High Net Worth Divorce: Child Support, Property Division, - - PowerPoint PPT Presentation

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High Net Worth Divorce: Child Support, Property Division, Investments, Alimony/Spousal Support

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, DECEMBER 6, 2017

Martin S. Varon, Partner, IAG Forensics & Valuation, Marietta, Ga. Linda J. Watson, Founding Partner, Watson Law, Peoria, IL. Anne Marie Jackson, Principal, Ain & Bank, Washington, D.C.

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High Net Worth Divorce:

* Determining Income, * Establishing Alimony/Child Support, * Property Division Considerations

Linda Watson, Watson Law, Peoria, IL Anne Marie Jackson, Ain & Bank P.C., Washington, D.C. Martin “Marty” Varon, IAG Forensics & Valuation, Marietta, GA

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OUTLINE

• WHAT IS “INCOME”?

– Statutory Definitions – Sources of income – Deduction considerations – A word about Fraud – Tax Forms to be familiar with

• ESTABLISHING SUPPORT

– Statutory Calculations – Establishing Need – Deviations – Add-Ons – Modifications

• DIVIDING UP THE MARITAL ESTATE

– Step One: Identifying the type of asset

• Is it “in” or “out”?

– Step Two: Valuations – Step Three Divide the Estate

• Identifying Tax consequences

– Is it better for my client to have this or that?

• What is “equitable”?

– 50/50? Maybe – Factors to consider – Case Examples

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• I. WHAT IS “INCOME”?
• Examples of Statutory guidelines
• Cash flow income vs. taxable income
• Mathematical calculations vs. spousal “need”
• Base salaries vs. bonus or commission income
• Trust income
• Lifestyle analysis

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Examples of statutory guidelines

– Illinois

• 750 ILCS 5/505 a(3): defines “income” as gross income: income

from all sources

• Only exceptions are for public assistance, which is not an issue in

high net worth cases

– Virginia; 20-108.2

• All income from all sources: salaries, wages, commissions,

royalties, bonuses, dividends, severance pay, pensions, interest, trust income, annuities, capital gains, social security benefits (unless excepted), WC benefits, unemployment insurance benefits, disability insurance benefits, veteran’s benefits, spousal support, rental income, gifts, prizes or awards.

• Subject to “reasonable business expenses for persons with self-

employment, a partnership or a closely held business.

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High Net Worth Divorce: Child Support…

• Determination of Income for High Salaried

Executives ** Salary ** Expense Reimbursement ** Bonuses-indefinite ** Fringe Benefits ** Stock Options/Deferred Compensation

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Where is the income coming from?

• If the entire income is from variable income:

Establish an average

• If only part of the income is from variable

income, break apart the support into two parts: the base salary, and an additional payment [usually a percentage] from any variable income: bonuses, commissions, etc.

– Be SURE to build in safeguards for the obligee to verify the existence and payment of any variable income.

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Where is the income coming from? Cash flow income vs taxable income

• Always get a copy of the employment contract
• Look for bonuses, commissions, paid for expenses,
• If they are an owner: always get a copy of the articles of

incorporation (DBA or S Corp) or organizing document (LLC): verify ownership and % of ownership

• These are filed with the Secretary of State, in most states there

is a searchable SOS web site

• Need to understand the basic types of business entities:
• DBA’s & S Corporations
• LLC’s
• Publically traded companies

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DBA’s & S Corporations

DBA’s, Sole Proprietorships, and S – Corporations: these are business entities that have pass through income, losses, deductions and credits through their shareholders for federal tax purposes. i.e. the gross receipts less deductions and losses (ie taxable income) are assessed at their individual tax rates. NOTE: Reality Check: there is a $300 billion gap in gross reported taxable income each year. A large part of that gap is believed to come from small businesses, particularly S corporations = the most common corporate entity. S Corporations must file a Form 1120S with their tax filings each year. A sole proprietorship must report profits and loss using a Form 1040, Schedule C. (the DBA name is noted on line C). Neither of these types of companies can leave profits in the company or reinvest them in capital assets without also claiming them as income.

