At The Money: Divorce Planning for the Ultra Wealthy

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2:01Half of all marriages end in divorce. That's just as true for the ultra wealthy and celebrities as it is for the rest of us. Jeff Bezos, Bill Gates, Kanye West, David Geffen. What happens when there are billions to divide? I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss the finances of divorce for the ultra wealthy. And full disclosure, I am not a billionaire and I remain happily married for 33 years. To help us unpack all of this and what it means for your portfolio, let's bring in Patrick Kilbane. He works at Ullman Wealth Partners, where he is a CFP and general counsel.

2:46He leads the firm's divorce advisory group. So, Patrick, the old joke is true. The wealthy are different than us. They have more money. All kidding aside, just how different are billionaire or celebrity divorces from the run-of-the-mill splits?

3:07Patrick Kilbane:Barry, first, thanks for having me. It's an honor to be with you. Believe it or not, celebrity divorces and billionaire divorces are not all that different. They may have more assets, more zeros in the bank account, more complicated assets. But what you really got to do is you got to take a step back and you got to figure out what you're dealing with. And then, you know, the biggest difference, I think, between a celebrity or a billionaire divorce versus, you know, the run of the mill divorce is the privacy issues that go along with that. And we can unpack that a little bit more, but I think that's a big non-financial issue that we're dealing with in those cases.

3:52So you're talking NDAs and things along those lines for everybody involved?

3:58Patrick Kilbane:Well, NDAs, and depending on what state you're actually getting divorced in, there's open government and sunshine laws that can get access to the divorce files. And one of the things that I enjoy working on the higher net worth and higher profile divorces is most of the time, both parties to that case are very cognizant of that issue. So what we tend to do is we work very collaboratively and get everything settled and valued and tied up nice and neatly. And we are thinking constantly about how to play keep away from the press. Really, really interesting. thing. We mentioned people with a lot of zeros on their net worth.

4:42When you have a ultra high net worth couple splitting, are the mistakes that they make more or less the same as what we see in normal divorces? Or are there things that happen that are really problematic and potentially not reversible?

4:59Patrick Kilbane:Well, they are the same. The problem is a 1 % 100 % tax mistake in your case or my case is magnified tremendously in that billionaire divorce case. So the mistakes are the same. The consequences are tremendously more consequential in that type of case. And then, Barry, what I found in these higher net worth cases, generally, you know, a young couple who starts making and earning and accumulating significant assets, they start doing what I call estate planning 2.0 or estate planning 3.0. Because as I tell everybody, there's two types of money problems, too much and not enough. And these people have the too much problem.

5:47Patrick Kilbane:So they have very complicated estate plans that are designed to not be busted apart. So then you start saying, okay, this is a couple that's been married 35, 40 years. They have slats and grats and cupirts and these complicated estate vehicles. Well, okay, how do we separate them? What are the tax consequences as a result of separating or blowing apart that estate plan? And do we really want to do that? Really, really interesting. I was out with a couple of guys right before the holidays. One of them was divorced and another person at the table mused, gee, I wish I could afford to get divorced.

6:34So I guess that's the too little money as opposed to too much money. But let's talk about the too much money. A lot of assets are not liquid. The headline value looks like it's really big. How do you figure out the difference between what something appears, the liquidity factors, and then of course you end up either with a concentrated position or a tax headache if there's a liquidity event in sale for the divorce? How do you navigate those areas?

7:09Patrick Kilbane:Excellent question. Excellent points. So let's think back to the financial crisis 2009, 2010. The late Elaine Wynn and Steve Wynn were getting a divorce. And we think of Steve and Elaine Wynn and we think about people that have tons of cash, cash flows and a problem. Well, the Wyns had to liquidate shares of Wyn resorts to free up money for their divorce case. So if Steve and Elaine Wyn have to sell assets from a liquidity standpoint in a divorce case, you can imagine that other business owners may have to do the same thing. And then, like you said, maybe the couples are going through a business sale or there's some other liquidity event.

7:54Patrick Kilbane:So again, as I stated earlier, the great thing about these cases is generally people are motivated together to reduce tax liabilities and work together to maximize the size of the pie. And I think, again, in the billionaire celebrity divorce case, there's more motivation from both sides to do that. What do you do with things that are kind of hard to put a dollar number on? Carried interest, RSUs, restricted stock, even deferred comp or options. How do you navigate that? Sure. Well, there are all sorts of other professionals that are experts in placing of value on that. And then you got to step back and say, okay, what are my goals and what are my strange spouse's goals.

