Wednesday, April 14, 2021

How to Navigate a High-Net-Worth Divorce

By Carol K. G. Lutz, LL.M., Law Clerk, Morris Law Group

Founder, CEO and president of Amazon, Jeff Bezos, who is currently the richest man in the world with a net worth of $188 billion, got divorced in 2019. While divorce is far from unusual, the extremely uncommon aspect of Jeff and MacKenzie Bezos’s split is that there was no pre- or postnuptial agreement.

An agreement would have typically set out an exact amount of money that MacKenzie would have received in the event of a divorce, among other conditions. The typical arrangement involves waiving all elective share, intestacy, and alimony rights and agreeing on whatever the set amount is, usually a modest sum from the richer spouse and enough for the other spouse to live comfortably for some time but far from 50% of the money spouse’s assets.

Fortunately for Jeff, the divorce was not a contentious one and MacKenzie did not ask for all that she was entitled to by Washington state law, mostly likely due to the fact that they are business partners. She received the far-from-insignificant amount of $38 billion in the split, which is not even close to 50% of her former husband’s wealth. She also gave up all of her shares in the Washington Post and Blue Origin, and only retained 25% of her shares in Amazon.

Other famous high net worth individuals were not so lucky in such an amicable split. Rupert and Anna Murdock’s divorce in 1999 after being married for 32 years still remains one of the most expensive divorces in history. She also was entitled to half of his property, as California is a community property state like Washington, and there was presumably no pre- or postnuptial agreement. Anna walked away with $1.7 billion (now $2.6 billion indexed for inflation). 

Her former husband famously married the woman he was allegedly having an affair with during the last year of their marriage less than three weeks later, to add insult to injury. He later divorced her as well in 2013 for having alleged affairs but made sure to sign prenuptial and two postnuptial agreements this time.

A pre- or postnuptial agreement stipulating exactly who gets what assets is obviously the simplest way to avoid a costly divorce settlement, but what are the alternative options? A postnuptial agreement in particular can be difficult and very awkward to ask one’s spouse for, so we recommend settling up the agreement prior to a marriage.

One way to protect one’s assets from divorce settlement and potentially child support payments is a Domestic Asset Protection Trust (DAPT). Each state that authorizes DAPTs has different statutes dictating what events can pierce the DAPT and how long they must be in the trust before they are protected.

Predictably, the states with the strongest asset protections, including protection from tort creditors, involve incredibly specific drafting and steps to be taken in order to be a valid DAPT that is protected. In fact, in the best states for this strategy, if done correctly, the only creditor that can reach the trust assets is the government. This protection is negated if the transfer to the trust is done fraudulently, however.

At Morris Law Group, our skilled estate and asset protection planning attorneys regularly draft both kinds of trusts for this exact scenario. For more information, please contact us at (561) 750-3850 to schedule a consultation today.

Estate Planning and Tax Law Changes Expected with the Biden Administration

By Carol K. G. Lutz, LL.M., Law Clerk, Morris Law Group
With a change in the presidency comes changes in many areas of the law, including tax law. President Joe Biden’s plan is to reduce the current estate tax exemption to half of its current amount: back to $5 million per person, indexed for inflation. He may possibly call for a reduction as low as $3.5 million per person, depending on what is likely to pass through Congress. The current exemption is $11.58 million per person. What does this mean for you if the exemption is reduced?
If the law changes in 2021, for anyone who has not used their exemption up, they will lose anything over the new amount that is established in 2021. As the estate tax is 40% on any amounts over the exemption, this can mean paying millions more in estate tax, so it is critical for people with estates above $5 million, or married couples with estates over $10 million, to use up their exemption before the end of the year to preserve the tax savings that may be lost. A great way to use up the exemption is to gift the remaining exemption amount to a trust. This would preserve the current record high exemption and provide asset protection from creditors and divorces.
Some assets can be hard to value and would require an appraisal to prevent the IRS from being able to challenge the estimated value several years down the line. A method that would make using a hard-to-value asset possible for utilizing the current exemption amount is to gift assets that are easy to value, such as cash and marketable securities, in early 2021 that are the same value as the other asset and then swapping these assets out for the difficult to value one later on in 2021 after getting it appraised. This will result in no tax and will not jeopardize one’s exemption. Naturally, only certain trusts allow for this kind of asset swap and need to be drafted carefully in order to avoid unintended consequences.
President  Biden also plans to eliminate the basis step-up. We have discussed this in a previous article, but put simply, instead of assets being valued at their date-of-death value and passing tax free, they will use their cost basis and any appreciation between the purchase and death must be noted. The problematic issue here is that finding out how much the decedent paid for an asset can be difficult, if not impossible. If the cost basis cannot be determined, it will be deemed zero, which is incredibly disadvantageous. This issue will be demanding to handle and will require skilled estate planners to navigate as a new challenge in the field.
Be sure to watch Stuart R. Morris's video on the topic of estate and tax planning under the Biden administration here. If you would like more information or guidance on your estate planning, please contact us today at (561) 750-3850 or visit www.law-morris.com.

New Video: Tax Planning During the Biden Administration

Watch the latest video below by Morris Law Group's founding partner Stuart R. Morris, Esq., CPA, B.C.S., on important estate planning and tax planning considerations during the Biden administration. For more information or to set up an estate planning or tax planning consultation with one of our attorneys, please contact Morris Law Group at (561) 750-3850 or visit www.law-morris.com