In a high-asset divorce, there are various complicated issues that may come up as you go through the divorce process. Whether you or your spouse owns a business, has a high net worth, or owns numerous assets, there are steps you can take to protect your financial future. Sonya K. Zeigler, a Toms River divorce lawyer, discusses what you need to know about the divorce process and dividing property when complex assets are involved, including what’s considered separate property and marital property and the pitfalls you need to to watch out for.
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Hosted by: Diana Shepherd, Editorial Director, Divorce Magazine
Guest speaker: Sonya K. Zeigler, Family Lawyer
Sonya K. Zeigler, a family lawyer based in Toms River, New Jersey, specializes in financially complex divorces that involve property division, business valuation, and cash-flow determination and spousal support. With a Master of Laws in taxation and having previously worked as a tax attorney for the world’s largest professional services firm, Sonya has the skills and experience to resolve even the most complex cases.
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Read the Transcript of this Podcast Below.
Will private business and financial records become public records during a divorce in New Jersey?
Typically, private business records and private financial documents would not become public records during the course of the divorce. The documents that would be supplied by a business owner to someone who is trying to ascertain the value of the businesses or the cash flow of the titled owner would be exchanged as part of what we call the discovery process during divorce litigation in New Jersey.
However, those documents would not be filed with the court to the extent that they would be ultimately recorded in Trenton. In a lot of our cases, especially with people that have a relatively high profile, we enter into what are called confidentiality agreements or protective orders. We as the attorneys and/or the accounting professionals create a document that limits who is able to review and/or obtain copies of the information that we identify in that agreement. This protects the litigants from competitors viewing their financial information or any access to things that they don’t want to be shared publicly.
How common is financial misbehavior during high-net-worth divorce cases, such as hiding money in offshore accounts, or stealing marital assets to cover gambling debts?
In the cases that I’ve dealt with directly, I would say that hiding or misappropriating valuable marital assets in not too common. Unfortunately, when they come to an attorney to begin the divorce process, a lot of people believe that monies have been hidden or redirected overseas, or that there are cash components to their spouse’s business that they are attempting to conceal.
However, the reality is that – with the exception of offshore accounts, which are a little bit of a challenge to identify – the forensic experts that we retain in these cases to review the books and records of the companies, and to make a determination on the cash flow of the titled owner, are highly skilled at looking for someone trying to divert funds, decrease money from the bank, reduce cash flow, or claim that sales are off in a particular business year because they’re trying to reduce the amount of the business valuation.
Off the top of my head, I don’t know how many people in all my divorce cases have actually tried to conceal assets, but I can tell you that it is not typically successful – either on the part of my clients or on the part of the other side – provided that there is a very skilled forensic accountant involved.
What pitfalls should someone watch out for in the divorce process – particularly if there are a lot of assets at stake?
One of the primary concerns in a case where there are substantial assets is to be certain that the manner in which the assets are allocated as the final equitable distribution in the case is selected based on what’s in the best interest of the individual that you represent. For example, when dividing a money market account or a brokerage account containing many thousands of dollars in shared stock, it is important to be sure that the stock was divided in a way that the person receiving it would receive the same tax benefit or be limited to the same tax liability as the other spouse from a capital-gains perspective in the event that the stocks were ultimately sold.
It would be simple to just say, for example, there is shared IBM and Apple stock, so one party will take the IBM and the other can have the Apple. But you need to look at those particular holdings and determine whether the tax benefits are comparable, and that the capital gain that would be recognized by either spouse is something that that spouse is able to absorb.
It’s also important to identify which assets can generate income for a party who may need that post-divorce. For instance, you may not want to ask for the marital home, plus the Florida home, plus the beach home if you are not the earning spouse and you’re only receiving alimony. You might need to generate income from another source, and things like homes that are not rented out would not provide a stream of income, and would increase the expenses that you would have to satisfy.
One of the things that sets attorneys apart when it comes to representing litigants in these relatively complex and high-asset divorce cases is being able to identify what a client should be attempting to gain based on their circumstances. An experienced attorney will consider what will work best for a particular client – including the status that they wish to maintain and the objectives that they have for moving forward subsequent to the divorce.
Are professional practices such as a dentist, doctor, chiropractor, etc. considered assets of the marriage? Does it matter if the practice started before or after the marriage took place?
