Sometimes estranged spouses can remain fair, rational and civil during divorce proceedings. But in other cases, a divorce can turn ugly. When the couple’s assets involve a business interest, the situation can be extremely complex.
Husbands and wives may become emotional and vindictive, hiding assets and withholding information. These behaviors can compromise the accuracy of asset appraisals and property allocations. But financial experts who specialize in divorce are accustomed to overcoming various roadblocks during discovery.
One Ohio Court of Appeals case illustrates some of the games people play in divorce court. In the end, neither spouse was satisfied with the trial court decision, so both made claims on appeal. Here are some of the valuation-related claims and how the expert witness managed to reliably value the business, despite having limited access to the company’s financial records, management and facilities.
Access Denied, Claim Denied
When Arun and Mona Chattree decided to call it quits after 48 years of marriage, their most significant marital asset was Arun’s 100 percent interest in Community Behavioral Health Center (CBHC), a mental health service company that was licensed in Ohio. During divorce proceedings, Arun refused to allow Mona’s expert to visit CBHC’s office or interview management.
The court ordered Arun to give Mona $5,000 to retain an appraisal expert to determine the value of CBHC, but he dragged his feet for six months. He also continuously delayed sending the expert court-ordered financial records, causing Mona’s expert to miss his original deposition date and submit his final report after the trial had begun.
One of Arun’s claims on appeal was that the court should exclude from evidence the appraisal testimony and report prepared by Mona’s expert. The appeals court denied this claim, because his failure to appear at deposition and untimely report resulted directly from Arun’s misconduct and repeated failures to comply with lower court orders.
Both spouses appealed the lower court ruling that CBHC was worth $1.5 million on December 31, 2008 on a controlling, nonmarketable basis. Arun argued the business had no value, given its liabilities and limited assets. Mona argued for her expert’s original appraisal setting the value at more than $1.9 million.
Mona’s expert used the capitalization of earnings method, relying solely on tax returns and audited financial statements from 2005 to 2008. His $1.9 million value included:
- A 10 percent discount for lack of marketability
- A normalizing adjustment for nonrecurring pension plan costs
- A normalizing adjustment for the cash surrender value of officer life insurance policies, a nonoperating asset valued at approximately $600,000
- A loan to its shareholder (Arun) for roughly $400,000 (see right-hand box on factoring in holder loans).
Consistent with Ohio legal precedent, no adjustment to the value of the business was made for goodwill. In Ohio, personal and enterprise goodwill in professional practice are generally marital property. Other states may handle goodwill differently, however.Arun claimed the valuator’s methodology was unreliable “due to his unfamiliarity with CBHC and its business structure.” Specifically, Arun contended that Mona’s expert didn’t understand Medicare and Medicaid regulations, the financing requirements for CBHC’s pension plan, and the transferability of the company’s license. (Chattree v. Chattree (2014-Ohio-489, 2/13/14)
Reliable Given the Limitations
Along these lines, the expert’s report contained the following disclosure:
Due to limited access to information and management, [my] analysis was not subject to the development or reporting standards set forth in the American Institute of Certified Public Accountants Statement of Standards for Valuation Services No. 1 (AICPA) nor the valuation standards as promulgated by the National Association of Certified Valuation Analysts (NACVA).
Additional information that could have impacted his conclusion — but Arun withheld from the expert — included:
- Access to management or the opportunity to interview management
- Details about certain balance sheet and income statement accounts
- Corporate governance documents
- An organizational chart
- Budgets and forecasts
- Other relevant information, such as significant contractual relationships and details of previous ownership transactions.
The valuator’s lack of knowledge about the day-to-day operations of CBHC stemmed primarily from Arun’s refusal to consent to a site visit or a management interview. The court refused to reward Arun for such conduct, so it ruled that the expert’s testimony and appraisal report, despite its limitations, were “reliable and based on application of his disciplines, practices, and knowledge of the facts of this case.” In the eyes of the court, the expert did the best he could with limited financial information.
