There’s a lot of buzz in California about carried interest these days. You’d think it was a new thing.
Carried interest has actually been around for centuries as a means of monetizing risk. In Alexandre Dumas’ 19th century novel, The Count of Monte Cristo, shipping merchants faced multiple forms of risk due to weather, shipwreck, disease, politics, even pirates, and weren’t paid in full until the ship’s safe return. The term carry actually goes back to maritime compensation in the 16th century when a captain could only claim a percentage of the value of the cargo which he safely carried back.
In 21st century California, the buzz is largely about carried interest in divorce. Amy Laughlin, Founder and Partner of Laughlin Legal Divorce and Family Law Group in Silicon Valley, is uniquely qualified to weigh in on some of the most common questions asked about carried interest in divorce. As a highly regarded UHNW divorce attorney in Silicon Valley, carried interest is considered on a daily basis. Here are excerpts from a recent conversation on the topic with Ms. Laughlin.
Q Why is carried interest and divorce such a hot topic right now?
Carried interest is a uniquely complex and controversial aspect of UHNW divorce, and there are a number of reasons it’s a hot topic at the moment.
Firstly, it’s about geography because in California, capital gains, which includes carried interest, are not taxed at a reduced tax rate as in some states. California generally taxes capital gains at ordinary income tax rates.
Secondly, carried interest is speculative, not liquid. It’s based on predictions of future performance, future profits. And there is no single formula or method of forensic accounting that everyone agrees with for determining those figures and values. Or determining how they’ll be taxed. As a result, carry is often challenged and litigated meaning divorces involving carried interest can take significantly longer to resolve.
Thirdly, because those future events – including when the interest will vest and when it will be distributed – often aren’t even on the calendar yet, these cases are prone to delays and extensions. It’s not uncommon for a case to take years to resolve.
Finally, the rise of AI in UHNW divorces is simplifying in some ways and increasing complexity in others. Though AI is efficient and can analyze scores of documents in no time, the accuracy, legitimacy, and true value of its conclusions is subject to debate.
Q In a layperson’s terms, explain what carried interest in divorce is about. And what’s a common case about?
In simple terms, carried interest is a partner’s share of profits received from an investment fund after the fund’s investors have received their return.
In California divorce courts, a common carry dispute is based on a claim made by the spouse who earns the carried interest that post-separation work should be deemed separate property. The other spouse generally argues that the carried interest was earned, at least in part, during the marriage and therefore remains community property.
Q What makes a carried interest divorce an especially high stakes divorce?
Because it can be so determinative of a couple’s future wealth. Venture capital firms, private equity firms and hedge funds attract people who invest despite tremendous risk because of the possibility of tremendous gain. At the time of their divorce, they may not have much. But their future wealth could be in the neighborhood of $10 million to $100 million. Very consequential.
Q Is carried interest marital property?
Whether carried interest vests during marriage is not, by itself, the legal test. Carried interest may be community property, separate property, or a combination of both depending on the governing agreements, when it was earned, and the extent to which it compensates services performed during marriage versus after separation.
Q How do I know if I should be concerned about division of carried interest in divorce?
If carried interest is an asset in your marriage, you should be concerned. And you should be looking for a divorce attorney who has experience and expertise in this area, and has access to experts. And by the way, experts don’t work with just anyone. Some are very snooty. We work with only the most experienced experts. We work with the best.
Q What is double-dipping and does it affect how assets are divided in divorce?
This refers to when an asset is counted twice – first as an asset that can be divided during the asset division, and second as income that determines spousal support. It’s receiving money from the same asset twice.
Q Carried interest is one thing, but what about my company? Who decides what the valuation of assets in divorce is?
Depending upon the complexity of the company, a forensic accountant may be called in to handle the valuation. But the ultimate determination is either agreed upon by the couple or negotiated through their attorneys. And failing at that, determined by a judge.
Q How is carried interest handled in division of assets in divorce?
The simple answer to this question is that California law presumes property acquired during marriage is community property, but that presumption can become much more complicated when compensation is earned over time or depends upon future services or performance. The court will determine what portion of the carried interest is community property and what portion is separate property. Only the community property portion is generally divided equally between the spouses.
Q Does it vary from county to county regarding how courts divide carried interest?
California community property law is generally applied consistently throughout the state, although outcomes may differ depending upon the specific facts and evidence presented in each case.
Q Does it matter who handles your carried interest divorce case?
Absolutely. Laughlin Legal Divorce & Family Law Group is a collection of some of the most skilled UHNW divorce attorneys and mediators in Silicon Valley. Laughlin Legal is trusted throughout California for their ability to skillfully help divorcing parties achieve a better outcome.
If you or someone you love is headed for a divorce, learn more about how the divorce services we offer can best represent you and your values. Call us now at 650.343.3486 to schedule a consultation with a Laughlin Legal divorce attorney. If you’d prefer, you can email us to set up your appointment. If we miss your call, we will respond promptly and call you back as soon as possible.
Laughlin Legal Family Law Group
You’ve never been better protected.