Latest / Masters in Business / At The Money: Divorce Planning for the Ultra Wealthy

Transcript

At The Money: Divorce Planning for the Ultra Wealthy · Masters in Business

• 0:00
  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Dear girl, it's too
• 0:11
  Speaker 1: talk because you know it, don't at it anyway, A
• 0:16
  Speaker 1: fidget tooth dog.
• 0:20
  Speaker 2: Half of all marriages and in divorce. That's just as
• 0:23
  Speaker 2: true for the ultra wealthy and celebrities as it is
• 0:27
  Speaker 2: for the rest of us. Jeff Bezos, Bill Gates, Kanye West,
• 0:31
  Speaker 2: David Geffen. What happens when there are billions to divide?
• 0:37
  Speaker 2: I'm Barry Ridheltson on today's edition of At the Money.
• 0:41
  Speaker 2: We're going to discuss the finances of divorce for the
• 0:45
  Speaker 2: ultra wealthy and full disclosure, I am not a billionaire
• 0:50
  Speaker 2: and I remain happily married for thirty three years. To
• 0:54
  Speaker 2: help us unpack all of this and what it means
• 0:56
  Speaker 2: for your portfolio, let's bring in Patrick Kilbain. He works
• 1:00
  Speaker 2: at Omen Wealth Partners, where he is a CFP and
• 1:03
  Speaker 2: general counsel. He leads the firm's divorce advisory group. So, Patrick,
• 1:11
  Speaker 2: the old joke is true. The wealthier different than us,
• 1:15
  Speaker 2: they have more money. Well kidding aside, just how different
• 1:20
  Speaker 2: are billionaire or celebrity divorces from the run of the mill.
• 1:24
  Speaker 3: Splits Barry First, thanks for having me it's an honor
• 1:28
  Speaker 3: to be with you, believe it or not. Celebrity divorces
• 1:32
  Speaker 3: and billionaire divorces are not all that different. They may
• 1:35
  Speaker 3: have more assets, more zeros in the bank account, more
• 1:40
  Speaker 3: complicated assets, but what you really got to do is
• 1:45
  Speaker 3: you got to take a step back and you got
• 1:47
  Speaker 3: to figure out what you're dealing with. And then, you know,
• 1:52
  Speaker 3: the biggest difference I think between a celebrity or a
• 1:54
  Speaker 3: billionaire divorce versus you know, the run of the mill
• 1:58
  Speaker 3: divorce is the privacy issues that go along with that.
• 2:02
  Speaker 3: And you know, we can unpack that a little bit more,
• 2:04
  Speaker 3: but I think that's a big non financial issue that
• 2:08
  Speaker 3: we're dealing with in those cases.
• 2:10
  Speaker 2: So you're talking NDAs and things along those lines for
• 2:14
  Speaker 2: everybody involved.
• 2:16
  Speaker 3: Well NDAs, and depending on what state you're actually getting
• 2:21
  Speaker 3: divorced in, there's open government and sunshine laws that can
• 2:25
  Speaker 3: get access to the divorce files. And one of the
• 2:28
  Speaker 3: things that I enjoy working on the higher net worth
• 2:31
  Speaker 3: and higher profile divorces is most of the time both
• 2:36
  Speaker 3: parties to that case are very cognizant of that issue.
• 2:39
  Speaker 3: So what we tend to do is we work very
• 2:42
  Speaker 3: collaboratively and get everything settled and valued and tied up
• 2:48
  Speaker 3: nice and neatly, and we are thinking away, We are
• 2:51
  Speaker 3: thinking constantly about how to play keep away from the press.
• 2:55
  Speaker 2: Really really interesting. We mentioned people with a lot of
• 2:59
  Speaker 2: zeros their net worth. When you have an ultra high
• 3:02
  Speaker 2: net worth couple splitting, are the mistakes that they make
• 3:07
  Speaker 2: more or less the same as what we see in
• 3:09
  Speaker 2: normal divorces? Or are there things that happen that you
• 3:13
  Speaker 2: know are really problematic and potentially not reversible.
