There is a lot at stake in a high net worth divorce and it is extremely important to have representation by a qualified and experienced attorney to recognize and value complex financial assets. Identification and valuation of these assets, as well as the equitable distribution of them between the divorcing parties, can be challenging.
In such situations, both parties to the divorce can benefit from the protection afforded them by skilled counsel well-versed in dealing with these types of complex financial assets, such as those certified for complex financial litigation with the American Academy for Certified Financial Litigators.
In a New York Divorce proceeding, it is important to understand that both tangible and intangible (not physical in nature) assets are to be identified, categorized, valued, tax-impacted, and distributed. Highly compensated individuals may have restricted stock, phantom stock or options, or other forms of deferred compensation/wealth accumulation plans that need to be addressed.
There may be forgivable loans, complex pension or retirement assets/accounts, tax loss carryforwards, intellectual property, cryptocurrency, and business/investment interests to value and distribute appropriately. One of the most important aspects of the distribution process of such assets in a New York divorce is the determination of the non-owner spouse’s equitable interest in the particular asset (usually expressed in a percentage of the total marital asset value).
As this is not an exact science, the knowledge and skill of counsel in presenting a case showing the direct and/or indirect contribution (or lack thereof) on the part of the non-owner spouse can make a big difference in the ultimate distribution of such assets. When your marital estate includes complex tangible or intangible assets or assets that have not fully matured, it is important to have representation by a well-qualified family law attorney who has significant experience and proficiency handling such matters, as they can help ensure a fair valuation and distribution of such complex assets including:
Stock Options, Phantom Stock, and Restricted Stock Units
Stock options must be included in the equitable property division if they were provided because of past performance during the marriage. This is not necessarily the case where they are provided to encourage or induce one to stay with the company in the future.
Phantom or “shadow stock” is a form of compensation offered to upper management that confers the benefits of owning company stock without the actual ownership or transfer of any shares. These are assets that must be identified, valued, and distributed in a divorce and they often involve complex valuation and distribution issues.
Likewise, Restricted Stock Units are a type of compensation issued by an employer to an employee in the form of company shares usually through a vesting plan and distribution schedule after they achieve required performance milestones or upon remaining with the employer for a particular duration.
It has become commonplace for hospitals and financial services institutions to extend loans to newly recruited physicians or financial services advisers to entice them to join the hospital or financial services company. The loans are often forgiven over time, assuming the borrowing individual satisfies certain conditions. For example, in a financial service setting, such a loan may be given as consideration for a new hiree who joins the company with an existing “book of business” based upon the anticipated annual revenue to be generated therefrom.
If and as the projections are met, incremental amounts of the loan will be forgiven. The amount of the loan forgiven in any given year is treated as income for that year. Forgivable loans differ from traditional signing bonuses in that signing bonuses are considered compensation and are fully taxable in the year paid.
These types of loans must be considered in a divorce as they may constitute an intangible asset or contingent future income.
Pension Plans & Retirement Accounts
The portion of a pension or retirement account that was acquired during a marriage is subject to equitable distribution. However, in certain instances, even premarital contributions may be distributed when there is commingling of the premarital and post-marital funds under the doctrine of transmutation.
Commingling is when one spouse’s separate property is mixed with marital property in which the other spouse has an interest such that the separate property is indistinguishable from marital property. In a recent case, NLG was able to successfully assert this commingling and transmutation doctrine for the benefit of our client to increase the distributive marital estate by more than $2 million.
Tax Loss Carryforwards
A tax loss carryforward allows taxpayers to use a taxable loss acquired during the marriage and apply it to a future tax period (i.e., after the divorce). These carryforwards can be marital assets with substantial values. Hence, these intangible marital assets must be identified, valued, and considered in the ultimate marital estate and its distribution. Usually, these carryforwards themselves cannot be distributed in kind.
With the help of a skilled attorney, the value of the carryforward to the entitled spouse can be offset by an adjustment of other assets being distributed to compensate the other spouse for their equitable share of the carryforward.
Intellectual property, in general, is any product of the human intellect that the law protects from unauthorized use by others. Unlike tangible property, it can be difficult to recognize, identify and value. Intellectual property includes, among other things, music, dramatic works, book manuscripts, screenplays, works of art, designs, computer games/programs, photography, and the like even if a work in progress.
Such intellectual assets can be protected by obtaining trademarks, patents, copyrights licensing agreements, and royalties. These types of assets can have substantial value and must be identified and distributed in a divorce.
Cryptocurrency is any form of currency that exists digitally or virtually and uses cryptography to secure transactions that can be transferred without involvement from a third party such as a bank. Cryptocurrency, like Bitcoin, can be used to purchase real goods and services and are subject to disclosure and equitable distribution just like other types of property in a divorce.
Divorce cases that involve cryptocurrency pose valuation difficulties because the value of cryptocurrencies can fluctuate wildly from day to day. There have been divorcing spouses who have tried to hide their financial assets or income during a divorce by converting them into cryptocurrency because cryptocurrency can be traded anonymously unlike money held in a bank account or traditional financial institution.
Here once again, representation by counsel who is proficient in such matters is crucial to the fair and equitable distribution of these types of assets.
We Can Help You Through the Process
Nolletti Law Group PLLC can meet all your needs with respect to the complexities of high net worth divorces. We are meticulous about working with equally qualified valuation and tax experts to incorporate complete asset valuation and any related tax liability into property settlements to protect the assets and maximize the benefit. Failure to consider all assets, tangible or intangible, valuation and distribution components, and tax-related issues/consequences can be very costly in divorce settlements.
We also work directly with CPAs, valuation experts, and other tax professionals to assist our clients in getting and keeping assets obtained in a divorce. We recognize that being knowledgeable about asset identification, valuation, and tax-impacting is critical to providing exceptional legal service to our clients.
1 JAMES J. NOLLETTI, Esq. has earned the credential “Certified Financial Litigator” from the American Academy of Certified Financial Litigators (“AACFL”) and is a Founding Member of their New York Chapter. AACFL is an educational institution dedicated to enhancing the legal profession through advanced financial education and innovative training programs designed to increase financial knowledge of attorneys dealing with high-net-worth clients and financials in their practice.