trying, are struggling to make ends meet, and then someone comes into court and they're like, "This is so unfair. How can I live on $40,000 a month?" I know, it makes me a little nauseous too. But the reaction might be different than in a bigger city. A Los Angeles or even in Atlanta where they've seen those types of arguments, seen those types of cases and they understand that while it may be something that's a little alien to them because of their own finances, it's not abnormal.
Leh Meriwether: And I'll say that, in these situations that's why it's really important to have a good lawyer on your side. There's a lot of high asset divorces where the parties are very smart and they think they can handle things but bringing a lawyer in, they're going to know what that judge wants to hear, and they may know a little bit about the judge personally, not because they're bust friends with them or anything, but because they've heard stories about them or they've been in the court room-
Todd Orston: They've had experience in front of that judge.
Leh Meriwether: Experience in front of that judge. And these judges, I want to say they do the best job they can with the information they have. But your lawyer will know how to get the right information in front of them.
Leh Meriwether: And up next we're going to talk about other aspects of high asset divorces, for instance business owners. How does a business impact a divorce? How does it make it more complicated?
Leh Meriwether: Welcome everyone. I'm Leh Meriwether and with me is Todd Orston. We are both partners at the law firm of Meriwether & Tharp and you are listening to the Meriwether & Tharp Show. If you want to read more about us you can always check us out online at atlantadivorceteam.com. Well today we are digging into the complications that high asset divorces bring to a courtroom or bring to the resolution process to help a couple that's getting a divorce that have a lot of assets. And you might say well, that's great you know. They have a lot of money to pay attorney's, but the lawyers don't look at it that way. They don't go, "Oh great a high asset divorce, that means they have money to pay for me." No, there's actually a lot of work to do in these cases because we want to make sure that we give good solid advice for them. And we're going to talk about that more in the equitable division section because what plays into it is a lot of tax consequences so we have to be really careful that we divide things up the right way so that there aren't unforeseen tax liabilities that pop out and we're going to touch on that a little bit right now because we're going to talk about the income side.
Leh Meriwether: Sometimes the fights that come in in the high asset divorces revolve around income. And you're like, well hang on a minute, what do you mean income? The challenge comes ... We'll use business owners at first. And this applies in the child support arena and the alimony arena. So we'll overlap on both. Under the IRS guidelines, business owners can write off certain things. And it's perfectly legal, it's in fact encouraged and often done, but in the child support arena, the courts are allowed to add that back into the income column of the high income person. Because to the extent, that business expense reduces someone's personal expense, then they're going to count that as income. A perfect example is cars. So we often see people running their cars through their business. And if you're an employee, a W2 employee, you can't do that. But the business owner can and they're probably using the car for the business but often maybe it's 25% of the time they're using it but they write off the whole car payment. But the court says, well hang on a minute, that's an advantage you have and we're going to add that monthly car payment back into your income column.
Leh Meriwether: Now they do also offset things because for instance a small business owner has to pay the full 15% of ... They have to pay self employment tax. And I don't want to get too much in the weeds on tax but an employee only has to pay seven and a half percent of the FICA and the FUTA and those are just ... I won't explain it. It's just, that's what it is. So self employment tax is basically just over 15%. If you're an employee the employer pays half of that for you and you pay the other half. If you're the boss though, you own the business. You're paying that full 15% so the legislature recognized that and you're allowed to back out that seven and a half percent self employment tax you're paying to reduce your overall income. I think they did a decent job trying to be as fair as possible in doing this.
Todd Orston: Yeah. Let's break it down for a moment, just to a more basic level. When you're dealing with a situation where one or both of the spouses are W2 employees, it's very simple for an attorney, it's very simple for a judge to determine things related to support, child support, alimony, things like that. Because when we're doing the analysis to look at income, it's very simple. We can look at tax returns, we can look at the W2. We know if you're a W2 employee, boom, here's one document that tells me exactly how much money you made from that job. It gets complicated when you're dealing with a business owner, when you're dealing with sometimes even just a high level executive at a company because they are getting these other benefits.
