If private equity investments exist in your marital estate you will have some challenges to overcome. One of the challenges is to design a risk-managed settlement structure. Another is to demonstrate your logical progression of thought to your spouse or your spouse’s team so they understand.
Some questions you will need to address in your settlement structure are:
- How do you incorporate the carried interest component into your settlement structure?
- How much of the carry should be included as part of your ongoing earnings stream?
- What happens if you experience a clawback at a future point in time?
- Should you use the value of your investments assigned by the fund as the value for your divorce?
- What if the final exit does not get realized in a reasonable period of time or you do not realize the projected exit value?
- How do you address future partnership calls for more investment into the fund?
- What happens if the capital allocation changes among your equity partners?
- Which date should you use to allocate your marital estate and why?
- How do the changing tax laws impact your outcomes?
- What do you do about the fact that your private equity investments are illiquid?
- Which assets should you keep as part of your divorce? Should you allocate a portion of the funds to your spouse? What complications arise by doing this? What if your spouse demands it? How do you manage that risk?
- How close are your investments to an exit? How should this be incorporated into your marital estate?
- How do you incorporate the need for a general partner to catch up on prior carry not yet distributed?
- Should the carry be used as a mechanism to pay for your divorce?
- What happens to the escrow?
- What impact does accounting for your carry on an accrual basis vs. a cash basis have on your divorce?
- Has your basis in your investments changed as a result of a return of capital? What’s the impact?
- Should you allocate some of the risk to your spouse? If so, which risks do you assign?
You need to manage these risks in your divorce process. How will you do that? Are you managing your divorce process alone without a personal financial advocate? If so, you will need to be very careful. One wrong decision can unravel your well designed plans. These issues are interrelated and require someone to think through how to design your solution to manage your risks.
As noted above, a key question you need to ask yourself is how will you explain these issues to your spouse or your spouse’s team so you can gain agreement to move forward? Does your spouse understand these matters? If not, you may find yourself in challenging discussions that could lead to a financial investigation and an elongated divorce process.
You may want to find a way to best preserve and protect your wealth that you have worked so hard to build. The answer is in the details and the way you architect your outcomes. It is about analyzing the components, breaking them down into the right parts and then putting them back together again in a cohesive framework that balances your risk. When you figure out the solution it is much easier to clearly document your wishes into your divorce decree which will help you avoid going back and forth in your negotiations.
To arrive at best fit outcomes for you and your family you will need a professional who is dedicated to the divorce process and can critically think through your issues, understand the corresponding data relationships and architect your solution to manage your risks.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.