8:43Patrick Kilbane:So all of the contention assets that you just rattled off, they have some sort of expectation that you're still going to have to be linked together for some period of time in order to realize those assets. And maybe the person who's employed and is compensated in those alternative ways, they may not want to have their former spouse contacting their human resources department or their executive compensation part. So then the question becomes, do we have enough liquidity to buy that person out? And what sort of risk premium are we assigning on carry that may actually not materialize? And are these assets, are they deferred?

9:32Patrick Kilbane:Are they qualified? Are they non-qualified? What sort of growth rate do we model when we're coming up? Do we think that growth rate is fair? If we don't, then do we just say, okay, fine, I'm going to roll the dice and I'm going to ride along and see what happens with the carry and whether it materializes or not. But I think history is a good place to look to too. If we've been married for a significant amount of time, how have previous iterations of the funds done and how comfortable do I feel about, you know, Carrie actually being there. You mentioned outside experts. How do you, as the advisor, coordinate with outside lawyers and accountants and estate attorneys?

10:16You're sort of trying to make sure the client isn't stuck as a project manager as they're undergoing this emotional, very emotional, potentially, I'm going to say it again, And they're undergoing a very emotional experience.

10:33Patrick Kilbane:Barry, it's not fair for the client to be the project manager. They're the ones who are leaning on professional advice. And having litigated for nearly a decade, I generally know all of the best of breed divorce lawyers in the area. And I'll lean on law school classmates to find the best of breed divorce lawyers all over the country. And the divorce lawyer is going to be the quarterback. I think it's very important to understand where the divorce is actually taking place. So you can have a great expert witness, but if that expert witness is not known to the judge or they're just simply not able to communicate their work product and make the court understand what's going on, then they're not a very good expert.

11:16Patrick Kilbane:So I think you really have to know where you're at, know the experts that have significant experience doing this type of work. And then, you know, if that expert is well known to the court and to the opposing parties and they do sort of a B plus job, then maybe we need to sort of backstop them with that national expert that is really, really precise and really refined that can that can help out. So that situation, and Barry, I said this to a client the other day, I'm sort of the offensive coordinator. I know enough to be dangerous, but I'm not in the business of giving out legal advice. If I wanted to do that, I would still be an advocate, but we work together.

12:02Patrick Kilbane:I make suggestions. The head coach, the lawyer has got to be the one who ultimately implements the plan. So I mentioned in our introduction, Jeff Bezos and Bill Gates, it raises the question when you have highly appreciated founder stock at a very low cost basis, and then all of the capital gains that come with getting liquid with that. But when I look at folks like Larry Allison or Bezos or Gates, they've let it run for so long. What we saw with Gates is he literally, there was an$8 billion transfer of Microsoft stock before the sell-off to Melinda Gates Foundation. What are best practices with dealing with things like founder stock at a really low cost basis?

12:53Patrick Kilbane:Yeah. I mean, you hit on one of the strategies right away. If philanthropy or charitable giving is part of the problem, then we bring in an expert and talking about if a charitable foundation isn't set up, what's the best way to maximize gift to charity? And you hit the nail on the head. Donating appreciated stock to the charity, to a charitable foundation, to a donor advised fund is certainly a way to do that. Because as you know, you get the market value for the contribution of the stock. You don't have to worry about the capital gains tax. Neither does the charity. Everybody wins. We saw that with Bezos's wife also, right?

13:37It was a big chunk of Amazon stock that went into her philanthropy. What do you do when it's not a public company? What do you do when you have a highly valued private company? Things like tangible book value and goodwill. They're so squishy. How do you put a dollar value on that?

13:59Patrick Kilbane:Sure. Will oftentimes bring in expert witnesses at valuing those privately held companies. And as you and I talked before the taping, Barry, there's two components to the value of a business. There's the tangible assets and the goodwill. Well, in the context of a divorce case, we have to drill down into the goodwill and we have to say, all right, what component of the goodwill is the enterprise goodwill? And then what component of the goodwill is attributable to the marital litigant? So let me give you an example. Let's say there's Barry Ritholtz Insurance Agency or there's State Farm Insurance where Barry Ritholtz is the registered agent.