Todd Orston: And if the benefits are reducing their life expenses, meaning a car, a cellphone. If they're going to maintain those basic things on their own ... I'm using a number. If the car payment is $500, then normal circumstance they would spend $500 that comes out of their income. It didn't change their income, it's just an expense. But here, you're not on the books, you're not looking at $500 flowing through to the employee. So what we have to look at is okay, do they have a car? Who's making the payment? The company's making the payment. Well hey, that's a huge benefit. And so that amount, that 500 gets tacked on to the income because but for the company paying it, that would be an expense that the person would be paying. So understand there are more complications. And then of course when you're dealing with these types of high level positions or business owners, there're all sorts of other issues that come up. You're dealing with the method of payment if it's not pure salary, then are they getting bonuses or distributions? Are they getting tax awards? Do they get options?
Leh Meriwether: Stock options is a big one.
Todd Orston: Absolutely. We deal with these things all the time. And that's where it gets more complex and that's ... I think a theme throughout the show is going to be that one of the things that complicates ... I'm sorry for jumping around. But that complicates is oftentimes there is a deep need for experts. In a situation where someone's a W2 and they make, I'm just using a number, $75,000 per year. You don't need a forensic accountant to jump in and determine what income looks like. But when you're looking at someone who they make their money and it's not just pure salary, then you may need someone to jump in and understand all the stock options and stock awards and all the other things that they get as part of the compensation package. Those are important things that an expert can help with.
Leh Meriwether: So going back to stock options, let's use that for an example. Sometimes ... And this is where it can get really complicated. In fact there is a case here in Georgia where there's a page of analysis and you can have separate property issues so let me give you the ... I'll do my best to keep this as simple and straight forward as possible. So the husband, high income earner and executive, a lot of his compensation is ... Some of it's deferred. We didn't even touch on that but some cases you have deferred comp. So he's earned it in one of the years of the marriage but it's not going to be paid out until the following year.
Todd Orston: Oh and by the way, I'm just quickly interrupting, sometimes if you're talking about a business owner, you're talking about sort of a above board deferred comp issue. Deferred comp can also be an effort to hide income. So that's another reason why when you're dealing with high assets, it is so important to have someone, not just an attorney but maybe even an expert that can jump in and identify where money should have flowed through the company to that person, but for some reason it didn't and then you can ask the right questions and figure out why.
Leh Meriwether: Yeah, and I'm glad you just reminded me-
Todd Orston: You're welcome. You are very welcome.
Leh Meriwether: You just reminded me of something.
Todd Orston: You owe me one.
Leh Meriwether: I do, I do.
Leh Meriwether: So we're playing this in June of 2019. Right, it's June isn't it? This year's flying by.
Todd Orston: Wow. All right, I-
Leh Meriwether: My point is if you're listening to this, because we re-broadcast this show in iTunes and Stitcher and Spotify and all different places you can listen to podcasts. If you're listening to this in 2020 or 2021, the law may have changed. So I want to put that caveat out there. We may be saying things about tax law today and you're listening and go, "That's not the tax law." It could have changed. So I just want to throw that out there and that's where the experts come in. A lot of times a divorce lawyer can become almost like the conductor of an orchestra. And we bring in the experts to help us. We know enough to identify the problems, and then we bring in the experts to get into the weeds to figure out the solution sometimes.
Todd Orston: Yeah, and we have the ability. Good attorneys have the ability to do a lot of that forensic work on their own. I can only speak for us. We also understand that there are people that are smarter than us out there.
Leh Meriwether: At least in that subject area.
Todd Orston: There are people who their expertise, let's say as a forensic accountant, they do it on a much different level and they can dig a whole lot deeper. And that way if there are hidden assets, if there is income that should be considered but hasn't been, they're going to be the ones who are best positioned to find it.
Leh Meriwether: So going back to the stock option thing that I sidetracked off of but you can have someone who can receive stock options before they get married, they vest, and then you get married, and then they exercise them. Well there becomes this question, is it marital or is it separate property? That's where this complexity can come in. And did they exercise them with marital funds? Because when a stock option ... The stock options I'm familiar with, basically you have the option to purchase stock at a reduced price. So if a stock is selling at $200 a share and your option price is $100 a share, and then you buy the stock by paying the $100 a share, you immediately receive a $100 benefit. And that is actually taxable income but it doesn't happen until you exercise the option. So you could have a lot of stock options that have built up over the years, but you didn't exercise them right away and that's actually going to be a component of equitable division we're going to get to up next. We're going to get into the equitable division, how do high assets divorces ... How are they complicated in the equitable division process?
