24 Mar When Family Wealth Has Funded the Marital Lifestyle, What Happens Upon Divorce?

As a divorce mediator and collaborative attorney, I have found that there are unique challenges that arise when dealing with a family that has relied on the inherited or gifted wealth of one spouse in funding the marital standard of living.

Consider this example: The couple have earned a reasonable income while married, but one spouse’s separate property wealth has allowed them to live a lifestyle beyond what could be afforded on their income alone. They may live in an expensive home with no mortgage. They may use separate property to pay for extensive travel or own a vacation home. They likely have not saved any of their employment earnings for retirement because of the separate property savings they know is (or will be) available.

What happens when this couple gets a divorce? The spouse without the inherited or gifted wealth may be surprised to find that under California family law, he or she is not legally entitled to a portion of those assets. Even if the inherited or gifted wealth was received during the marriage, and even if the wealth felt like it was shared while they were married, the general rule under California law is that it is the separate property of the spouse who received it. Even their house, which may technically be community property, is not necessarily split equally, because the spouse who contributed separate property to purchase it is generally entitled to a reimbursement of that investment, leaving only the appreciation of the house as community property. Determining child support and spousal support is tricky – if it is based only on income from employment, and any interest and dividends earned on separate property, the supported spouse will likely not be able to afford to remain at the same standard of living.

Divorce mediation or collaborative divorce may be a better approach than litigation for both parties in this scenario. Better for the spouse without the wealth because he or she is likely to receive a more favorable settlement in a mediation or collaborative process than in a litigation process because (in my experience) the wealthy spouse is often willing to give more than what a court would order. Better for the spouse with wealth because he or she will likely spend less on legal fees (for both spouses), and will be able to maintain privacy about the family and personal wealth. One reason that the wealthy spouse is often willing to give more than the law would require is that he or she wants to ensure that their children don’t see a large discrepancy between their 2 households.

A common challenge that I have noticed in these scenarios is that even though the spouse without the wealth is likely to get a better settlement in mediation or collaborative law than in litigation, he or she may not get enough to fully maintain the standard of living they enjoyed during the marriage, and may fear for their future financial security. The wealthy spouse may not be able to fully understand the financial security provided by the safety net of such wealth; and may not appreciate how concerned the other spouse feels about financial security.

In mediation or collaborative law, there will a discussion to better understand each person’s views of money and financial security. Often, there are “family values” that are inherited along with the family wealth, such as a preference for preserving wealth for future generations, that should be explored since they will likely impact what the wealthy spouse is willing (or in some cases, able) to agree to as a divorce settlement.

If the discussions about financial matters is contentious, it is helpful to have a “coach” – a mental health professional with experience working with divorcing couples – to explore their different perspectives on wealth and financial security. It can also be helpful to have a neutral financial professional assist in structuring a settlement that will satisfy both people’s needs.

The good news is that there are many creative settlement options that are available for clients with family wealth that fall outside of what a court would do.