Divorce can come with as many financial headaches as it does heartache. The ante is often higher for couples with multiple properties, complex investment portfolios and a host of businesses.
Wealthy divorces are typically more thorny to navigate because of the complex nature of their finances, says Heather Hansen, a partner who practices family law at Martha McCarthy and Co. LLP.
“The challenge is how high-net-worth people manage their financial affairs doesn’t necessarily fit well into the system of family law,” says Ms. Hansen, who has represented many clients with millions of dollars at stake in divorce proceedings.
“It’s a bit of a square-peg-in-a-round-hole problem.”
The federal Divorce Act and provincial family acts are set up to be accessible regardless of income. But they are largely designed for the biggest segment of the population – middle-income wage earners with a pension, a home and some savings, she says.
Laws determining child and spousal support based on wage income and dividing the aforementioned assets are generally straightforward, Ms. Hansen adds. But the law offers less clarity on how to determine financial issues for high-net-worth individuals who may own a businesses and earn money from multiple sources, such as dividends from private corporations.
Untangling the web of shared wealth generally requires more than lawyers. Mediators, forensic accountants, financial analysts and business valuators usually are roped into the process.
“It’s almost the exception rather than the rule that I will not engage in some sort of outside professional assistance like a valuator or forensic accountant,” says Ms. Hansen.
Valuating businesses can be especially tricky, says Vancouver lawyer Carol Hickman, who practices family law at Quay Law Centre. “Because quite often one party is trying to buy out the other from that business. … You need to know the value you’re going to place on it.”
Complicating matters is the fact that a business’s value can fluctuate during the course of a divorce, which can take years.
The task of providing an objective assessment generally falls on a business valuator. In British Columbia, the law requires parties to share one valuator, whereas in Ontario, each party generally hires its own.
Yet even in British Columbia, situations still arise where one party is unsatisfied with the valuation and cases end up with “duelling valuators,” Ms. Hickman says, noting the cost can run more than $100,000.
Additionally it’s not uncommon for entrepreneurs to be reticent to share much of their business’s wealth with a divorcing spouse, says Scott Spence, a divorce financial analyst at Second Half Solutions Ltd. in Winnipeg.
“It’s often boils down to a perception of entitlement: ‘I’m a business owner and worked hard all my life, and my spouse just took care of the kids.’”
But this ignores the fact that “the stay-at-home parent made it possible for the other to focus on the business.”
Like other professionals working with divorcing couples, Mr. Spence occasionally comes across individuals who try to hide assets in offshore accounts or fudge income to reduce the financial support they may need to pay. Yet tighter rules on reporting income from foreign sources to the Canada Revenue Agency have made hiding assets offshore more difficult, he adds.
It’s generally more common for spouses to accuse one another of hiding assets only to discover, after careful analysis, that these investments have been accounted for already in the proceedings. Mr. Spence points to one example in which a spouse claimed the other party had stashed away $2.5-million. But after following the paper trail, “it was $200,000 that was being moved around multiple institutions.”
Still, forensic accountants are often required, particularly for verifying an entrepreneur’s income from a business.
“So a person may report $60,000 from the business on the tax return, but if you look at the lifestyle of that individual – four cars, including a Lamborghini and a Tesla – well, there’s more there than meets the eye,” says Bruce Roher, a forensic accountant, business valuator and partner at Fuller Landau LLP in Toronto.
“At that point, we’re often asked to take a deeper dive, and we do what’s called a lifestyle analysis.” This involves poring over credit card expenditures, bank statements and brokerage accounts, Mr. Roher adds.
As well, forensic auditors frequently analyze a business’s financial reporting to determine whether its retained earnings are appropriate, or whether this is really personal income being held unnecessarily in the corporation.
They can also examine business expenses because some owners “will put a lot of personal expenses through the company,” he says. “It could be trips, dinners and so on, and it adds up.”
That a spouse tries to protect assets, however, does not necessarily mean the individual is nefariously trying to hide wealth, Mr. Roher says. After all, much is at stake – the wealth the couple built together and high-income lifestyles for themselves and their children.
It’s the need to protect that drives behaviour, for better and worse, says Hilary Linton, a mediator with Riverdale Mediation Ltd. in Toronto. “It’s human nature to care more about what we have to lose than what we have to gain.”
Divorce makes individuals feel exposed and vulnerable, and “if you look at what drives conflict, it’s vulnerability,” she says.
Ms. Linton notes many high-net-worth couples are also high-profile members of the community, and like everyone else, they often would rather not have their dirty laundry aired. They might therefore choose alternatives to litigation.
“If they’ve got secrets that they don’t want people to know, then mediation and arbitration may be a de-escalating process for them,” she says, adding these processes are confidential.
Yet some cases are so contentious and complex that “a good lawyer should sit down with their clients and do a cost-benefit analysis,” and when millions of dollars are at stake, a trial may be worth the time and expense, Ms. Hickman says.
Still, fighting it out in court does not necessarily involve rancorous hostility, Ms. Hansen says. “I become involved when everybody knows everybody’s positions, only they’re still far apart and someone [likely a judge] needs to resolve it,” she says.
“But it’s not a ‘War of the Roses’ conflict, where the parties are engaged in it for the sake of trying to defeat the other person’s interest,” she says.
“It’s largely a myth that because there is more money, people are inclined to engage in conflict.”