Leh Meriwether: And we have to finish up alimony too. There's so much stuff to talk about.
Todd Orston: We'll get to it all.
Leh Meriwether: We'll get to it all. But it's really interesting. You have to dig into the timing of when someone exercised the option. When did the option vest? Did it vest after the divorce and does that mean it was earned before? But we can't get into to it because before that we got to break for a commercial. We'll be right back.
Leh Meriwether: Welcome everyone. I'm Leh Meriwether and with me is Todd Orston. Todd and I are partners in the law firm of Meriwether and Tharp and you're listening to The Meriwether and Tharp Show. If you want to read more about us, you can always check us out online at atlantadivorceteam.com.
Leh Meriwether: Well today we have been getting into high asset divorces and how they can be a little more complicated, sometimes a lot more complicated, than a divorce with say a house, a 401K, and two people that are W2 employees. Their successes, dividing up the spoils of those successes can be complicated sometimes. But we haven't even gotten into dividing the assets yet. We're going to start that in this segment, but let's wrap up the issues of income because that can be a big fight when you're talking about what should we list for child support, how much should someone pay in alimony because that becomes an issue. Often you'll see one person that makes the majority of the money, and the other one makes very little.
Todd Orston: Yeah. Think of it in these terms. In a case where you have a W2 employee, determining what support pursuant to child support guidelines is, is more simple. Even dealing with an issue of alimony might be more simple because in black and white on one or two pieces of paper you can tell how much money that person earns. When you're dealing with a high asset individual and a high income individual, if you can't even agree on what their income is, it becomes incredibly difficult to agree on what support should be. Because support, remember, is based on two things, need and ability to pay. So you look at each party's respective budget to figure out okay, you're saying you need, show me there's a deficiency or a deficit in your budget. Okay, you've done that? Fine. Does the other party have a corresponding ability to pay? So you have to go through that analysis.
Todd Orston: If you can't even agree on what the payor spouse's income is, then you're in for a much longer fight, maybe even a trial, because there's this huge breakdown in just the basic information you need to make a determination.
Leh Meriwether: And so usually you deal with that more so with the business owner than you do perhaps with an executive, who's still ... Executive is a W2 employee. But they're often receiving these executive perks or stock options or some sort of deferred compensation which you've got to do analysis on. And here's the other complicated part. This part becomes, really a sticking point often. On one end someone says, "All right, when I include your stock options when you exercised stock options" ... Let's say their salary was 200,000, but for the last three years they've been exercising their stock options which has given them another 150,000. So their up to $350,000 in income. But they actually didn't really spend it. Let's say 300 of that is sitting in a bank account.
Leh Meriwether: And then there's unvested stock that will vest the following year, which will be the year following the divorce. And so the one party ... And I'm not picking on the wives, I'm just picking parties just to make it easier to explain. So the wife says, "All right, well I'm setting your income at $350,000 and you're going to be exercising that stock next year so I want half of that stock, but I also want you to pay alimony and child support based on an income of $350,000. But I also want the $300,000 that's sitting in this bank account over here that the husband's claiming they had started setting it aside for college expenses." And now it becomes ... If you're representing the husband the argument's that's double dipping. You can't take half the profits from the stock option. You can't take half of those but then count 100% on the other end for calculating child support and alimony.
Todd Orston: Right. Again, these are examples of where the complications arise. And we also see it, not just with business owners, where there are oftentimes differences of opinion when you're dealing with high commission type individuals. When you're dealing with people where ... I've had cases where in one year they made 50,000 in commissions and in another year they made $400,000 in commissions. And because you can never guarantee ... And if you've done any work working with people who have those types of positions, you know that the companies oftentimes will change the rules of the game. So in one year you have this many markets and you are getting this many clients and customers and therefore you can expect a $400,000 commission, but you know what, this year we've changed it. Instead of the entire southeast, you've got Florida and Georgia and we've given the other areas to some other people. Oh and by the way the commission structure has now changed. So now all of a sudden they went from a 400 and their commission might be more like 100, 120. Still a lot of money, but we're talking about how do we then take that into consideration and how do we prove that hey, what he got in the past isn't likely to be what he gets in the future because of these changes at the corporate level.