In addition, the Ohio Court of Appeals reversed the lower court’s pension plan adjustment, which was based on an apparent misinterpretation of the expert’s original testimony. The appellate court ruled that the lower court erred in valuing the business at $1.5 million and remanded the case to the trial court to determine whether the appraised value of $1.9 million was appropriate.
Play by the Rules: In divorce cases that involve private business interests, it may be tempting for controlling shareholders to downplay assets, income, strengths and growth opportunities — and play up expenses, liabilities, weaknesses and threats — to alter the appraised value of the company. But as the case described above demonstrates, many valuation-related issues are left to the court’s discretion, and judges don’t look favorably upon spouses who hide assets, withhold information or otherwise defy court orders.
It’s best to consult with an attorney with questions about your situation.
We’re in the midst of tax season, with April 18 just around the corner. You may be wondering how to determine your tax filing status if you are divorcing or are recently divorced.
A divorced or divorcing couple’s tax filing status is determined as of the last day of a tax year. A couple in the process of divorce may find that they are still considered married for tax purposes even though they do not live in the same household.
There are five federal tax filing categories for individuals:
2. A married person can alternatively file a separate return from his or her spouse.
3. A qualified individual can file as a head of household.
4. A person can file as a widow or widower.
5. An unmarried individual generally files as a single person, but if certain criteria are met, he or she may qualify for head-of- household status or as a qualifying widow or widower.
What if you are in the process of a divorce? What if your spouse has abandoned you?
A couple remains married for tax purposes until:
- A final decree of divorce is issued by a domestic relations court;
- A domestic relations court issues a final decree constituting a legal separation under local law, requiring the couple to live apart; or
- The “abandoned spouse” rule applies.
You may be able to file as a head of household if you are considered to be abandoned by your spouse. An individual is required to live apart from his or her spouse for the entire last six months of the tax year to achieve abandoned spouse status.
In some divorce situations, if the abandoned spouse rule does not apply, a spouse may be reluctant to file a joint return due to the “joint and several tax liability” resulting from joint returns. This means both you and your spouse may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. One spouse may be held liable for all the tax due even if all the income was earned by the other spouse.
Accordingly, in situations in which the abandoned spouse rule cannot be met but a spouse is reluctant to file a joint return, one option is for the spouse to file under the status of married filing separately, then wait to determine if any instances of concern regarding joint and several tax liability arise, and then elect to file an amended joint return within three years of the original due date of the separately filed returns.
An amended return can be filed under joint return status where separate returns had originally been filed. However, the amended return must be filed within three years of the original due date, excluding extensions, of the separate returns.
An individual who has not received either a decree of divorce or separate maintenance from a court as of the last day of a tax year, and who fails to qualify as an abandoned spouse, is considered married for tax purposes. The taxpayer must therefore file a joint return or file as married filing separate.
The potential tax savings from delaying a divorce to file a joint return may not justify the additional liability exposure created by the joint filing. In some instances, completing the divorce and terminating the marriage may save income taxes.
Once a marriage is terminated for tax purposes, the former spouses are no longer eligible to file a joint income tax return for that year. The individuals are then faced with the problem of dividing income and deductions on the divorce-year return. Also, special issues arise for allocating mortgage interest and taxes in divorce situations. Finally, the rules governing the reporting of income and deductions differ significantly between community property and equitable distribution states.
Consult with your attorney or CPA if you have questions about determining your filing status.
Even if you have a valid will, you may need to draft a new one for a variety of reasons. A will is an essential part of planning for the future. But don’t think creating a will is a one-time proposition. Even if you have a valid document, you may need to draft a new will for a variety of reasons.
Here are seven reasons to update your will:
1. Deaths – If individuals named (as heirs or executors) have died or they become incapacitated, a will should be reviewed to ensure changes are not needed.
2. Assets – Revisions may be needed if the value of assets has increased or decreased significantly, or they are no longer owned. For example, if you specifically leave your home to one of your children, and later sell it, you may want to change the distribution of your other assets.