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Underreporting of income

• How do we know?
• Common size financial statements
• Industry ratios
• Life Style Analysis

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Determination of Income-Self Employed

• Sole proprietor, Subchapter S shareholder,

Limited Liability Company member, Partner in a partnership

• Salary/Guaranteed Payments
• Ordinary Business Income
• Profits reinvested or distributed

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Determination of Income Self-employed (cont.

• Georgia case-minority owner, minimal

distributions, judge ruled K-1 income (portion

• f ordinary business income) was INCOME

for purposes of child support

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Cash Flow Income vs. Taxable Income

“Reasonable business expenses” Reasonable and necessary for the production of income. Income tax statute authorizing deduction of ordinary and necessary expenses incurred for production of income implies that the expenses must be reasonable in the amount and must bear a reasonable and proximate relation to the production of the business. This does not include expenses that a person would have whether or not he/she owned or ran the business. * Expenses for meals, entertainment, gas, auto repairs, and insurance premiums are not deductible from net income.

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Look Out for:

• Personal expenses buried in computation of ordinary

business income

• Items used for both business and personal reasons (fuel for

auto, cell phone, meals)

• Are profits being reinvested instead of being distributed?

(capital expenditures)

• Determination of recurring sustainable income
• Variation over last few years

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Look out for: (continued)

• Double Dip
• Excess Profits generate value AND income for

possible support

• Is this equitable?
• How is value computed?

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Active Factors

• Evidence?
• Depose key people?
• How much does your spouse know?
• Prior year tax returns, W-2s, K-1s, other owners-do they

tell a different story?

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Child Support

• Georgia-child support worksheet calculator
• Income must be computed
• Separate worksheet for self employed people
• Non cash expenses (depreciation) added back
• Latest year, average?

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No receipts? No deduction

• https://www.irs.gov/businesses/small-businesses-self-

employed/what-kind-of-records-should-i-keep

• Gross Receipts
• Purchases
• Expense receipts (cancelled checks, invoices, etc.)
• Travel, Transportation, Entertainment, and Gift

Expenses

– Elements of the expense must be proven

• Assets
• Employment Taxes

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What if there are no tax returns?

• 1.) Get a court order for the party/parties to file tax returns.

– A. Be sure to employ a CPA – B. Be sure to get deadlines from the court – C. If any of the documentation is out of your client’s control, be sure to have an indemnity clause in the final order: meaning, if it’s wrong, the responsible party is solely liable for any IRS liability and must reimburse the innocent spouse for any costs related to the misrepresentation.

• 2.) Can establish the obligor’s income by establishing their lifestyle.

– Subpoena, subpoena, subpoena. – Become VERY familiar with an accounting program, i.e. quick books – Get to work.

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• II. Establishing Support

What’s the number?

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Statutory Calculations vs. Need

• (In IL) straight mathematical calculation: 30% of [obligor’s]

gross, less 20% [obligee/lesser income] gross, not to exceed 40% of the total

– Again, gross is income from all sources less reasonable and necessary expenses.

• In (VA), while there is not set mathematical formula, there

are guidelines: 28% of the gross income of the spouse with the higher income, and subtract from that 58% of the gross income of the other spouse. If no child, changes to 30% of the higher paid spouse’s income less 50% of the lower paid spouse’s income.

• which do not apply to “high income” cases, i.e. cases which

have a monthly gross income which exceeds $10,000 a month, combined (in VA), over $500,000 combined for IL

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Mathematical calculations do not apply, now what?

* Bring on the windfall arguments: i.e. the award is a number

• f times beyond the needs of the spouse/child.

* Balancing “competing concerns”

• Abuse of discretion standard

What Lifestyle the child would have enjoyed if the parties had not divorced? I.e. a child is not limited to their needs. Consider creating court ordered college trusts if excessive income is not expected to be sustainable

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How much is enough?

• A child is entitled to enjoy the benefits of their

parents’ success, but how much is enough?

• Or how many ponies are enough?
• Document and support how the funds would

be spent – cannot underestimate the value of a well-prepared expense statement!

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How Much is Enough?

• Alternatively, if there are no needs presented,

then there is no need for additional support.

• Does Child Support need to be based on the

child’s “actual needs” necessary to live an appropriate lifestyle or should Child Support be based on the “reasonable needs” of the children in light of their parents’ resources.