Leh Meriwether: Yeah. Now here's the wonderful thing about attempting settlement. We've had a few shows about alternative dispute resolution. We had a show about mediation. We had a few shows about mediation. Here's where mediation shines. And we've had these situations with the high income earners and the stock options, and what we do is we craft something saying all right we're going to set ... And maybe let's say the stock options extended out for over a five year period. And there's all kinds of legal arguments you can make whether at some point they're no longer marital property, they're actually separate property, but we didn't go there because we were trying to settle the case. And what we did was we used the baseline salary as the income, and for the next five years when the husband exercised the stock options he automatically split the net proceeds. Meaning after he paid his taxes he split the net proceeds with the wife.
Leh Meriwether: So that was a fair way to resolve it. Here's the other problem. You look at the stock option today and the stock is selling at $200 a share and your strike price is 100, but two years from now it may be selling at $70 a share, which means you're not going to exercise the stock at that point in time.
Todd Orston: But you're locked into a support obligation based on the expectation you are going to exercise it. And the same thing with commissions. We've dealt with it that way also where ... Especially when you see big fluctuations in the commissions that they receive. One year it's 60, one year it's 120, one year it's 300, one year it's 10. Then sometimes what we'll do is we'll either take an average ... But if the numbers are that dramatically different from year to year, sometimes we'll deal with it or try to deal with it separately. We'll set a base amount of support and then upon receipt of a commission we will split it in some way. So then within five days of receipt you have to basically make a payment of X percent to your former spouse.
Todd Orston: So we can deal with it in these types of ways, but again, an expert can come in and really help us identify where the issues are and how to deal with them successfully, not just in court but in mediation, in settlement.
Leh Meriwether: Yeah, and sometimes we even bring in the accountant because they can estimate your tax liability too. So someone doesn't suddenly get ... We don't want to have a situation where someone says, "All right I'm going to pay the other person 40% of whatever I get", if that winds up being unfair because of the taxes, leave the person who exercised the stock with only 20% of the gross number. So that's the nice thing of bringing in experts that can help identify tax liabilities. And talking about tax liabilities, let's switch to equitable division. And I probably should say for the record, apart from some issues, usually child custody, I haven't seen where a high asset divorce necessarily complicates a child custody issue. I mean there may be some nuances here and there, but for the most part the way the judges look at these things are pretty much the same.
Todd Orston: Yeah. I mean look if you're talking about very, very sizeable assets and very sizeable income, first of all it may not impact. Like let's say you do have a child or children, and equestrian. They have horses and they have barn fees, and they have travel expenses. But usually when you're talking about incomes at that level, it doesn't matter. It might impact child support but it's not truly impacting the party because they usually have an expectation they were going to paying that anyway. But if one of the parties, let's say if you're talking traditional husband and wife, if we're talking millions and millions of dollars and the wife is the non-earning spouse, then it is also likely if she is going to be walking away with five, 10, 15 million dollars, that the court could look at her say, "Well ma'am, if you want to take the children all over the country and go to shows, you have more than enough money to contribute."
Todd Orston: But these are some of the arguments that-
Leh Meriwether: Skilled lawyers will make.
Todd Orston: And most people don't have to deal with those realities, but you can't lose sight of the fact that it is a reality for some.
Leh Meriwether: Yeah. If someone's receiving, like you said, $5 million, one million of it is in cash, I've seen situations where the court's like you don't need alimony, you have a million dollars in cash over here.
Todd Orston: But there are arguments, and you know this, there are arguments on the flip side where it's, "Okay, so I'm getting my $10 million and you're getting $10 million, and you're earning a million dollars a year so you don't have to dip into your savings in order to survive, but immediately upon divorce I do. That's not fair. That's why I need some support."
Leh Meriwether: Right. And so it's an argument that goes back and forth. But I've seen where the judge did award it and I've seen a judge not award it.
Todd Orston: Well you know what I'm not going to argue? It's the time.