3. Marriage – Wedding bells usually signal the need to review a will. Which assets should pass to your spouse? Are step-children involved? If this is not spelled out in a will, the state will decide. In a community property state, a spouse automatically inherits half of all community property. In most other states, a spouse may receive one‑third to one‑half of the estate, absent any other directions.
Also, keep in mind that an unmarried couple living together may want to leave assets to each other but in order to make an inheritance happen, it must generally be spelled out in a will.
4. Divorce – In many states, a divorce automatically revokes a will or those provisions concerning an ex‑spouse. As a result, if you get divorced, it’s best to have a new will drafted. For instance, you might have your former spouse removed as a primary beneficiary. In addition, you may want to change the beneficiary of your life insurance, pension or any existing IRAs. Consider the use of a trust if children from a previous marriage are involved.
You may also want to change your will if one of your children gets divorced.
5. Births – Once parents have children, you may want to consider updating your will to include the names of children. Also, you want to name guardians to care for the children in the event the parents die prematurely. (However, the naming of guardians is not binding by the probate court.) Grandparents might wish to draft a new will concerning the distribution of assets after children are born. Again, the use of a trust may be recommended.
6. Retirement – This event may also trigger the need to make changes to an existing will. For example, many retirees sell their homes and move to other states. But state laws can vary widely. Furthermore, individuals may consider a power of attorney that enables someone else to act on their behalf in the event of certain illnesses.
7. Tax law revisions – The Internal Revenue Code is regularly changed. In fact, the estate tax rules have undergone significant changes in recent years and more changes could occur. A will should be reviewed to take advantage of maximum tax benefits that exist today so it may have to be updated if tax laws change.
Note: In some cases, a will might be amended with a “codicil.” However, in many cases, it is best to draft a new will. Your attorney can guide you on how to proceed.
Don’t wait…. Do it now…. Make it a priority to protect your loved ones this year!
save $100 on Will Preparation
Offer expires March 31, 2017
We feel that having a will, and related powers of attorney and advanced directives, is one of the most important tasks one should complete.
After working hard your entire life to provide for your family, you should not allow the Texas Probate Code and the courts to decide how your assets are distributed.
This article points out the various problems of dying without a will and how these consequences are eliminated with a properly drafted will that disposes of your assets in accordance with your wishes.
1. Name Your Own Beneficiaries in your Will
Problem: When you die without a will, you are considered to die intestate and your property will pass in accordance with the descent and distribution provisions of the Texas Probate Code. Sometimes these individuals are the same you would provide for under your will, but not always.
Benefit: When you die with a will, the beneficiaries named under your will inherit your property exactly as you specify.
2. Reduce the Cost and Time of Probate
Problem: If you die without a will, the cost to probate your estate is substantially higher because of additional requirements, such as filing a determination of heirship with the court to decide the rightful heirs of your estate.
Benefit: This procedure is not necessary when the beneficiaries of your estate are named in your will.
Problem: The probate process is substantially more time consuming if a dependent administration is required in which the court has to approve every action taken by the administrator.
Benefit: An independent executor named in your will administers your estate with minimal court supervision. This allows the probate process to be completed in a timely and cost effective manner.
3. Name Your Own Executors in your Will
Problem: If you die without a will, the court will appoint an administrator of your estate based on the order specified in the Texas Probate Code.
Benefit: If you die with a will, the court will appoint the executor(s) named in your will before considering any other individuals.
4. Extend the Time in Which Beneficiaries Receive the Bulk of Your Estate
Problem: If you have minor children and you die without a will, your children will receive their share of your estate when they reach 18 years of age.
Benefit: With a properly drafted will, a contingent trust can hold your children’s share until they turn an age that is more appropriate for them to receive the bulk of your estate.
The trustee named in your will manages the children’s inheritance until they turn an appropriate age. The trustee may make distributions to your children during the life of the trust for their health, education, maintenance and support.
