At the start of this year, I don’t think that anyone could have imagined that we would all be quarantined and isolated with our spouses/partners, children and in some cases, and/or our parents, for months on end. The stress associated with COVID-19 and the resulting economic downturn has pushed many relationships that may have already been strained to the breaking point. Divorce during the pandemic seems to be on the rise for many couples who have reached this breaking point.
A recent article in the New York Post noted that “the number of people looking for divorces was 34% higher from March through June compared to 2019.”
That’s an interesting statistic, and I think the key point is that it refers to couples “looking to divorce,” and not to those actually divorcing. The fact is, during a pandemic and economic downturn, as much as a couple may want to split, doing so is much more difficult for both practical and financial reasons.
What Are the Financial Impacts of Divorce During the Pandemic?
Practically every aspect of getting a divorce has become much more challenging. While there is a lot to unpack, for this article we’ll focus on the financial implications facing divorcing couples as a result of the pandemic and its devastating impact on the economy.
Dividing marital assets has proven challenging in the best of economies, particularly when real estate and businesses are involved. During the pandemic, the complexity has increased exponentially. For instance, under normal conditions when a divorcing spouse is granted a piece of real estate such as an office or apartment building, an ongoing income stream from the property could be expected to provide ample income towards spousal support.
Today, as tenants are unable to pay rent or even go to the office, an individual’s potential for net income to live on can be much less than anticipated. If that property happens to be a multi-family apartment building in California (where I happen to live) matters have recently become even more complicated.
Loss of Income For Divorced or Divorcing Couples
At the beginning of September, Governor Newsom signed Assembly Bill 3088 into law prohibiting landlords from evicting anyone before February 1, 2021 – so long as they pay at least 25% of their rent. I doubt Governor Newsom had divorcing couples in mind when signing this bill into law. Nevertheless, a reduction of net operating income in such a dramatic way could translate into a devastating loss of income for divorced or divorcing couples. It’s a situation that the attorneys and forensic accountants with whom I consult on complex marital estates will have to deal with in the coming months, as we take calls from our clients who accepted real estate assets as part of a divorce settlement.
In short, there are no simple answers, and the solutions may create additional complexities. What does this mean for the prospect of creating a financial settlement during such times? People who live in high tax states, such as California, are now facing higher cost of living increases.
Whether we see Biden or Trump in the White House, virtually every level of government is experiencing massive deficits. An increase in corporate and individual tax rates are a virtual certainty. California already has two such ballot measures to be voted on in the fall – Proposition 15, which would increase property taxes on certain commercial real estate, and ballot initiative 10-0023, which would increase the individual personal income rate from approximately 13.3% to 15.3% on those earning over $250,000 of annual income. Moreover, as businesses are taxed more, the cost will be passed along to the consumer as much as possible. This will lead to a higher cost of goods and services. The cost of living increase will likely hit the upper-middle- middle to lower income classes particularly hard.
How Do Individuals Address These Headwinds?
One way is to be prepared to re-think and possibly re-adjust historical financial models to account for this likely scenario. This means looking deeper into the calculus of valuing hard assets such as businesses and real estate to ensure new variables and factors are being considered.
In the past, it was common for a spouse who owns a business to attempt to hide the true value of the company’s net worth. This was challenging to determine before the pandemic – and now made much more so. For instance, industries that rely on interaction with the public such as hospitality, restaurants, salons, and any kind of walk-in business have been hit hard. Most businesses took in money from the SBA, and that debt now appears on their balance sheets. However, the devaluation of the business due to an increase in debt may not actually be appropriate in the intermediate or long term. By way of example, restaurants are evolving. Some are even doing better switching to take out operations or renting out their kitchens to chefs for the preparation of mass meal production.
Over the next few years, it is going to become increasingly important for divorce attorneys and advisors to develop different approaches and methodologies for uncovering the real value of a business, hard asset, and real estate. Traditional approaches have been failing, and now may not be enough. New expertise may need to be brought to the table to determine value so that a fair and equitable resolution may be reached in the division of marital assets and spousal support obligations can be calculated fairly.
Brian Weiner, Co-Founder of Audent Capital Partners, is a widely respected global financial expert often called upon by divorce attorneys and forensic accountants to consult on matters relating to complex marital estates. He is also Managing Partner of Audent Family Wealth Advisors. www.audentfwa.com