The sight of a wealthy couple squabbling over their assets in an acrimonious divorce may be guiltily enjoyed by a viewing public, but for the couple involved the emotional and financial consequences can be heavy. Due to this, couples are well advised to get a pre or post-nup. While in the US these agreements are popular and carry a lot of weight in the courts, they cannot provide for all events, and changing circumstances might affect how they are interpreted.

And with some 9.8 per cent of the adult population divorced according to the US Census Bureau, it is an issue worth paying attention too.

“We work with clients in drafting prenuptial agreements to prepare them for what can potentially happen in the future. One of the biggest challenges with drafting a prenup is that you are working with two people who are very much in love and talking them through the planning process of what happens if things do not ultimately work out.

“It requires you to make certain assumptions about the future, and do so in a neutral and fair way. But of course, there is no way to predict the future,” Sheila Riesel, matrimonial attorney and partner at the law firm Blank Rome, tells Family Wealth Report, speaking from the firm’s NYC office in the Chrysler building.

A creature of the state

In the US, divorce law is a creature of state law, and each state has its own particulars – a factor that HNW individuals can sometimes use to their advantage, as they are likely to have properties or interests in various states, she explains.

The state of New York, for instance, where Riesel is based and has a license to practice, has only just been “dragged kicking and screaming into the twenty-first century” with the introduction of no fault divorces, she says. Another idiosyncrasy of the state’s divorce law is that an advanced degree or professional license is classified as an asset.

“For example, an expert will quantify the earning potential of a medical degree and the non-titled spouse is entitled to an equitable share of that value, and the amounts can be staggering,” says Riesel.

The process values the difference between a person’s enhanced earnings from an advanced degree or license, compared to what they would have been without the additional training, and then impacts this for tax and discounting effects. But it can still be a significant amount, warns Riesel, and is essentially a “fictional asset”.

The future earnings clause is certainly one to be aware of, as was highlighted when Michael Douglas’s former wife fought to receive proceeds of the Wall Street sequel because they were married when he first developed the character of Gordon Gekko.

“In New York, the only way to protect against having to share an enhanced earning capacity on divorce is to do a prenup or post-nup,” says Riesel. She adds that if someone wants to protect a long-standing family interest, such as a business, not only “can you and should you do a prenup, but you can also put that asset in a trust. If it’s done correctly, it will be protected.”

However, the whole process of putting together a prenup is tricky, due to the emotions involved on the side of the clients: “It’s a difficult balance of emotions and has to be approached in the right way. Both parties need to understand that finances are a big part of the couple’s life together, and this is an opportunity for them to begin discussing them in the early stages of the relationship.”

The changing role of women

The changing roles of women and men in society have had knock-on effects in the divorce courts.

“I represent many successful women, who have all of the same demands on their time and energy as their male counterparts.  When it comes time to determine custody in these cases, the children may ultimately end up being cared for [after the divorce] by retained staff, or by the fathers, or at the very least on a more equal basis, such as joint custody. Separate and apart from more women entering the workforce, this trend is also as a result of men becoming more involved with care of their children,” says Riesel.

As a consequence when the marriage dissolves, it is no longer a forgone conclusion that the mother will be the primary caregiver. However, if during the marriage the mother was the primary caretaker, the likelihood is that that will continue. And of course, while a prenup can protect your financial assets, future children, the couple’s most valuable assets, cannot be catered for in a prenup, explains Riesel.

But the rising importance of women in the workforce is impacting the way children are handled in a divorce, and has given rise to a phenomenon known as nesting – where a judge requires one spouse to maintain a third residence where the children live consistently and the parents come and go.

Many of our institutions, such as marriage, and indeed divorce, were founded in a time when women had far less economic and social power than they do nowadays, and as the social landscape shifts it can often take time for the institutional landscape to catch up.

“In years past, women stayed at home and took care of the household. Now, things have shifted and while women may bring in half the income, in many cases, they still have not transferred half of the duties to maintain the home to their spouses,” says Riesel. “This breeds resentment among women who are the monied spouses and are asked to share equally on divorce with a spouse who did not contribute equally during the marriage.”

The effect of this, she adds, leaves some women feeling that a fifty-fifty split of assets is unfair, due to the time they have put into increasing the marital assets as well as caring for the children and home.

The vertiginous economy

Another factor that is increasingly being dragged into the argument is the effect the economy has had on asset valuations in recent years.

“The economic crisis has made the date upon which assets are valued a subject of contention. Assets are either valued on the date of the commencement of divorce action or the date that the case will be tried. During the past few years, the difference in those two dates can create a large financial gap. We have seen many cases in which one party argues for the action date, and the other argues [the assets] should be valued at the trial date,” says Riesel.

“In New York law, there are distinctions made between active and passive assets. Prior to the financial crisis it was much more cut and dry. For active assets, the commencement date was used for valuations, and that is because it is generally believed that after divorce actions are filed, the titled spouse is only acting in his or her own interests, and that was a pretty inviolate rule,” says Riesel.

“But now, because the downturn in the economy has had such a broad and tremendous impact, the titled spouse will claim that the typical asset valuation is unfair, because at the time of the trial, their business may be worth half of what it was at the commencement date,” she adds.

Basically, the dominant factor in the price movements of many assets since 2008 – even active assets such as direct business interests – has been exogenous. As a result the titled spouse may have to pay out a share of an asset that is valued well above what it is now worth, even though the fall in value is through no fault of his or her own.

“That’s an issue that’s very much in flux,” says Riesel.

“At the end of the day, it still depends on the judge and the individual circumstance. In the past, if active assets went down in value, the titled spouses would argue for an exception, and vice versa, but the courts were very skeptical. However, the impact [of the economy] has been so great that in many cases the judge will now listen to and weigh these arguments, and not turn a blind eye to the economic effects.”