Over the past five years, we have seen a noticeable change in the financial landscape of divorce: more divorcing spouses are connected to significant intergenerational wealth.
Parents are transferring businesses, investment accounts, real estate and other assets to their adult children in ways that can have important consequences when those children later find themselves in a divorce.
The issues are rarely as simple as asking, “Was this money inherited?”
In a divorce, the source of an asset, the manner in which it was transferred, how it was or is being held, whether it has appreciated or depreciated during the marriage, whether distributions or other transfers are being made, whether it was commingled with marital assets, and what happened to it during the marriage can all matter, among other factors. An inheritance that appears straightforward on a balance sheet can become considerably more complicated when viewed through the lens of Colorado divorce law. For that reason, couples dealing with substantial family wealth need more than an attorney who understands the mechanics of divorce. They need counsel who understands how inherited and transferred wealth interacts with the marital estate.
Wealth Can Move Through a Family Long Before a Divorce
The current generation of divorcing spouses is increasingly encountering wealth that was accumulated by parents and grandparents. That wealth may arrive through an inheritance after a parent’s death. But it may also arrive while the parent is still living through gifts, transfers of investment accounts, interests in family businesses, real estate, trusts or other arrangements designed to move wealth from one generation to the next. Sometimes the transfer is obvious. A parent gives a child $19,000 each year. Other times, it is considerably less obvious. A parent of a party may transfer an interest in a family business. A trust may distribute income or hold assets for one of the divorcing parties. Real estate may be transferred or held. Investment accounts may be established or funded for the benefit of the next generation. A person may receive an inheritance and use it to purchase a home with a spouse.
By the time the couple divorces years later, determining what happened to that original family wealth can require reconstructing a financial history that stretches back well before the marriage began. For over 50 years, with offices in Castle Rock, Colorado, our firm has expertise in assisting clients who navigate through these different issues in divorce.
Separate Property Can Become a Complicated Question
One of the fundamental concepts in divorce is the distinction between marital and separate property. But identifying an asset as separate property is not necessarily the end of the analysis. What happened to the asset during the marriage can matter.
Was inherited money kept in a separate account? Was it deposited into a joint account? Was it used to purchase a marital residence? Were inherited investments sold and the proceeds reinvested? Did both spouses contribute to an inherited business? Were marital earnings used to improve or maintain inherited property? Has the asset appreciated or depreciated? What is form of the account or the method of transfer? Each of these circumstances can raise different legal questions and, perhaps more importantly, different answers of how a divorce court would treat it.
The Paper Trail Matters
Intergenerational wealth often comes with a long paper trail. There may be trust documents, estate-planning documents, deeds, account statements, business records, tax returns, wire transfers and correspondence among family members. There may also be years of transactions between parents, children and/or spouses. When a divorce occurs, reconstructing that history can be critical.
An attorney who regularly handles high-asset divorces understands that the question is often not simply, “What is this asset worth today?”
It may be: Where did it come from, how was it transferred, who owned it, what happened to it during the marriage, and what can be demonstrated through the records? This requires complex analysis and we have attorneys who specialize in tackling these special issues in divorce, together with advice from our estate planning, probate and trust lawyers.
The Family Business Can Add Another Layer
Intergenerational wealth frequently involves a family business. A divorcing spouse may have received an ownership interest from a parent, inherited shares from a grandparent or become involved in a business that was established generations earlier.
The legal and financial questions can become particularly complicated when the business is operated by multiple family members. What is the value of the ownership interest? Has the interest changed during the marriage? Did the spouse’s work contribute to the growth of the business? Are there restrictions on transferring the interest? Do other family members have rights under a shareholder, operating or partnership agreement?
These questions can require coordination among family-law attorneys, business counsel, valuation professionals, accountants and other financial professionals.
Trusts Require Careful Analysis
Trusts can present another layer of complexity. A divorcing spouse may be a beneficiary of a trust established by parents or grandparents. The spouse may receive distributions from the trust, have certain rights under the trust instrument, or have an interest that is subject to restrictions. The existence of a trust does not answer every divorce question. The trust document, the nature of the beneficiary’s interest, the distributions that have been made, and the manner in which those distributions were used may all be relevant to the analysis. This is an area where familiarity with both estate planning and family law can be particularly important.
The Mistake Is Assuming the Answer Is Obvious
Perhaps the biggest mistake in a high-asset divorce involving family wealth is assuming that an asset’s origin automatically determines its treatment.
“My parents gave it to me, so my spouse can’t touch it.”
Or the opposite:
“It was acquired during the marriage, so it must be marital.”
Neither statement necessarily tells the whole story. The actual analysis can depend upon the specific facts, the applicable law and the history of the asset. That is why early legal analysis matters.
Choose Counsel Who Understands the Intersection
Divorce is already complicated. Add a family business, substantial investments, inherited real estate, trusts or significant gifts from parents, and the financial issues can become substantially more sophisticated. In these cases, choosing counsel based solely on familiarity with ordinary divorce litigation may not be enough. You want an attorney who understands the intersection of family law, inherited wealth, trusts, business interests, valuation and financial tracing.
That doesn’t mean every case involving an inheritance becomes a high-asset divorce. It means that when generations of family wealth are involved, the lawyer needs to understand the questions that wealth creates.
Start Before the Money Moves
For families who anticipate a substantial inheritance or gift, planning before a divorce ever becomes a possibility can also be important. Parents transferring wealth to adult children should understand how the structure of that transfer may affect the child’s future financial circumstances. Likewise, individuals receiving substantial inherited or gifted assets should understand the importance of maintaining clear records and obtaining appropriate legal advice before combining those assets with marital property. Once separate and marital finances become intertwined, reconstructing what happened years later can be difficult, expensive and contentious. Good planning cannot eliminate every dispute.
But it can make the history of the family’s wealth much easier to understand.
A New Kind of Divorce Issue
The Great Wealth Transfer is not simply an estate-planning phenomenon. It is increasingly becoming a family-law issue. As significant amounts of wealth move from parents and grandparents to their adult children, divorce attorneys are being asked to deal with assets that originated outside the marriage but may have become intertwined with the couple’s financial life. For someone going through a divorce involving substantial inherited or family wealth, the important question is not simply whether the money is “marital” or “separate.”
The important question is what happened to the money—and what does the law say about it now?
Those questions can be complicated. They deserve an attorney who understands not only divorce, but the increasingly important intersection between divorce and intergenerational wealth.
This article is intended for general informational purposes and does not constitute legal advice. The treatment of inherited and gifted property in divorce depends on the specific facts and applicable law. Individuals facing these issues should consult qualified legal counsel regarding their circumstances. Please call us today for a free telephone conference with Marc Patoile, our partner who manages the family law section of the firm at 303-688-3045.