• 3:18
  Speaker 3: Well, they are the same. The problem is a one
• 3:21
  Speaker 3: percent tax mistake in your case or my case is
• 3:26
  Speaker 3: magnified tremendously in that billionaire divorce case. So the mistakes
• 3:33
  Speaker 3: are the same, the consequences are tremendously more consequential in
• 3:39
  Speaker 3: that type of case. And then barry what I found
• 3:42
  Speaker 3: in these higher net worth cases. Generally, you know a
• 3:47
  Speaker 3: young couple who starts making and earning and accumulating significant assets,
• 3:53
  Speaker 3: they start doing what I call a state planning two
• 3:56
  Speaker 3: point zero or state planning three point zero, Because as
• 3:59
  Speaker 3: I tell everybody, there's two types of money problems, too
• 4:02
  Speaker 3: much and not enough. And these people have the too
• 4:05
  Speaker 3: much problem. So they have very complicated estate plans that
• 4:09
  Speaker 3: are designed to not be busted apart. So then you
• 4:13
  Speaker 3: start saying, Okay, you know this is a couple that's
• 4:16
  Speaker 3: been married thirty five forty years. They have slacks and
• 4:21
  Speaker 3: grats and cuberts and these complicated state vehicles. Well, okay,
• 4:27
  Speaker 3: how do we separate them? What are the tax consequences
• 4:31
  Speaker 3: as a result of separating or blown apart that estate plan?
• 4:36
  Speaker 3: And do we really want to do that?
• 4:39
  Speaker 2: Really really interesting. I was out with a couple of
• 4:42
  Speaker 2: guys right before the holidays. One of them was divorced,
• 4:47
  Speaker 2: and another person at the table mused, gee, I wish
• 4:51
  Speaker 2: I could afford to get divorced. So I guess that's
• 4:54
  Speaker 2: the too little money as opposed to too much money.
• 4:57
  Speaker 2: But let's talk about the too much money. A lot
• 5:01
  Speaker 2: of assets are not liquid. The headline value looks like
• 5:06
  Speaker 2: it's really big. How do you figure out the difference
• 5:11
  Speaker 2: between what something appears the liquidity factors? And then of
• 5:15
  Speaker 2: course you wind up either with a concentrated position or
• 5:19
  Speaker 2: a tax headache if there's a liquidity event in sale,
• 5:22
  Speaker 2: for the for the divorce. How do you navigate those areas?
• 5:27
  Speaker 3: Excellent question, excellent points. So let's let's think back to
• 5:32
  Speaker 3: the financial crisis two thousand and nine, twenty ten, the
• 5:35
  Speaker 3: late Elayne Win and Steve Win. We're getting a divorce,
• 5:40
  Speaker 3: and we think of Steve and Alaine Win, and we
• 5:42
  Speaker 3: think about people that have tons of cash, cash flows
• 5:45
  Speaker 3: and a problem. Well, the Wins had to liquid eate
• 5:49
  Speaker 3: shares of win resorts to you know, free up money
• 5:52
  Speaker 3: for their divorce case. So if Steve and Alaine Win
• 5:55
  Speaker 3: have to sell assets from a liquidity standpoint in a
• 5:59
  Speaker 3: divorce case, you can imagine that other business owners may
• 6:03
  Speaker 3: have to do the same thing. And then, like you said,
• 6:07
  Speaker 3: maybe the couples are going through a business sale or
• 6:11
  Speaker 3: there's some other liquidity events. So again, as I stated earlier,
• 6:15
  Speaker 3: the great thing about these cases is generally people are
• 6:19
  Speaker 3: motivated together to reduce tax liabilities and work together to
• 6:24
  Speaker 3: maximize the size of the pie. And I think again
• 6:27
  Speaker 3: in the billionaire celebrity divorce case, there's more motivation from
• 6:31
  Speaker 3: both sides to do that.
