Double Dipping in a Divorce
By Jennifer Riek, Financial Advisor, Marcum Financial Services
When a couple is contemplating divorce, very often there are many complex issues they must become familiar with such as equitable distribution, child support, alimony and tax implications. In a case where the divorcing couple owns a business, this is often the biggest and most controversial marital asset causing additional valuation and distribution issues to consider.
“Double Dipping” is a term that refers to a situation in which one spouse receives double payment for a single asset. This can also be referred to as “double counting” and is often applied to pension funds but can also apply to business interests as well. Generally speaking, the courts do not allow a spouse to receive both an equitable distribution of pension assets and alimony based on that same pension income. However, this is less clear when it is applied to business interests. Depending on the state in which the divorcing spouses live, some or all of the company’s goodwill may be excluded from the marital estate when dividing assets but only if the nonmonied spouse receives alimony.
Steneken vs. Steneken is a high profile New Jersey Supreme Court case that is now relevant to divorce cases everywhere in the United States. In this case, the husband was unsuccessful in proving that his business’s future income was double counted by:
- increasing his business’s value to reflect normal salary adjustments and
- computing alimony based on his above-market compensation.
In this decision, the court distinguished between the structural purpose of alimony (to provide the nonmonied spouse with sufficient income to maintain lifestyle) and equitable distributions (fair division of assets). It was decided that the alimony would be based on the husbands actual take home pay and not on a lesser amount based on the husbands replacement compensation. This would allow the wife to maintain her marital lifestyle.
Of utmost importance to making an equitable distribution is an assets fair market value. Making necessary normalization adjustments is customary when attempting to value the controlling interest in a private business. Therefore, the income stream of a company might be adjusted for expenses and revenues that are nonrecurring, recorded at, above or below market value.
Possible factors that will affect how a business interest is divided are:
- How long the parties were married
- If and how each spouse contributed to the business throughout the course of the marriage
- If the business’s value includes business or personal goodwill
- If normalization adjustments were made for excess owner compensation and perks
- When the business interest was acquired
- If the business were to be sold – would it be subject to significant capital gains taxes
- If the monied spouse’s compensation and marital lifestyle adversely impacts the value of the business due to past investment opportunities and neglected capital improvements
- Business valuation discounts (ie: lack of marketability or key person discounts, lack of control) affect the percentage that the nonmonied spouse receives.
The lesson learned from this example is that replacement compensation is not prohibited from use by either spouse when computing business valuations and alimony computations. The Steneken case demonstrates that the courts usually refrain from imposing rigid rules preventing double dipping in cases that involve closely held businesses. They are much more likely to impose a flexible approach to handling the overlap between alimony and equitable distributions.
The information contained in this article does not purport to be a complete description of the developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Riek and not necessarily those of RJFS or Raymond James.
Please note, changes in laws may occur at any time and could have a substantial impact upon each person’s situations. While we are familiar with the provisions of the issues presented herein; as financial advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. If you have any questions pertaining to this article, please feel free to call Jennifer at 631-414-4486 or by e-mail at [email protected]