Professional practices are considered assets of the marriage; however, New Jersey recognizes a “carve out” for the premarital component of an asset. If one party had a practice before he or she got married and maintained it until the complaint for divorce is filed, it would be up to a forensic accountant to establish the value of that practice as of the date of the marriage. This would be the “carve out” that the titled practitioner would retain. The change in the value from the date of the marriage to the date of complaint is the only portion that would be subject to equitable division in the divorce process, as is required under New Jersey law.
Non-business assets are typically divided equally between the parties; however, a business asset would ordinarily not be divided on a 50/50 basis. The Courts recognize that if you own a business valued at $2 million, if you sell that business you will realize capital gain and will not net $2 million. You, as the titled spouse, also assume the risk that you’ll be able to maintain the business at a level where its value would stay $2 million subsequent to the division of the value of the assets.
For those reasons, case law has established that the non-titled spouse will typically receive about a third of the marital value in a divorce.
The burden to establish the premarital value lies with the individual claiming that it should not be included. If our client has a business with a premarital component, we immediately contact their accountant or the Internal Revenue Service to gather records from that period of time so that we have the necessary financial data to calculate a very good estimate of its value as of the date of marriage.
If someone inherited a significant non-business asset, such as a house, vacation property, or other real estate holding before they got married, is this asset their separate property now that they’re getting a divorce?
It depends. The general proposition regarding the division of assets is to consider all the assets that are acquired during the period starting with the date of the marriage and ending with the date of the complaint for divorce being filed. With assets that are inherited or gifted to a spouse, those assets are considered exempt from equitable distribution, provided that a few things happen.
The title to the asset is important. For example, if a house is given to one spouse during the course of the marriage, that spouse must keep the house in his or her name alone – and not make any considerable improvement to the property – in order for its value to not be pooled for equitable distribution purposes.
However, a good lawyer could make a contrary argument and claim that the titled spouse paid the taxes and other costs with dollars generated during the marriage. In that case, there would arguably be an asset value that the other spouse should share in.
To put it into a quantifiable example: if someone receives a home with a mortgage as a gift during the course of their 10-year marriage and, during the course of that marriage, they paid the mortgage for that house from their earnings, such that when they file for divorce the mortgage has shrunk from $100,000 at the time of the gift to $75,000 by the date the divorce complaint is filed, that $25,000 of difference is arguably equity that has been created in that asset because of dollars that were used and generated during the marriage.
In that scenario, I would argue that half of the $25,000 equity generation is a marital asset subject to equitable division, even though the home itself is not necessarily an asset subject to division in the divorce.
Are stock options, bonuses, and so on treated any differently than any other assets in a divorce settlement?
Stock options, bonuses, and commissions are all facets of someone’s income, which could be considered for purposes of determining alimony and child support. The attorneys have to ascertain whether they want to include the annual total of the salary plus bonuses or commissions as the number utilized for alimony purposes, or to base alimony strictly on the salary of the individual and then give the non-titled spouse a percentage each year of the bonus that’s received.
For example, if a spouse’s salary is $500,000 and they typically receive a bonus of $200,000, a decision has to be made whether or not to base alimony on the $700,000 total, or choose to base it on the $500,000 and then award the other spouse a percentage of the amount that’s received via each year’s bonus. It really depends on the facts of each case. You have to look at whether or not the employed individual gets a bonus every year, or the bonus is of a consistent amount. Perhaps the bonus is $200,000 one year but the next year it’s $50,000; to maintain stability, the non-titled spouse might prefer to average the dollars and receive a percentage of the total instead of getting a percentage of the separate bonus when that’s received by the employed spouse.
How can a financially inexperienced person know if their spouse is being completely truthful in their financial disclosure during divorce?
The only way that a financially inexperienced spouse will know whether or not the disclosure is accurate and encompasses all of the assets and income of the marriage is if they retain professionals that they trust and who are capable and experienced enough to identify and obtain that information. Attorneys who handle high asset cases know exactly what to look for. Some people might think that they are going to outsmart the attorney by masking an asset or not disclosing a particular source of income, but we have pretty much seen it all. A good attorney and a forensic accountant are able to identify what is really there. In a scenario where the earning spouse doesn’t want to disclose or confirm information, the Court will assume they do have that income or assets if the right case is proven by the attorney for the other side.
For example, if a spouse claims they really don’t have cash coming in through their medical practice, the forensic accountant will determine that a practice of this nature – similarly situated in this geography with these gross receipts – would have cash receipts of, say, $50,000 per year. That will be the number that we will use if we’re lacking any other concrete information for purposes of determining the cash flow for alimony and child support.