14:41Patrick Kilbane:So if I live in some proximity to the State Farm office where Barry's the registered agent, maybe I'm going there because I know Barry. But more likely than not, I'm going there because of the brand State Farm. So there's more enterprise goodwill there. But if I'm going to the Ritholtz property and casualty insurance up the street, it's probably because I rode the train into the city with Barry. Maybe Barry sponsored the Little League baseball team. Barry was referred to me by somebody else that you helped, you know, who needed those products. So those are the issues that we have to get. And, you know, on my team, you know, you and I and your listeners know how significant small businesses are to the American economy.

15:29Patrick Kilbane:Well, in the higher net worth cases, a lot of these families have small businesses. It's the biggest asset in the divorce case. So I found my business partner, Caitlin, she was working at a business brokerage firm. And I thought, man, this woman has great credentials, great presence. She has that business valuation expertise. So on my team, I have somebody who came from the valuation world to help the lawyers and our clients spot those business valuation issues because they are so essential to the divorce case. Since we're talking about ultra high net worth potential divorces, one of the things I was thinking about was liability protection.

16:10A lot of these families have umbrella policies. They have very specific lawsuits and potential liability. They're trying to shield themselves from. How do you manage that throughout a divorce process?

16:23Patrick Kilbane:That's probably the most important question that you've asked me. We can design the best portfolio, have a great asset allocation, have strategy to redeem company stock and dilute concentrated positions. But if you don't have the right protection in place, if you don't have an umbrella policy, if you don't have an umbrella policy that is taking into consideration uninsured motorists, and I'm going to even back up before we even get to insurance and look at how assets are titled. So Barry, I live in Florida and Florida is one of the jurisdictions in the country where you can hold property as tenants in the entireties.

17:04Patrick Kilbane:And most of the other jurisdictions you can hold property as joint tenants with right of survivorship. And I don't want to make this a law class. You're a lawyer, but tenants by the entirety means that you and your spouse own an undivided 100 % interest in that asset. Joint tenants with right of survivorship means that Barry and his wife each own 50%. So if you're a tortfeasor and you don't have an umbrella policy, I can go after 50 % of your brokerage account. But if you hold it as tenants in the entirety, then you and your wife have to be the tortfeasor for me to try to go after those assets.

17:45Patrick Kilbane:What about titling cars? I mean, how many advisors are looking at how their clients title their car. I'm dealing with a case right now where somebody that I know was killed by a 16-year-old motorist. Well, the insurance companies are smart. They don't want to just title the car in the kid's name, right? They'll charge a higher premium to make sure that either mom and or dad is also on the title so they can have mom and dad's assets be used to satisfy a judgment. So, I mean, these are all the things that I try to help people look at and say, hey, look, just by the way you title your assets, you can shield yourself from a potential liability.

18:27Final question. What are your thoughts on finding hidden assets and not just Swiss bank accounts, but other ownership of companies, of real estate, of what have you, that perhaps one of the spouses is not fully aware of? Right.

18:45Patrick Kilbane:That's why tax returns and corporate tax returns and following the money and watching where it goes is so significant. Most of the time, one spouse trusts the other spouse or has no dealings whatsoever with what's going on at work and the business accounts and so on and so forth. So it's really important. You talked about big money mistakes. Before you agree to a settlement, get a CPA to help you sit down and take a look at the tax returns and see how the money's flowing. I mean, generally, there are things on there that raise significant red flags, which may make you want to pause and say, OK, I need to take a look at this.

19:28Patrick Kilbane:I need to look at the corporate bank accounts. How are these retained earnings consistent with other businesses in the same industry? Is this too much? Did the salary significantly change? Did distribution significantly change? How have the historical expenses changed right around the time that the divorce was starting to bubble to the surface? So to wrap up, billionaire divorces aren't all that different from run-of-the-mill divorces. Sure, there are a couple of more zeros at the end of the asset list and some complications, but generally speaking, the risks, the boxes you want to check, and the other issues that you're going to run through aren't all that different from traditional divorces.

20:13I'm Barry Ritholtz. You're listening to Bloomberg's At The Money.

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