When I meet with couples in mediation and one spouse has a medical practice, a law practice, an accounting practice, or a business that was created during the marriage, there may exist a marital interest. New York is one of the last states, if not the last state, to value a business license earned during the marriage as “enhanced earning capacity” which means it may be subject to division as marital property. When a couple comes to see me, I will discuss this further and give them an explanation of how it works. Is there a marital interest, and if so, how do they go about determining what that marital interest is?
This is not unlike pensions where there is also a marital interest. I ask that the pension be valued because pensions created during the marriage are marital property. I do get clients sometimes that have been to other mediators and some say they are hearing this for the first time.
Recently one couple, according to them, was told by the mediator that since they each had one, they didn’t need to determine the marital interest in each other’s pensions. Because that made them equal, they didn’t have to get anything valued. When I looked at the couple’s finances however, I saw that one spouse made a great deal more than the other and all of it was during the marriage. So when we did get the pension valuations, we saw that there was a huge difference amounting to hundreds of thousands of dollars. You have to be careful when going to a “Divorce Mediator” that you choose one who knows about the different kinds of pensions and their additional benefits.
The same is true for business valuations. How often on an IRS 1040 form do you look at line 17 that shows income from S Corps and/or other businesses where a salary is paid to officers, and see that the amount paid is minimal. The accountant’s job is to try to lessen the tax impact, but in doing so you really have to do an analysis of what the business has paid for. Often there are a lot of personal and living expenses paid by the business unrelated to business expenses.
So when mediating your divorce that includes businesses or professional practices:
Talk about a valuation? Absolutely.
Do I encourage you to do it? Absolutely.
Do you have to get a valuation? That’s up to you and I’ll explain to you how you go about doing it if you want to do it.
Gather up all the numbers, all the statements, and tax filings, so that everything is on the table. Often in these cases, one spouse is not as knowledgeable about the financial situation as the other. Before we can mediate the terms of your divorce, we have to level the playing field by educating everyone about the issue.
Divorce mediation is about fairness and self determination, which you can’t do unless you have a clear understanding of the issues.
Is it a bird? Is it a plane? NO! It’s a valuation.