An interesting aspect of doing divorce work is that you get to look under the hood of the rich and/or famous to see what powers their wealth engine. What lawyers are used to seeing is unduly heavy concentrations in a family business or shares in an employer. People seem to have broken free of expecting crypto to fund their golden years and the latest penchant for anything “AI” also seems to be cooling.
Just about anything publicly traded is easily divided with the right paperwork. You do need to pay attention to what assets come with trapped capital gains or losses unless the asset is held in a 401K or IRA.
Where things get sticky is what we can dub the “Country Club investment.” Classically this is a limited liability interest in a company or partnership in a small to medium business. You heard about it in the locker room of your club or in the adjacent bar. “Great opportunity. Owned by the locals and destined for greatness.” It seemed plausible if not inviting and you certainly did not want to learn that your golf or tennis partner made millions on an opportunity you passed up. So, you wrote a check for $10-50,000 and now you own 0.145% of Avarice Enterprises, LLC.
Now, you are talking divorce and the lawyer asks what you own. Avarice is on your Form 1040 and you get an annual K-1. Somewhere in your files is an operating agreement that spells out your rights, but you never read it. This was just a flyer that you hoped would take off.
The lawyer asks what it is worth. You have no idea. Could there be future capital calls to fund the enterprise? You hope not. Is the interest transferable? “Why wouldn’t it be?”
This is a problem. Your spouse has heard you brag about this “investment” and what it someday might be worth. You tell the lawyer “Put it down for the $50K I paid for it.” Your spouse tells her lawyer that “If he wrote down $50K, it must be worth $150,000.” Your response is: “Tell her we’ll just split it.” Unfortunately, the operating agreement says transfers require consent of the other owners. Another missed aspect is that the agreement states investors can be required to contribute more capital. I’ve had to advise dependent spouses of Avarice owners that our divorce settlement doesn’t have spare cash to throw at this speculative investment and that failure to meet a capital call could trigger a default affecting the ownership rights.
Most divorce lawyers don’t know much about this ground. The provident move may be to jointly engage an attorney who does these investment deals to (a) secure financials of the business so it can be valued (b) figure out what more capital could be required and how any payout to an owner is managed and (c) assess whether spouses can split ownership in divorce. Most clients don’t really understand what they bought beyond the hype. These assets can create lots of marital friction because they were acquired with high expectations and low knowledge.
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