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INSIGHT: More Money, More Problems—Cryptoassets and Art in Divorce

Feb. 27, 2019, 9:01 AM

Divorce lawyers to high net worth clients must determine and understand their clients’ assets, including the nuances associated with those assets. Two asset types that can be underestimated in their complexity in divorce are digital assets and art.

It is essential that lawyers who represent parties with such assets understand their intricacies as well as demonstrate an ability to identify their associated issues and risks.

Cryptoassets Challenges

Digital currencies, or cryptocurrencies, were first successfully introduced in 2009 with the emergence of Bitcoin; there are now thousands of other cryptocurrencies, most notably Ethereum, XRP (Ripple) and Litecoin. Cryptoassets pose a challenge in divorce because they can be more easily hidden or undisclosed, sometimes difficult to value and continuously evolving given their recent introduction.

Determining the identity of a cryptocurrency holder can be challenging, as there are various levels of anonymity, although this is beginning to change with new regulations.

Each cryptocurrency owner has a public key, akin to a bank account number, and a private key, similar to a PIN code, enabling him or her to use or transfer the cryptocurrency. Lose the private key and the asset is forever gone, as shown with the death of Gerald Cotten.

Cryptocurrencies are transacted on the blockchain, which allows for owners to exchange cryptocurrency directly with one another. Therefore, the non-titled spouse may have no way of knowing that his or her spouse owns cryptoassets or exchanged cryptoassets for another asset without the titled spouse specifically disclosing it. The potential for anonymity and lack of third party involvement undermines the power of subpoenas or injunctions, common tools associated with uncovering hidden or undisclosed assets.

If a party has not disclosed a cryptoasset as he or she is required to do in a divorce proceeding, it is important to consider whether there is reason to believe such assets exist.

Financial Forensic Expert

Is your client’s spouse tech savvy? Did he or she ever discuss trading, selling or buying cryptoassets or express an interest in such assets? A financial forensic expert can review the parties’ financial records for evidence of transactions involving cryptocurrency exchanges, such as Coinbase, Kraken, Polinex, Bittrex or Gemini.

The non-titled spouse should also search the parties’ residences for any documents referencing cryptocurrency or with strings of alphanumeric characters written on them, possibly a private or public key, as well as for any external hard-drives, flash drives or Cryptosteel, where crypto wallets and/or keys may be stored “offline.”

A digital forensic expert, if given access properly and legally, could also review the titled spouse’s email or messaging accounts, smartphones, tablets or computers for evidence of cryptocurrency transactions or private or public keys. It is important that throughout discovery, the private key remains protected and confidential to avoid any funds being inadvertently misappropriated.

Although regulators have issued initial guidance on cryptocurrencies, investors hope for more clarity. While sometimes simple, valuing cryptoassets can also be challenging for divorce purposes, as the value of some cryptoassets may be speculative and subject to massive fluctuations.

Given such speculation and volatility, assigning a reliable value to cryptoassets can be difficult. Without an agreed upon or reliable valuation, an in-kind distribution may be more appropriate to ensure an equitable result.

Artwork: Identifying the Collection

While collecting art is not “new,” like cryptocurrency, its increased commonality as a marital asset certainly is. Thanks in part to social media, pop art, celebrity culture and the branding efforts of artists, there has been a rise in art collecting beyond traditional, large-scale collectors. Its financial utility has grown such that you can now partially invest in a Warhol painting with bitcoin or secure a bank loan with your art collection.

Lawyers and their clients need to be fluent in understanding the unique challenges associated with identifying, classifying, valuing and distributing art. If one of the parties is the creator of the artwork, these tasks will be even more complex and far more contentious.

Identifying the “universe” of art owned by a couple is the first task and often the most challenging. If the parties do not have an inventory of their collection or a complete and detailed insurance rider, an inventory must be created.

If the collection is vast, an expert can be retained to help create an inventory. The expert will need to view the entire collection, which likely includes inspecting the parties’ residences and storage facilities as well as those pieces which may be on consignment, exhibition or held by others, such as their children.

Critical Documents

Critical documents to help create the inventory include: art transportation records, insurance records, exhibition details (if any), correspondence with galleries or dealers as well as the records from any art storage facility relating to all persons who accessed the storage units as well as the movement of the pieces. It is important to cross-reference these records for any inconsistencies, as that may indicate missing art.

Once the universe of artwork has been identified, the works must be classified as marital or non-marital, generally by the date of purchase, unless there is a prenuptial or postnuptial agreement with specific guidance. If marital funds were used to store, transport, maintain or insure non-marital works, the non-titled spouse may be entitled to a credit for a portion of any marital funds used for such expenses.

If the parties cannot agree to a division on their own, each piece must be individually appraised. It is helpful, but often difficult, for parties to agree upon a neutral art expert for this. The parties will also need to agree upon the appropriate date of valuation as well as whether the valuation will be pure fair market value or if a blockage discount will be applied.

Once the works are appraised, the parties need to decide which distribution method suits them best: a buyout, sale or in-kind distribution.

Although rare, some parties create shared custody arrangements for certain works, whereby the works alternate between their homes, with the last surviving spouse retaining the works until death at which time the works pass to the children.

Under a buyout, the parties should consider in the buyout price the carrying costs associated with the art until the buyout (e.g., insurance, storage) and the prospective costs which would otherwise be associated with a sale, such as taxes or dealer/gallery commissions, which can reach up to 50 percent. If the works are being sold, the timing of any such sales should avoid market saturation. If the works are being distributed in-kind, a detailed selection mechanism needs to be agreed upon in advance.

Author Information

Judith Poller co-chairs Pryor Cashman’s Family Law Group and is one of New York City’s most prominent matrimonial attorneys. With more than 25 years of experience practicing exclusively in family law, she represents high net worth individuals, executives, entrepreneurs, celebrities and their spouses. In 2018, she was named a top “Hollywood Troubleshooter” by The Hollywood Reporter for her work in divorce law.

Paul Fotovat is an associate in Pryor Cashman’s Family Law Group, where he represents individuals in prenuptial and postnuptial agreements, custody and support matters, divorce litigation and settlement negotiations. Fotovat has been named a Super Lawyers–New York Metro “Rising Star” each year since 2015.