The Enhanced Earnings of Businessmen and Professionals in the Divorce Court
by Elliot D. Samuelson
The financial planner must be conversant with the equitable distribution law in New York that divides marital property according to certain enumerated factors. Unlike a community property state such as California, that mandates an arithmetic computation be made and that all marital property be divided, courts are free to exercise their unfettered discretion, to arrive at a fair and equitable result, and divide property essentially as the court sees fit. However, the New York courts in doing so are obligated to consider each of the enumerated factors contained in domestic relations law §236 B(5)(d) 1 - 13 as set forth below:
- the income and property of each party at the time of marriage, and at the time of the commencement of the action;
- the duration of the marriage and the age and health of both parties;
- the need of a custodial parent to occupy or own the marital residence and to use or own its household effects;
- the loss of inheritance and pension rights upon dissolution of the marriage as of the date of dissolution;
- any award of maintenance under subdivision six of this part;
- any equitable claim to, interest in, or direct or indirect contribution made to the acquisition of such marital property by the party not having title, including joint efforts or expenditures and contributions and services as a spouse, parent, wage earner and homemaker, and to the career or career potential of the other party;
- the liquid or non-liquid character of all marital property;
- the probable future financial circumstances of each party;
- the impossibility or difficulty of evaluating any component asset or any interest in a business, corporation or profession, and the economic desirability of retaining such asset or interest intact and free from any claim or interference by the other party;
- the tax consequences to each party;
- the wasteful dissipation of assets by either spouse;
- any transfer or encumbrance made in contemplation of a matrimonial action
without fair consideration;
- any other factor which the court shall expressly find to be just and proper.
Although enhanced earnings are not contained in the statute as an enumerated factor to consider in dividing marital property, nevertheless a body of law has developed in New York that will value professional license, educational degree, or special skills that has produced enhanced earnings over the recipient's useful employment years. Soon after the first case was decided some 10 years ago, O'Brien v. O'Brien, that valued a medical licence there was a proliferation of litigation that extended the enhanced earnings rule to any exceptional wage earner, who had garnered special skills during marriage that enabled him or her to enjoy exceptional wage earnings. For example, the courts have found that the value of a celebrities good will could be translated into exceptional wage earnings, that produced enhanced earnings. There are many examples of enhanced earnings being attributed to persons with exceptional wage earning abilities. Another example is, the star salesman who might earn two or three times more than the average salesman in his industry, and his special skills acquired during the marriage may be subject to an evaluation that produces his exceptional wage earning abilities. If the salesman earned $300,000 a year and the average salesman in his field but $100,00 and if the salesman acquired his skills in the industry all during marriage that produced these extraordinary earnings, then the court would consider that the salesman had $200,000 in enhanced earnings and if he was 35 years old and had 30 years to go to retirement age, the court would then multiply the unused portion of his career path, (30 years), by $200,000. In this example the enhanced earnings would then be $6,000,000. This sum would be reduced to present value by a discount factor of perhaps three to four percent, leaving enhanced earnings of about $3,750,000.
There is no way a financial planner can possibly consider a client's prospective earnings, income and assets, without realizing that the client could suffer a serious financial diminution of his assets during the divorce process, as would occur in each of the examples discussed above..
Being forewarned is to be forearmed. It would be inappropriate to recommend a financial plan to one of your clients believing that they would have hundreds of thousands of dollars more to possibly invest at the conclusion of their divorce matter. Recent cases that have determined enhanced earnings of litigants have included those of a opera singer, police lieutenant, exceptional stock salesman, as well as those persons holding medical degrees, law degrees, Ph.D.s, and other licenses or degrees such as a series 7 license and even a college BA or BS.
At times it can be most difficult to predict the outcome of any case, but it would be wise for both members of the bar and financial planners to work together as a team each helping the other in their own disciplines. For example, an attorney may be in a position to estimate the amount of exposure to an award by the courts for the enhanced earning capacity of his client. Of course, there is no way to absolutely predict the outcome of a case, but it should be an easier task for the attorney to predict the minimum and maximum amounts of a recovery. Bear in mind that a computation of the enhanced earnings of a particular individual really is based upon an arithmetic calculation or formula as was previously noted. Once the calculation is made it is then up to the court to determine what percentage of the enhanced earnings should rightly be awarded to the other spouse. In marriages of short duration, the percentage may be minimal, and that would include marriages that span perhaps one to three years in duration. In such cases an award of 10 or 15 percent of the enhanced earnings calculation has been meted out in previous court decisions. In a seasoned or mature marriage say those that exceed 15 years in duration, the courts generally award the other spouse 50% of the enhanced earnings calculation. Yet, this too can vary from judge to judge sitting in the matrimonial part of the court within the same county.
Ultimately, the amount of enhanced earnings and the percentage a spouse will receive, will be resolved by an appellate court. If the award is patently unfair it will generate an appeal since appeals from the awards of the supreme court, where all divorce cases in New York are tried, can be made as of right. Likewise, where the award is far too small under the circumstances of the case, the aggrieved party will more than likely take an appeal. At times both parties will appeal from the same order of the court. Until the appellate court rules on the case, there can be no finality, so that it may be important for a financial planner to reserve a sum of money in liquid assets in order to bide the event.
There are other ways that financial planners can also be helpful to the matrimonial attorney who is processing a divorce matter. Certainly where the attorney is representing the unmonied spouse a financial planner can help prepare the net worth statement, a copy of which is attached, which is required in every contested matrimonial case. In reviewing this form, it can be seen that it is divided into four categories: 1) budget which should be expressed generally in weekly amounts; 2) income which should set forth income from all sources whether employment or investment income; 3) assets; and 4) liabilities. Because of the tedious nature of the form and its requirement for specificity, attorneys would welcome the input and assistance of a financial planner, especially in the budget areas.
It is most important to a divorce attorney to apply for pendente lite or temporary support during the pendency of a divorce action. The most important document submitted upon such a motion is the net worth statement, and often it forms the predicate for the court's award. The budget prepared should be appropriate for the client's pre-separation standard of living. For example, in a marriage of great wealth, there should be ample sums provided for vacations, luxuries, and the other trappings of a marriage between high income and net worth couples. Conversely, in marriages where there is lesser income and assets, and a lesser standard of living, requests for budgetary amounts that far exceed the pre-separation standard of living, will be ignored, and far worse, regarded as an attempt to "pull the wool over the eyes of the court".
In many instances a financial planner may be a better choice for a divorce lawyer to work with than an accountant. A financial planner must understand that in marketing their services to matrimonial attorneys, they should proffer the benefits and the cost savings that could possibly be involved.
The effective handling of a contested divorce case, involves assembling of a litigation team, which should always include forensic accountant, estate planner and a skilled matrimonial attorney. A client will be most receptive to the assembling of such a litigation team when a recognized the benefits of input from these varying disciplines.
It is important that financial planners become conversant with many of the valuation formulas that are used to valuate professional practice of closely held corporations as well as stock options, deferred compensation plans, and real estate and other assets. Only then can a client be better served, and ultimately be counseled in the investment of their money after the case is concluded and an equitable distribution made of marital property.