Can I claim a share of husband’s future earnings after we divorce?
I’m getting divorced. My husband works in private equity and his firm has just finished raising its first fund, so his current income is relatively modest by industry standards.
However, if the fund performs well, he is likely to make an enormous amount of money through “carried interest”, probably 10 years from now. He wants my financial settlement to be based on what he currently earns but I don’t feel this is fair. I took a long career break to raise our children and to allow him to focus on raising the new fund. My earning potential has suffered as a result. Will I be able to seek a share of this money further down the line?
Katie O’Callaghan, partner in the family practice at law firm Boodle Hatfield, says it is common for people to worry that money that is not yet in their spouse’s back pocket might not be taken into account if they divorce. With carried interest in particular, it may be a complete unknown at the time of the divorce whether the private equity fund will be a success.
Thankfully, the English Family Court not only looks at what exists at the time of marital breakdown, such as property, cash and investments, but also at any potential financial resources which may be available in the future. A husband’s carried interest may not be available for many years to come, but that does not alter the fact that he would be expected to disclose full details in relation to that interest as part of the divorce process.
If the information and documents provided are not sufficiently clear, the other spouse is entitled to ask further questions and to request further evidence. Even though the carried interest does not yet exist as a tangible asset, the court would most likely treat all or part of it as part of the family’s wealth to be divided, given that much of the effort required to bring success to the fund was undertaken by the husband during the marriage.
It is important for non-working spouses to be aware that looking after the home, raising children and supporting their spouse’s work are all considered to be entirely equal to any financial contribution that their spouse has made by earning an income and creating potential carried interest entitlements. They should therefore be reassured that the starting point on any divorce is that they have made an equal contribution to the marriage and are therefore fully entitled to bring financial claims against their ex.
It is most likely that the court will seek to divide any carried interest entitlement as and when it is received, by allocating a specific percentage to each spouse. That percentage would depend on how advanced the fund was at the point of separation.
There may be an argument on behalf of the husband to say that the fund was in its infancy at the point that the marriage broke down and therefore he has years of blood, sweat and tears left after the separation to bring the venture to fruition. Even if the wife does not achieve an entitlement to half, the lucrative nature of many of these funds means that a percentage share of future carried interest may well result in a substantial sum of money becoming available to her in the future.
This article was first published in The Financial Times on 3rd November 2021.