• 6:34
  Speaker 2: What do you do with things that are kind of
• 6:36
  Speaker 2: hard to put a dollar number on, carried interest RSUs,
• 6:41
  Speaker 2: restricted stock, even deferred comper options. How do you navigate that?
• 6:49
  Speaker 3: Sure, Well, there are all sorts of other professionals that
• 6:52
  Speaker 3: are experts and in placing of value on that. And
• 6:56
  Speaker 3: then you've got to step back and say, okay, what
• 6:58
  Speaker 3: are my goals and what are my strength spouse's goals.
• 7:01
  Speaker 3: So all of the contingent assets that you just rattled off,
• 7:07
  Speaker 3: they have some sort of expectation that you're still going
• 7:11
  Speaker 3: to have to be linked together for some period of
• 7:14
  Speaker 3: time in order to realize those assets. And you know,
• 7:18
  Speaker 3: maybe the person who's employed and is compensated in those
• 7:23
  Speaker 3: you know, alternative ways, they may not want to, you know,
• 7:27
  Speaker 3: have their you know, former spouse contacting their human resources
• 7:31
  Speaker 3: department or their executive compensation parts. So then the question
• 7:35
  Speaker 3: becomes do we have enough liquidity to buy that person out?
• 7:39
  Speaker 3: And you know, what sort of risk premium are we
• 7:42
  Speaker 3: assigning on kerry that may actually not materialize? And you know,
• 7:47
  Speaker 3: are these assets are they deferred, are they qualified? Are
• 7:51
  Speaker 3: they non qualified? What sort of growth rate do we
• 7:54
  Speaker 3: model when we're coming up? You know, do we think
• 7:56
  Speaker 3: that growth rate is fair? If we don't, then we
• 8:00
  Speaker 3: just say, okay, fine, I'm gonna roll the dice and
• 8:02
  Speaker 3: I'm gonna you know, I'm gonna ride along and see
• 8:05
  Speaker 3: what happens with the carry and whether it materializes or not,
• 8:08
  Speaker 3: And but I think history is a good place to
• 8:11
  Speaker 3: look to too. If you know we've been airried for
• 8:13
  Speaker 3: a significant amount of time, how have previous iterations of
• 8:17
  Speaker 3: the funds done? And how comfortable do I feel about,
• 8:21
  Speaker 3: you know, Carrie actually being there.
• 8:25
  Speaker 2: You mentioned outside experts. How do you, as the advisor
• 8:30
  Speaker 2: coordinate with outside lawyers and accountants and the state attorneys.
• 8:35
  Speaker 2: You're sort of trying to make sure the client isn't
• 8:38
  Speaker 2: stuck as a project manager as they're undergoing this emotional,
• 8:43
  Speaker 2: very emotional potentially I'm gonna say that again, they're undergoing
• 8:49
  Speaker 2: a very emotional experience.
• 8:52
  Speaker 3: Barry, It's not fair for the client to be the
• 8:54
  Speaker 3: project manager. They're the ones who are leaning on professional
• 8:57
  Speaker 3: advice and having litigated for nearly a decade, I generally
• 9:03
  Speaker 3: know all of the best to breed divorce lawyers in
• 9:07
  Speaker 3: the area, and I'll lean on law school classmates to
• 9:10
  Speaker 3: find the best to breed divorce lawyers all over the country.
• 9:14
  Speaker 3: And the divorce lawyer is going to be the quarterback.
