You don’t have to look far to understand the financial perils of divorce. In the world of the ultra-high-net-worth, it seems that every week there is another headline involving the expensive divorce of an entertainer, athlete, or corporate CEO. For example, hip-hop mogul and business executive Dr. Dre is reportedly paying his ex-wife Nicole Young, $3.5 million a year in spousal support, as well as an undisclosed portion of his accumulated wealth.

Many wealthy couples underestimate the risk and the potential devastating impact divorce can have on their financial situation. Whilst every situation is different, divorce typically involves dividing marital assets, leaving each spouse with less than before. A divorce settlement may include an ongoing stream of payments from one spouse to the other, however they forget the impact it may have on their overall estate. Additionally, a high-net-worth divorce will usually result in costly fees for attorneys, counselors, forensic accountants, and expert witnesses, not to mention the potential for media coverage.

The family business

But divorce can create other perils for wealthy families, especially if business or real estate assets are involved. For example, who will control a family-owned business, will you maintain majority control, how do you manage a commercial property and resolve differences? After all, it’s unlikely that the two ex-spouses will be able to set their emotions aside and work together, at least in the initial years after the break-up.  It may create pressure from a non-involved spouse to sell the business or property and split the proceeds.

If second- or third-generation family members are also actively engaged in the business, the dynamics of divorce can become ever more complicated. A son or daughter may be inclined to support one spouse versus the other, exacerbating the difference of opinion – directly impacting business operations.

Setting up a multi-generational succession plan or a partnership agreement can go a long way toward mitigating the impact of divorce and ensuring the family retains control of its long-term financial destiny.

The family office

Divorce or separation can also have an impact on a family office. Suddenly, the professionals may feel conflicted, potentially putting them in a no-win position. The problem can be particularly acute during the divorce process. If an attractive investment opportunity comes along or if they wish to exit one, the family office team might need to wait for approval from both spouses before proceeding with the transaction.

Whilst documents like a pre-nuptial or post-nuptial agreement can provide a financial structure for the divorcing spouses, these documents typically don’t address the issues facing the family offices. Fortunately, an outside financial professional can provide guidance and assist in mediating during the divorce but also assist in creating a family constitution, mission statement or operational guidelines that spell out roles and responsibilities in the event of a divorce. After all, a family office typically has a long-term perspective that encompasses the financial needs of both current and future generations.

Ideally, the ex-spouses and the family office team will find a path forward that best meets their ongoing needs. But the ex-spouses need to start thinking about the way forward and ensure that their advisors aren’t conflicted and represent their best interests. This doesn’t necessarily mean changing your relationships, but potentially switching their coverage teams.

Before making significant decisions, either investment related or around your coverage team, during or after a divorce, be sure to engage an outside independent professional that can provide objective, unbiased advice.