High-value marital estate division is an interesting aspect of our divorce practice. When a divorce involves division of property for high-net-worth individuals, an experienced lawyer is a must. With decades of experience dividing marital estates, we have seen our share of high-value property divisions.
This experience allows us to visualize, organize, and summarize the marital estate relative to the divorce process. In doing so, we maximize our client’s goals and negotiate property division from a position of strength. The divorcing spouses only get one chance to get the property division right.
The Verification Process.
A first-step in this process is the identification and value verification of each asset in the marital estate. Sometimes, this is a simple task like appraising residential real estate. In other cases, valuation is more complex. For example, appraising commercial real estate, or valuing a business, often involves making reasoned assumptions based on the opinion of an expert.
Business valuation depends on the type of business. The valuation of a professional practice differs, for example, from the valuation of a manufacturing company. Formal discovery is key to the right business valuation.
Divorce lawyers frequently retain certified public accountants and licensed commercial realtors in such cases. While this adds to the overall cost of the divorce, it also provides the requisite value verification needed for a rationale and equitable property division. Without such valuations, the lawyers are guessing; they are flying blind with your interests.
Property or Income.
A second step in the process of dividing a high-value marital estate is to separate income from property. Issues such as significant bonuses, retained earnings and non-qualified deferred compensation arise with high-net-worth individuals. These components of the marital estate are treated one way if they are considered income and another way if considered property.
For example, if a business owner or corporate executive consistently receives a significant annual bonus, that bonus can be considered a component of the spouse’s overall income for support considerations. If past bonuses have been retained, either within the company or on deposit in a personal bank account, they will be characterized as property, subject to division.
Business owners have significant control over their own compensation package. They can award a bonus or hold-back such compensation depending on the circumstances of the divorce. The non-participating spouse of such a business owner needs a team of professionals to identify and properly characterize the earning-spouse’s compensation history. An experienced divorce lawyer leads this team.
Key Employee Designation.
Even when a spouse does not own the business, they may be considered a “key employee” for purposes of income and property analysis. A key employee has influence over their own compensation package, including determination of bonuses and access to retained earnings. Also, a key employee is highly-compensated and has significant ownership or decision making authority within the company.
Retained earnings refers to a percentage of the net earnings of the company not used for paying dividends, salaries, or bonuses but rather, used for investment within the company or to retire debt. A key employee involved in a buy-out of the company, for example, can use retained earnings to effectuate the buy-out. The key employee stages payments and often controls the timing. This obviously impacts the divorce process.
Avoiding a “Double-Dip”.
Complications known as “double-dipping” occur when a highly-compensated key employee is being asked to share his or her interest in the company as part of the property division, along with paying significant spousal support. This business owner’s lawyer must take care not to over-obligate the client. Each aspect of the key employee’s relationship to the company [ownership and compensation] must be analyzed separately. While every case is slightly different, we have experience recognizing and avoiding a “double dip”.
The Non-Participating Spouse.
The non-employee or the non-participant spouse in the company also must take special precautions in a divorce. If divorce is imminent, this spouse should seek counsel well in advance of the divorce filing whenever possible. Investigative steps taken prior to filing for divorce assist in the property settlement negotiations. Sometimes, the family circumstances relative to a divorce do not lend themselves to such advance planning. When they do, the non-participating spouse gains the advantage of obtaining significant information about the company’s asset and liability structure. This information is key to negotiating an equitable property settlement up-front, and keeps legal fees under control. As an “outsider” to the company, the non-participating spouse depends on high-quality legal counsel.
Divorce During a Company Buy-Out.
Sometimes, spouses have no control over the timing of their divorce. When divorce hits during a buy-out of a spouse’s company, special considerations arise. The non-participating spouse faces a significant decision. They can be a spoiler in the transaction, or they can collaborate with the buy-out. This is a common challenge with a high-value marital estate division.
When divorce occurs during a buy-out, the participating spouse faces significant cash-flow concerns. These concerns arise from obligations to the seller, the business partners, if any, and to the non-participating spouse. Suddenly, a highly-compensated key employee or business owner faces a shortage of cash to meet these co-occurring obligations. Promissory notes often secure the owner’s business obligations making the owner personally liable for the business payments. The health and profitability of the company is a paramount consideration is such cases.
Many work-arounds exist to address these problems. Solutions, however, require flexibility from both spouses. Until the buy-out is complete, for example, spousal support payments do not begin. If this is not acceptable to the payee spouse, then alimony can be structured in “tiers” to relieve the payor of immediate cash-flow issues. In addition, life insurance on the payor secures spousal support payments. These tools help both spouses.
We Can Help
High-value marital estate division is a challenging aspect of the divorce process. The right divorce lawyer is key to a successful equitable property division. Eliminate unnecessary headaches by scheduling a free consultation with our law firm to discuss your options if you face this situation.