• 9:16
  Speaker 3: I think it's very important to understand where the divorce
• 9:20
  Speaker 3: is actually taking place, so you can have a great
• 9:22
  Speaker 3: expert witness. But if that expert witness is not known
• 9:25
  Speaker 3: to the judge, or they're just simply not able to
• 9:28
  Speaker 3: communicate their work product and make the court understand what's
• 9:32
  Speaker 3: going on, then they're not a very good expert. So
• 9:35
  Speaker 3: I think you really have to know where you're at,
• 9:39
  Speaker 3: know the experts that have significant experience doing this type
• 9:43
  Speaker 3: of work. And then you know, if that expert is
• 9:47
  Speaker 3: well known to the court and to the opposing parties
• 9:50
  Speaker 3: and they do sort of a B plus job, then
• 9:53
  Speaker 3: maybe we need to sort of backstop them with that
• 9:56
  Speaker 3: national expert that is really really precise and really refined
• 10:01
  Speaker 3: that can help out so that situation. And you know, Barry,
• 10:06
  Speaker 3: I said this to a client the other day, I'm
• 10:08
  Speaker 3: sort of the offensive coordinator. I know enough to be dangerous,
• 10:12
  Speaker 3: I know, but I'm not in the business of giving
• 10:15
  Speaker 3: out legal advice. If I wanted to do that, I
• 10:17
  Speaker 3: would still be an advocate. But we work together. I
• 10:21
  Speaker 3: make suggestions. The head coach, the lawyer has got to
• 10:24
  Speaker 3: be the one who ultimately implements the plan.
• 10:28
  Speaker 2: So I mentioned in our introduction Jeff Bezos and Bill Gates,
• 10:32
  Speaker 2: it raises the question when you have highly appreciated founder's
• 10:37
  Speaker 2: stock at a very low cost basis and then all
• 10:41
  Speaker 2: of the capital gains that come with getting liquid with that.
• 10:45
  Speaker 2: When I look at folks like Larry Allison, O Bezos
• 10:48
  Speaker 2: or Gates, they've let it run for so long. What
• 10:53
  Speaker 2: we saw with Gates is he literally there was an
• 10:56
  Speaker 2: eight billion dollar transfer of Mike Off stock before the
• 11:01
  Speaker 2: selloff to Melinda Gates Foundation. What are best practices with
• 11:07
  Speaker 2: dealing things like founder stock at a really low cost basis?
• 11:12
  Speaker 3: Yeah, I mean you hit on one of the strategies
• 11:15
  Speaker 3: right away. If philanthropy or charitable giving is part of
• 11:20
  Speaker 3: the problem, then we bring in an expert and talking
• 11:23
  Speaker 3: about if a charitable foundation isn't set up, what's the
• 11:27
  Speaker 3: best way to maximize gift to charity, and you hit
• 11:30
  Speaker 3: the nail on the head. Donating appreciated stock to the charity,
• 11:35
  Speaker 3: to a charitable foundation, to a donor advice fund is
• 11:39
  Speaker 3: certainly a way to do that because, as you know,
• 11:41
  Speaker 3: you get the market value for the contribution of the stock,
• 11:47
  Speaker 3: you don't have to worry about the capital gains tax,
• 11:49
  Speaker 3: neither does the charity. Everybody wins.
• 11:52
  Speaker 2: We saw that with Bezos's wife also right it was
• 11:56
  Speaker 2: a big chunk of Amazon stock that went into her philanthropy,
• 12:02
  Speaker 2: what do you do when it's not a public company.
• 12:05
  Speaker 2: What do you have do when you have a highly
• 12:07
  Speaker 2: valued private company? Things like tangible book value in goodwill,
• 12:13
  Speaker 2: they're so squishy. How do you put a dollar value
• 12:16
  Speaker 2: on that?
• 12:17
  Speaker 3: Sure will oftentimes bring in expert witnesses at valuing those
• 12:22
  Speaker 3: privately held companies. And as you and I talked before
• 12:26
  Speaker 3: the taping, Barry, you know, there's two components to the
• 12:31
  Speaker 3: value of a business. There's the tangible assets and the goodwill. Well,
• 12:35
  Speaker 3: in the context of a divorce case, we have to
• 12:38
  Speaker 3: drill down into the good will and we have to say,
• 12:40
  Speaker 3: all right, what component of the goodwill is the enterprise goodwill?