Leh Meriwether: Yeah. Hey, up next we're going to get into talking about how a lot of real estate can complicate equitable division.
Leh Meriwether: Welcome everyone, I'm Leh Meriwether and with me is Todd Orston. Todd and I are partners at the law firm of Meriwether and Tharp and you're listening to The Meriwether and Tharp Show. If you want to read more about us you can check us out online at atlantadivorceteam.com. If you actually want to read a transcript of this show, you can find it at divorceteamradio.com, where you can also find previous shows.
Leh Meriwether: All right, so today we've been talking about high asset divorces. Why is it that those can be more complicated? Why do they cost more than all the other divorces? Isn't the law the same? Well the law is the same, but its application can vary. So here's an example with real estate. A lot of times we see people that have maybe a home that's worth a million and a half and they have a mortgage of let's say $800,000. Well that is a jumbo mortgage. It doesn't follow the conventional guidelines. Although I heard they're down, typically they're higher interest rates and that sort of thing. And the other problem with the large estates ... As soon as you start getting over a certain price range ... I can't remember what it was. I talked to a real estate agent one time, but when you start getting 600,000 and up, they just don't sell as fast. And when you get over a million, they can sit on the market for ... Because there's a lot less people looking for a million dollar home than the $300,000, $400,000, or $200,000 homes.
Leh Meriwether: Sometimes you have people that built up a lot of assets but the executive lost their job and they're in a cash crunch now because they're real estate rich but cash poor. But then you've got the situation where the house isn't going to sell for six months maybe.
Todd Orston: Yeah, and that is going to then impact alimony. That's going to impact, potentially, child support. But if the other party is like, "Well I'll pay the mortgage and I'll pay other things." But yeah it does complicate things. But when you're dealing with these types of cases also, that might just be the tip of the iceberg. Because that's the primary residence. But the other party had the ability financially speaking to go out and buy a second home. So they tied up marital assets to buy their own home during a period of separation. We have many cases where the parties just simply can't do that. They can't afford so they have to unfortunately live under the same roof during the pendency of the divorce simply because that's the reality they're in. And what about the fact that now that there's two homes during the pendency of a divorce? What about the lake house that they have or the beach house that they bought, or the ski lodge that they have?
Todd Orston: When you're dealing with this kind of money, real estate ... It's not abnormal to see a portfolio that includes two or three or four homes and other investment properties.
Leh Meriwether: Or more.
Todd Orston: Right. And then some of those are just homes they use for themselves, but then you're also dealing with real property that is for investment purposes. What about the three rental homes or the building that they manage that kicks off income? So now we have to hit it from different angles again. We have to deal with it in terms of division of property, who gets the rental home? And we also have to deal with it from the point of view of well, if that rental home is kicking off income, if you're asking for the home but you're trying to make the rental income as part of the other party's income for purposes of support, that's double dipping.
Leh Meriwether: Yeah. I'm glad you brought up the issue of all the other homes too because the law is well the courts will equitably divide the assets. All right, so that's the law but what comes in is a marital home, there are certain exemptions from capital gains. And you can cross that gap, but you get up to $250,000 per single and $500,000 for married couple. And that could change next year. You just never know.
Todd Orston: And remember, January 1st of this year there were major tax changes. So when we're saying that things can change, they do actually change on occasion and you have to be aware of what the current law is. Going back to experts that are out there that know the law and can advise you properly.
Leh Meriwether: So when you have homes that aren't your primary residence, you don't get that exception to the capital gain treatment. So if you've got the beach house and the lodge up in the mountains for skiing and everything and you go to sell those, if there's an appreciation of value there you're going to pay capital gains. Of course, it ranges. So the capital gains can range anywhere from 0%, which won't happen in most high asset divorces because to get 0% I think you have to earn $39,000 or less, somewhere around there. But then up to $434,000 a year the capital gain, if that's your income, is 15%. Once you cross over that 434 ... I think it's $434,550. Where they come up with these numbers I don't know. But usually they just round them. But anyways, once you cross over that now it's 20% capital gains. So you kind of have to look at those, consider those factors, because a 5% difference if you're talking about a lot of real estate, it's starts to add up. Then when you add the rental property on there, here's what I've seen a lot of people legitimately do. It's perfectly okay.
