Divorce proceedings can be complex when representing clients of means. When the client is a professional, executive, business owner or has acquired assets through some other endeavor, they often present with a wide array of financial and fixed assets, along with compensation structures that vary from typical W-2 income to varied and complex forms of income and benefits. An understanding and awareness of the myriad issues to address is key to achieving a favorable resolution of the matter through settlement or litigation.
Marital Assets
Marital assets in complex estates/high-net-worth matters can come from a variety of sources. As a divorce professional, it is important to identify the marital estate's assets and work with the right companion professionals, such as forensic accountants and valuation experts, to get an accurate value and financial picture of the marital and non-marital interest.
If an asset of the marriage is an ownership interest in a business entity, a valuation of that asset will be necessary. And, if a party to divorce proceedings has a business entity interest that is not an asset of the marriage subject to division in divorce, the value of that interest may be relevant to the percentage division of marital assets, but incurring the cost of valuation may not be feasible.
Valuation of Business
Valuation of business interests typically requires hiring a business valuation expert, sometimes called a forensic accountant. To conduct the valuation, the expert will need access to documentation, including tax returns, accounting records, and other related financial information of the business.
In addition to offering an opinion on the value of the business, valuation experts assist the divorce attorney in crafting requests for the production of documents and questions for depositions. They may also participate in settlement conferences and testify in court as to value, if necessary. Valuation experts typically apply one of the following methodologies: Asset-based value or book value; Income-based approach, which focuses on the future gain; or Market-value approach, which considers the sale of similar businesses as the cornerstone for this valuation technique. While having a working knowledge of valuation is helpful in advising your clients, working with a valuation professional will provide you with the expert litigation/negotiation support needed to yield the best result for your client.
It is not unusual for complex estates to include a family business. A divorce involving a family business is often charged with emotion and concern from the business-owner family side of the proceedings. The discovery process is intrusive and may require sharing sensitive and confidential information about business practices, including trade secrets and customer lists. A confidentiality agreement can be an effective tool to address some of the concerns.
If the family business interest was acquired during marriage, it may be a marital asset subject to valuation and division in divorce. However, a family business may not be marital, even if acquired during marriage. Typically, non-marital business assets include those obtained through inheritance or a gift from a third party.
Although not the role of divorce counsel, it is important that clients with family businesses understand that estate and business planning for owners of business entities should include consideration of the important distinction between assets purchased by the next generation, which may include their married sons and daughters, and those that are gifted to them. Structuring the transfer of family business interests to the younger generation as a purchase to provide an incentive may have unintended consequences in the inclusion of the marital estate in the event of divorce.
Sources of Income
Affluent couples in divorce proceedings often derive their income from multiple sources, including employment, trusts, business ownership interests, investments, and other forms of both passive and active income. In some cases, the client is an executive with a complex compensation structure: Senior executive compensation takes many forms, including salary, bonuses, and long-term and short-term incentives, such as stock options, restricted stock units, and deferred compensation, in addition to retirement asset contributions.
In divorce, executive compensation is often a hybrid, considered either an asset of the marriage subject to division in divorce or income of the executive included for purposes of determining support obligations. Attorneys representing executives focus on avoiding the “double dip,” where the component of compensation is both included as an asset subject to division in divorce and income available to the executive for support purposes. This issue often arises with bonuses paid as a lump sum. Counsel representing the other party will want the bonus divided as a marital asset and included as income available for support. Where there is a support obligation, however, this approach prejudices the executive support obligor and can leave that party with insufficient income to meet the support obligation, at least in the short term.
Executive compensation assets may not be transferable, which complicates the division of the asset and results in the entanglement of the parties. The executive may be required to act at the direction of the other party to cash in the assets to provide net proceeds while withholding sufficient funds to satisfy the tax obligation on the income the executive will incur.
As a result, a practitioner must always be cognizant of the tax impacts related to the compensation and assets of a high-net-worth client. The best place to start is to work with a tax advisor to develop an understanding of the taxable nature of the assets and income in a particular matter. It is good practice to have tax accountants and financial advisors available to assist you in order to educate both you and your client as you navigate the waters of property division and support. A knowledgeable advisor can assist you not only in spotting potential tax issues but also help you craft discovery, provide litigation support and assist in developing a settlement agreement that minimizes the tax impact to your client or, at the very least, considers the potential taxable events and distributes them equitably between the parties.
The dependent spouse in a high-net-worth/complex marital estate frequently is dependent not just from a financial perspective, but also from the perspective of their knowledge of the composition of the marital estate. As this spouse strikes out on their own, it is advisable that they partner with a knowledgeable and reputable financial advisor. Similar to the tax advisor, this advisor can analyze the marital estate and determine the best mix of assets to assign to the dependent spouse, which they can manage to meet their financial needs post-divorce.
One of the most important pieces of information a dependent spouse needs is their cash flow and from where their income may derive post-divorce. Often, the dependent spouse did not work during the parties' marriage or may have limited work history. As a result, they will likely be relying largely on the assets they receive from the property division and support from their former spouse to meet their income needs in the future. The financial advisor can assist in presenting the matter to the court by providing information on various property division scenarios that will best benefit your client.
"This article originally appeared in the Best Lawyers Family Law Legal Guide and has been republished with permission on December 18, 2023."