• 12:44
  Speaker 3: And then what component of the goodwill is attributable to
• 12:48
  Speaker 3: the merital litigant. So let me give you an example.
• 12:51
  Speaker 3: Let's say there's Barry Ridtholts Insurance agency, or there's State
• 12:55
  Speaker 3: Farm Insurance where Barry Ritholtz is the registered agent. So
• 13:00
  Speaker 3: if I live in you know, some proximity to the
• 13:03
  Speaker 3: State Farm office where Barry's the register agent, maybe I'm
• 13:07
  Speaker 3: going there because I know Barry, but more likely than not,
• 13:11
  Speaker 3: I'm going there because of the brand State Farm. So
• 13:13
  Speaker 3: there's more enterprise goodwill there. But if I'm going to
• 13:16
  Speaker 3: the Ritholtz Property and Casualty Insurance up the street, it's
• 13:20
  Speaker 3: probably because I rode the train into the city with Barry.
• 13:24
  Speaker 3: Maybe Barry sponsored the Little League baseball team. Barry was
• 13:29
  Speaker 3: referred to me by somebody else that you helped, you know,
• 13:33
  Speaker 3: in who needed those products. So those are the issues
• 13:38
  Speaker 3: that we have to get. And you know on my team,
• 13:41
  Speaker 3: you know, you and I and your listeners know how
• 13:44
  Speaker 3: significant small businesses are to the American economy. Well in
• 13:48
  Speaker 3: the higher networth cases, a lot of these families have
• 13:51
  Speaker 3: small businesses. It's the biggest asset in the divorce case.
• 13:54
  Speaker 3: So I found my business partner, Caitlin. She was working
• 13:59
  Speaker 3: at a business brokerage firm, and I thought, man, this
• 14:03
  Speaker 3: woman has great credentials, great presence, she has that business
• 14:06
  Speaker 3: valuation expertise. So on my team, I have somebody who
• 14:09
  Speaker 3: came from the valuation world to help the lawyers and
• 14:12
  Speaker 3: our clients spot those business valuation issues because they are
• 14:17
  Speaker 3: so essential to the divorce case.
• 14:20
  Speaker 2: Since we're talking about ultra high net worth potential divorces,
• 14:25
  Speaker 2: one of the things I was thinking about was liability protection.
• 14:28
  Speaker 2: A lot of these families have umbrella policies. They have
• 14:32
  Speaker 2: very specific lawsuits and potential liability. They're trying to shield
• 14:36
  Speaker 2: themselves run How do you manage that throughout a divorce process.
• 14:41
  Speaker 3: I mean, that's probably the most important question that you've
• 14:44
  Speaker 3: asked me. We can divide, we can design the best portfolio,
• 14:49
  Speaker 3: have a great asset allocation, have strategy to you know,
• 14:54
  Speaker 3: redeem company stock and dilute concentrated positions. But if you
• 14:59
  Speaker 3: don't have the right protection in place, if you don't
• 15:02
  Speaker 3: have an umbrella policy, if you don't have an umbrella policy,
• 15:05
  Speaker 3: that is taking into consideration uninsured motorists. And I'm going
• 15:10
  Speaker 3: to even back up before we even get to insurance
• 15:12
  Speaker 3: and look at how assets are titled. So, Barry, I
• 15:15
  Speaker 3: live in Florida, and Florida is one of the jurisdictions
• 15:17
  Speaker 3: in the country where you can hold property as tenants
• 15:21
  Speaker 3: in the entireties. And you know, most of the other
• 15:23
  Speaker 3: jurisdictions you can hold property as joint tenants with right
• 15:28
  Speaker 3: of survivorship. And I don't want to make this a
• 15:30
  Speaker 3: law class you're a lawyer, but tenants by the entirety
• 15:33
  Speaker 3: means that you and your spouse own an undivided interest
• 15:39
  Speaker 3: in that asset. Joint tennants with right of survivorship means
• 15:42
  Speaker 3: that Barry and his wife own each own fifty percent.