Leh Meriwether: You get a rental home, or a bunch of them, and you depreciate the home. As an asset you start depreciating it. So if you bought a rental home and you paid $300,000 for it and over the years you depreciate it. So when you buy it your basis is 300,000. I don't want to get too complicated, but you depreciate it and then you go to sell it and you're selling it for $400,000 but you depreciated it 100 grand over the course of the time you had that as a rental home. Now there's $200,000 because your basis got dropped from the $300 purchase price to the 200,000 because you wrote off in depreciation 100 grand.
Todd Orston: I'm so glad you're not getting into the weeds here. Because I'm taking notes here and I've started to glaze over and it's what I do for a living.
Leh Meriwether: All right, that's as deep as ... But I was trying to give an example of-
Todd Orston: Yeah, absolutely. But you know what, I understand your point. Our point is that's why when we say experts oftentimes have to be brought in, things get more complex, things get more complicated. And where we had talked about a forensic accountant to help find the money and determine budgets, and determine spending, and determine what your need is in terms of when you move out and you're living on your own and what your needs are financially. This is where a tax expert can be brought in. Someone who understands the tax ramifications dealing with, well if you're going to get this retirement asset and these two rental properties and the marital residence and da-da-da-da, whatever it might be, you can't just say yay, I have two or three or whatever it was, pieces of real property. You need to be able to sit down and say, okay, now what's that going to cost me? So what are the tax ramifications? Am I going to have a tax bill that basically even though I'm getting a large amount of assets, four years from now I'll be bankrupt because I've had to pay all the taxes and the carrying costs and the this and the that.
Todd Orston: So a tax professional can come in and educate you so when you're trying to settle, or when you're going into court making a request, meaning at a hearing you're saying judge this is what I want, you're not asking for something that you don't actually really want that's not going to be beneficial to you.
Leh Meriwether: The nice thing about when you've got high asset divorces is typically the parties can afford those experts. And it could make a huge difference. Sometimes you get people that are a little penny wise, but a pound foolish and that can really frustrate me because when you're talking about that level of tax liability you're like, that's not-
Todd Orston: It's understandable though. Right? I mean we've both heard of cases where there are a lot of assets, there are a lot of financial issues and the cost is relatively high. And with some attorneys it's going to be extremely high and with some other attorneys it's just going to be high. But the bottom line is it's going to be higher than a case where there aren't high assets, high income out of necessity. There are complex issues you need to resolve.
Leh Meriwether: Sometimes though I've seen a few high asset divorces where part of the reason they have high assets is because they were very frugal. But sometimes they'll start to get a little too frugal in the end.
Todd Orston: No, your point is well taken. I mean sometimes people, they start thinking about okay, hold on, you want me to bring in a forensic accountant for these issues, you want me to bring in someone to do evaluation of the business, you want me to do evaluation of the seven pieces of real property that we have. You know what, no. I'm not going to spend $10,000 or $15,000, $20,000 on all those expenses. But when you look at them and you're like, "Okay, just hold on one second because I'm telling you you might be leaving $600,000 on the table because you haven't taken the necessary things into consideration including taxes and values and what have you." Then 20,000 makes sense.
Leh Meriwether: Yeah. Or you taking on a $200,000 tax liability that you may not need to take on.
Todd Orston: That's right. And you know, putting it in perspective, people refinance mortgages all the time. And there is a cost to refinancing. And you might pay $5,000, $7,000, $10,000 in closing costs. But people don't think about it. They're like, "Well, I need to do this because financially it's smart for me." Well that analogy is the same. It's hey, yes you're going to spend money on experts but you know what, hopefully it's going to pay off in the end because now you're better educated and you know that what you're getting is fair.
Leh Meriwether: And what I hope everyone got out of today is they're just a little bit better educated when it comes to what goes on in dividing up the assets in a high asset divorce. Hey everyone, thanks so much for listening. If you're really enjoying this show we would love it if you'd go out and give us five star review in wherever you're hearing us. If you're hearing us in iTunes, great, go to iTunes and post a review. If it's Stitcher or Spotify, we'd love a positive review there too. And until next time, thanks for listening.