If money was a person, how would you describe your relationship? Is friendly, or marked with tension and anxiety? In family law, we deal with that connection constantly, as we discuss alimony, child support, equitable distribution of assets and debts. Every family has its own method of managing assets, debts, expenses. When spouses divorce, it frequently comes to light that they had dramatically different ideas about money. Money might have caused strife, even if there was plenty to go around. Discussions about dividing assets and debts, and making appropriate arrangements for the support of the whole family, forces husbands and wives, mothers and fathers, to consider how they have acquired, spent and saved their money, and how they think they should be entitled to spend or save it in the future.
Educating each client about economic rights and responsibilities in a family law case takes time and careful attention to personal financial details. When one party owns a business, the details matter a great deal because it is not always simple to determine the value of that business, or the full economic benefit that the family unit obtained from the business income. When family wealth passes between generations, perhaps both spouses do not have the same claims to those funds when dividing marital assets.
Generally, all assets and liabilities acquired during the marriage can be divided as part of the divorce process. Important exceptions include inheritances and gifts received by one party from someone other than the spouse. Businesses owned or operated during the marriage, however, are (at least partially) joint assets regardless of which spouse is actually named as an owner or worked at the business. This frequently baffles the business owner, whether she is a professional, an entrepreneur, a franchise owner or self-employed in any capacity. We often hear an objection that the business does not have value, because “without me” it is “worthless.” Business owners often produce an income tax return as proof of his/her income, usually without realizing that in Family Court we look far beyond the first-page declaration of “adjusted gross income” when the taxpayer is self-employed.
Lawyers quickly learn about each client’s perspective, and each business owner’s relationship with money. We use that starting point to teach the client about how the divorce court views businesses and business income.
Sometimes, the business owner correctly asserts that his/her operation lacks any value independent of personal efforts and the revenue generated by those efforts. More likely, from the perspective of the divorce court, the business operation has a value that someone else might pay to acquire, based upon the market value of that business (e.g. a franchise), the value of the future income stream (e.g. a professional services company like a law firm or medical practice) or the value of the assets held by the business (e.g. a real estate holding company). A profitable or asset-rich business probably has a value that can be calculated by a valuation expert and that value becomes another asset on the marital balance sheet. How to divide that value, or compensate the non-titled / non-owner spouse for his/her share of the value, is a topic for a future blog.
For anyone who requests, or who might have to pay, alimony or child support, we total income “from all sources”. There can be a drastic but legitimate difference between the amount of a business owner’s income that is taxable and the amount of total income that the court will consider for purposes of alimony and child support. For example, business owners frequently and reasonably deduct automobile, cell phone, some meals / entertainment paid through the business. To the extent that these payments defray personal costs, the value of the benefit to the business owner can be added into taxable income when calculating support payments. More technically, some perfectly acceptable tax deductions, like depreciation on assets, do not actually reduce a business owner’s cash flow, and might also be added into taxable income. The complexity increases if there are questions of whether all receipts were actually reported to the taxation authorities.
Earning, spending and sharing money can be complicated. If you own your own business, and have questions about how it will be discussed in your divorce, alimony or child support case, contact the family law team at Cohn Lifland Pearlman Herrmann & Knopf, LLP: (201) 845-9600.