• 15:46
  Speaker 3: So if you're a tort feezer and you don't have
• 15:50
  Speaker 3: an umbrella policy, I can go after fifty percent of
• 15:53
  Speaker 3: your brokerage account. But if you hold it as tenants
• 15:56
  Speaker 3: in the entirety, then you and your wife have to
• 15:59
  Speaker 3: be the fees aer for me to you know, try
• 16:02
  Speaker 3: to go after those assets. What about titling cars? I mean,
• 16:06
  Speaker 3: how many advisors are looking at how their clients title
• 16:09
  Speaker 3: their car. You know, I'm dealing with a case right
• 16:12
  Speaker 3: now where somebody that I know was killed by a
• 16:14
  Speaker 3: sixteen year old motorist. Well, the insurance companies are smart.
• 16:18
  Speaker 3: They don't want to just title the car in the
• 16:20
  Speaker 3: kid's name, right, They'll charge higher premium, you know, to
• 16:24
  Speaker 3: make sure that either mom and or dad is also
• 16:27
  Speaker 3: on the title, so you know, they can have mom
• 16:30
  Speaker 3: and Dad's assets be you know, used to satisfy a judgment. So,
• 16:34
  Speaker 3: I mean, these are all the things that I try
• 16:36
  Speaker 3: to help people look at and say, hey, look, just
• 16:39
  Speaker 3: by the way you title your assets, you can shield
• 16:42
  Speaker 3: yourself from a potential liability.
• 16:45
  Speaker 2: Final question, what are your thoughts on finding hidden assets
• 16:50
  Speaker 2: and not just Swiss bank accounts, but other ownership of companies,
• 16:56
  Speaker 2: of real estate, of what have you that perhaps one
• 16:59
  Speaker 2: of the spouses is not fully aware of.
• 17:02
  Speaker 3: Right. That's why tax returns and corporate tax returns and
• 17:07
  Speaker 3: following the money and watching where it goes is so significant.
• 17:12
  Speaker 3: You know, most of the time you know one spouse
• 17:15
  Speaker 3: trusts the other spouse or has no dealings whatsoever with
• 17:20
  Speaker 3: you know, what's going on at work and the business
• 17:22
  Speaker 3: accounts and so on and so forth. So it's really
• 17:24
  Speaker 3: important you talked about big money mistakes before you agree
• 17:28
  Speaker 3: to a settlement. Get a CPA to help you sit
• 17:31
  Speaker 3: down and take a look at the tax returns and
• 17:35
  Speaker 3: see how the money's flowing. I mean, generally there are
• 17:38
  Speaker 3: things on there that raise significant red flags which may
• 17:43
  Speaker 3: make you want to pause and say, okay, I need
• 17:45
  Speaker 3: to take a look at this. I need to look
• 17:46
  Speaker 3: at the corporate bank accounts. How are these retained earnings
• 17:50
  Speaker 3: consistent with other you know, businesses in the same industry.
• 17:54
  Speaker 3: Is just too much? Did the salary significantly change? Did
• 18:00
  Speaker 3: distributions significantly change? How have the historical expenses changed? You know,
• 18:05
  Speaker 3: right around the time that the divorce was starting to
• 18:08
  Speaker 3: bubble to the surface.
• 18:09
  Speaker 2: So to wrap up, billionaire divorces aren't all that different
• 18:14
  Speaker 2: from run of the mill divorces. Sure, there are a
• 18:16
  Speaker 2: couple of more zeros at the end of the asset
• 18:18
  Speaker 2: list and some complications, but generally speaking, the risks, the
• 18:24
  Speaker 2: boxes you want to check, and the other issues that
• 18:26
  Speaker 2: you're going to run through aren't all that different from
• 18:29
  Speaker 2: traditional divorces. I'm Barry Redults. You're listening to Bloomberg's at
• 18:34
  Speaker 2: the Money.
• 18:38
  Speaker 1: You know, don't you