“When a girl marries she exchanges the attentions of many men for the inattention of one.” – Helen Rowland
This is an underappreciated and underused angle to consider in a divorce litigation, though it has generally limited applications and, like so many other interesting ideas, needs the right case, the right financial magnitude, to justify pursuing. The concept is that on or around the time of the filing of the complaint for divorce, the business (or the earnings power of one or both of the litigants) reached a critical mass, kind of a precipice, where from this point forward it can be expected to increase dramatically, perhaps far out of proportion to what might otherwise be considered normal. That is, the marital partnership has devoted years of effort to building up something, whether that be a business or a career, and the fruits of those years of labor are now (now being defined as the filing of the divorce complaint) about to be realized. Would this not warrant some additional consideration, some additional value, payment or some other financial compensation to the spouse who will no longer share in the rewards to which they worked, in effect an investment in deferred benefits that are now coming in to pay status.
Using a career, an employee situation, as an example, let us assume we are dealing with a corporate executive type, who has worked her way up through the ranks, and is currently earning $200,000 per year. The marital lifestyle, the build-up of savings and everything else that goes along with that level of income, is consistent with same, and in a divorce context, alimony and the equitable distribution aspects can be expected to fall into place in accordance with normal procedures. However, this is not normal – this corporate executive is on the verge of being recognized, has developed a skill set that will either get her a great promotion, increase in pay, and the next stepping stone onto corporate executive stardom, or position that person to be able to jump ship for a major increase in pay, options, benefits, etc. None of these potentialities has happened, and none could have contributed to the marital lifestyle, or to a build-up in assets.
Is it fair to turn off the spigot at the DOC – or should the stay-at-home spouse be allowed to share in what the two of them were working towards all those years? Can it be seriously posited that this executive’s upcoming move with all the financial rewards that it entails just happened within the last few months or year or so? Or is it more likely that this quantum increase in financial power was the result of years of effort? If so, and if the concept of a marital partnership is relevant, wouldn’t those years of effort mean that the marital estate has a vested interest in what is about to happen? Whether the spouse would be rewarded by escalating alimony as the years go by, by some share of a dramatically increasing pension benefit, or other forms of savings – whatever and however, wouldn’t that be appropriate, wouldn’t that be equitable?
The issue is perhaps a bit more complex when it involves a business. The basic concept is the same. However when valuing the business, in theory the valuation expert took into account the potential for the business at that point (at any point) to grow, to be more valuable. Nevertheless, at least two issues arise. For one, most valuation experts would be extremely reticent to make assumptions of the magnitude of growth and increase in value that are under consideration here. The odds are that the valuation done as of the DOC, based on history and reasonable expectations of the future, will not take into account the extent of the increase that is being hypothesized here. As a result, the expert may conclude with a dramatically lower value than a valuation would conclude were it done one or two years later.
The second issue with a business, even if the valuation issue were fairly addressed, is what the increase in income will mean to the standard of living, including a build-up of savings. Not only will the business itself increase in value, but the compensation received, the pension benefit, the personal savings, and all the other accoutrements of a higher income will, in the traditional approach, inure only to the business spouse, none of it to the soon-to-be ex-spouse. Again, taking into account the premise expressed earlier in this chapter, is that fair?
One possible approach, at least in part to some of these issues, would be the determination of enhanced earnings, and a calculation as to the present value of same. In effect, this is treating enhanced earnings as a form of asset that can be valued. By way of illustration, assume that the executive spouse can anticipate an increased income stream in the magnitude of $200,000 per year above and beyond what has already been realized, that $200,000 being above and beyond what would reasonably be expected were it not for this martial momentum concept. Further assume that enhanced level of income can be expected to continue for the remainder of that person’s business/working life.
Thus, wouldn’t it be in some way fair to calculate what that enhanced earnings means on a present value basis, then possibly tax effect same, and award the other spouse an equitable share of that future income? By way of an oversimplified example, this executive spouse is expected to work another 20 years, with this $200,000 bump-up in income – an extra 4 million dollars. Do we present value same? On one hand, it seems like an obvious need; on the other hand, it may be that there is no need for a present value, because it can be expected that the $200,000 of income being considered itself will be adjusted by at least the rate of inflation, probably more, a contra (offset) to the present value discount.
Let’s go now to the next step – we have determined there’s a 4 million dollar asset, and the spouse is entitled to a fair share. For discussion purposes, let’s assume that a fair share here is less than what might otherwise be an equitable distribution percentage, say 20% – which equals $800,000. Putting aside whether or not this should be tax effected, it is probably a certainty that the marital estate that exists currently doesn’t have that extent of additional funds to carve out to the non-business spouse. It would require some form of a future payout. Besides the inherent difficulty in getting this concept across to the spouse who will be paying it, you can readily see how – despite some possibly clear issues as to equity – this broad concept is fraught with complexities.