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Consider the Add-Ons

• Consider base child support PLUS
• The Payor covers a % or all of various add-on

expenses for the children such as:

• Extracurricular activities, summer camp,

unreimbursed medical expenses, orthodontia, tutoring, private school, cell phones, college prep expenses (testing, applications, visits), car insurance and driving lessons, music lessons and instrument fees, sporting equipment, etc.

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Consider the Add-Ons

• Have both parties be responsible for some %

(proportionate share or a set %)

• Consider a cap on the annual expenditure for

each category

• Recognize what is important to each party
• Tuition – are there resources from extended

family members?

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The Variable Income Issue

• Base child support and a % of any bonus or

additional income in excess of $X

– Perhaps with a cap on the excess income – Or the % decreases at different levels – Or a % of excess income goes into 529 Plans (Same concept can apply to alimony, although perhaps a decreasing % as time goes by)

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Location, location, location

• Laws vary from state to state – sometime

dramatically

• High Net Worth clients may have multiple options

for where to file and those options should be considered.

– Texas v. California – alimony – Walzer, et al., Wealth, Fame and Fortune: Navigating the Treacherous Waters of High Stakes Family Law Litigation, 26 Journal of AAML, 403 (2014) http://aaml.org/sites/default/files/MAT201_4.pdf

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MODIFICATION

Think about modification while you are drafting the Agreement. For alimony, do you want to build in events for modification? Retirement; Cohabitation; Income Reduction to a Defined Level For child support, do you want to exchange Income Information periodically? Emancipation?

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Dividing up the marital estate

In high net worth divorces

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Know your assets

1.) Is it an appreciating asset or a depreciating asset? * House vs. vehicle * investment property vs income producing property 2.) Is there a large tax consequence if you liquidate? And your client will need to liquidate?

• A. Retirement assets
• B. 1031 shelters

3.) Do any of the assets provide your client with significant tax deductions? That your client needs?

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Identify ALL of the Assets

• Intellectual property
• Non-ERISA Executive Compensation Plans

– G. Brown, What the Matrimonial Lawyer Needs to Know About Non-ERISA Plans, Executive Compensation, and Other Related Plans, 26 Journal of AAML, 291 (2014) http://aaml.org/sites/default/files/MAT206_4.pdf

• Art, wine, antiques, collectibles, jewelry
• Tax loss carry forwards
• Review the tax return and make sure all items on

the Return are identified.

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Equitable Division of Assets

• What is equitable/fair?
• 50%/50%?
• Something else?

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Assets That are off the Table For Distribution

• Gifts
• Inheritances
• Owned Before the Marriage
• Impact of Commingling/Transmutation

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Assets that May Be Partially Off the Table

• Business owned before Marriage, Still Owned
• Business Received by Gift or Inheritance before or during

Marriage, Still Owned

• How do we Determine What is “Separate” v. What is

“Marital”

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Assets that May Be Partially Off the Table

• Active v. Passive Growth
• What if Both Active and Passive Growth
• Financial Ratio Analysis
• Industry Publications re: Growth Rates
• Does your company’s experience mirror industry rates?

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Active Factors

• Position in Company
• On Board of Directors or Management
• Job Analysis-day to day operations
• Sales, supervise key people, operations,

financial (CEO, COO, CFO)

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• Dad divorcing second wife
• Daughter (from first marriage) is President
• Three years later, daughter is divorcing, dad

wants to testify on her behalf

Recent Case in Georgia -Appealed

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Case that Unfortunately Settled

• Local insurance agency
• Dad transferred agency to son
• Clients and cases down, commissions up
• Commissions based off insurance premiums

(higher than inflation)

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Considerations for Dividing Marital Property

• Will the financially dependent spouse receive

enough assets that alimony will be unnecessary?

• Hofstein, et al., Equitable Distribution

Involving Large Marital Estates, 26 Journal of AAML 311 (2014) http://aaml.org/sites/default/files/MAT203_3. pdf

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GET TO KNOW A REALLY GOOD CPA!

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Questions

IAG Forensics & Valuation Marty Varon (770) 565-3098 (office) Marty@IAGForensics.com

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