In recent years there has been an evolving literature devoted to income and wealth disparities between the “top tier” of Americans and what is often termed “the rest of us.” The data seem fairly clear. Whether this disparity merits attention through tax or other policy approaches is beyond the scope of a divorce blog. But, in the divorce world we are seeing the emergence of a new class of clients; the wealthy poor.

            Who are these people? Typically, they are between 40 and 60 years of age. They have parents who are 65 and older who have done very well in a financial sense. More often than not,  the parents have operated successful family held businesses which produce immense income. The children (those 40-60) have often worked in the family businesses and are often shareholders or members/partners in the business. But the elder generation maintains a tight grip on when and how those profits are distributed; sometimes for reasons more related to “control” than munificence.

            The circumstances are as varied as the families involved. Years ago I worked on prenuptial agreements for a family that had begun land development businesses in the 1960s and profited handsomely from suburban development. The children of the founders all worked in the business and were getting annual gifts of shares in the business. When I prepared the financial disclosures I was struck by how modestly the children were paid; in some cases well below what would have been a market rate. Each year, they received K-1s reflecting hundreds of thousands of dollars in profits for their ownership interests. But their distributions of profits never exceeded a third of their reported profits because their father distributed only enough cash to pay the income taxes due on the income. The balance was held by the business for “reinvestment.”  In most cases, that withholding was plowed back into new projects to grow the business. But, we have also seen cases where distributions were withheld because the patriarch of the family felt the children didn’t “need” the money even though it was technically the money of the children. Most closely held businesses have operating agreements that confer to the managing partner the power to decide what profits actually get paid out.

            Unfortunately, the “control” often does not end there. Another wrinkle is when the younger generation wants a house or some luxury like a pool or a boat. In his discretion the 65+ patriarch offers or agrees to advance cash from the business to secure this family need, but often with strings attached. The house or boat will be acquired by the business or the business will hold the mortgage. The 40-60 year old “children” are told not to worry, the business will “take care” of the need. But it means that there is no asset or that it comes highly leveraged with debt. Another concern is the matter of retirement. The parents tell the child and their spouse that retirement savings aren’t really necessary because when the parents die “There will be plenty of money” from the family business or the parent’s estate.

            So, as lawyers we are seeing a 40-60 year old prospective client. He or she has a spouse who comes from “family money.” There is a beautiful house but it is owned by a corporation or the corporation holds the mortgage. There are nice cars and/or private school educations. But they are paid by the business or from accounts the elders have created for the children. There is no significant retirement because of that expected inheritance or the eventual sale of the family business. It can even reach the level where your prospective client has no cash in the Louis Vuitton purse or wallet; only a bevy of company credit cards.

            These are true “bubble clients.”  They are living well but inside a bubble of wealth over which they have very little control. Often when we ask about the issues in the marriage, they turn on the control exercised by the elder generation. Every decision of consequence is subject to control by the wealthy parents. In many cases, the spouse who comes from the wealthy family feels powerless to push back with this interference out of fear of being disinherited or fired.

            Truth be told, there is not a lot the divorce attorney can do. The spouse with the rich family owns very little. And everything the couple does own has come as a gift or an indulgence. Often there are no savings or retirement accounts because of the expectations of a trust or an inheritance. But rarely does the estate plan of the wealthy parents make any bequest or allowance for a son or daughter “in law.” And the inheritance itself, if given to the child descendant is non-marital property and not subject to distribution in divorce. You can be married for 20 or more years and leave the marriage with nothing because there is nothing to get until the elder generation dies; a prospect that could be decades away.

            When counseling younger couples about to marry with a prenuptial agreement we tell the non monied future spouses that they to protect their own financial future. Unfortunately, many couples marry trusting that everything will turn out all right when the family business sells or the elder generation dies. They live in bubbles that may include mansions, shore homes, fancy cars and private schools. But their balance sheet of assets and liabilities is overwhelmed by one spouse’s interest in a business that is illiquid. A spouse’s minority interest in his parent’s business could be worth millions but who will pay that money to own a minority interest controlled by your in-laws.

            If these facts sound like your marriage the law is not your friend. There is some federal tax law indicating that where parents create gift interests for their children but then act as if no gift was made (no voting power of consequence, profit distributions withheld) the gift may be subject to a challenge. Alas, even if that argument succeeds you have foiled a well planned estate plan for your in-laws but also removed property from your spouse’s asset column. If these facts sound like your son’s or daughter’s or friend’s marriage where they are the non monied spouse living in the “bubble” it would be wise to suggest they think about planning their future in the event there is a divorce.