While the use of a contingent trust is most common when minor children are involved, they work just as well for any individual under a certain age or otherwise incapacitated.
Any beneficiary designations for your life insurance policies or retirement plans should also be coordinated with your will to make sure they are distributed to the children’s trust if they are under a certain age.
5. Eliminate or Reduce Any Estate Tax
Problem: Under current law, if your gross estate, including life insurance and retirement, is under $5.45 million, your estate will typically pass tax-free to your beneficiaries (and a married couple typically can pass up to $10.9 million of their wealth estate tax free).
Benefit: If your gross estate exceeds that number, you should contact an estate planning attorney to learn about estate planning options that can eliminate or substantially reduce any estate tax which would otherwise be payable to the Internal Revenue Service. With a federal estate tax rate as high as 40%, this issue should not be ignored.
Don’t wait…. Do it now…. Make it a priority to protect your loved ones this year!
save $100 on Will Preparation
Offer expires March 31, 2017
While most people realize they should have a will, they still tend to procrastinate over having it done. Most attorneys can have a will prepared within days of the initial meeting, which will alleviate the many problems your loved ones will face if the time is not taken to get your affairs in order.
Our last blog post offered some tips for avoiding family feuds when distributing assets of a family member. It’s important to choose your executor carefully.The executor generally exercises discretion in distributing personal and household items. So it’s important to name a trustworthy person with a fair, impartial, reasonable personality — especially if there are sibling rivalry issues. You want someone who will fulfill your intentions. The right executor can reduce the chance of litigation.
No matter who you name as an executor, the individual will appreciate clear, written instructions.
Here is a “Textbook Example of Headaches, Heartaches and Expense”
Without specific estate instructions concerning asset distribution, family members can be left guessing what a deceased person would want — or decide what to do themselves.
In one case, a Michigan probate court had to step in and resolve bitter disputes by distributing numerous items. The court called it “a textbook example of the headaches, heartaches, and expense that can result from inadequate estate planning.”
Facts of the case: According to court documents, Barbara Waters was divorced and living with Kevin Goethe when she died. She had three children from a previous marriage and he had one son.
Goethe built and furnished the house. When the couple moved in together, they combined household furnishings and purchased items together and individually.
Goethe proposed and purchased an engagement ring but the couple never married. “Ms. Waters was diagnosed with cancer and told Mr. Goethe it would be unfair of her to marry him because of her illness,” according to court documents.
Waters made out a handwritten (holographic) will and signed it “Mom.” Upon review, the court stated the document did not meet the state’s legal requirements and was therefore invalid.
Weeks after Waters’ death, her children moved out of Goethe’s home. He packed some belongings and left them on the front porch for the children to pick up. He was not home when they arrived. The children gained entry to the house through another relative. They removed “almost everything they thought was their mother’s.”
Goethe testified the house was “ransacked.” Family photographs were removed. One photo was ripped in two, with Goethe’s image returned to the frame and Waters’ image taken.
The Probate Court called the children’s actions “offensive.” It then made decisions to divide the items, including:
- A jewelry chest and small kitchenware had to be returned to the estate by Goethe. However, some jewelry items were determined to be gifts from Waters so Goethe got to keep them.
- Photos were ordered returned or duplicated at estate expense.
- A family pet was claimed by both sides. Goethe was awarded the Maltese Terrier “in lieu of compensation for items which either disappeared from his house or items to which he might have had a reasonable claim.”
The judge stated the court could not adopt either “extreme position” — that everything in the house belonged to Goethe or that the children were entitled to anything connected with their mother.
He added: “there is a difference between saying or writing down what you hope will happen and taking the proper legal steps to assure that a court will enforce your intentions.” (Waters, Probate Court for the County of Marquette, No. 10-31879-DE)
This article only provides basic answers to some of the questions involved in the distribution of assets. Consult with your estate planning adviser about your situation. By planning ahead, you can avoid battle lines being drawn after your death over possessions accumulated during your life.
In family law, a central doctrine in cases affecting children is that decisions should be made in the children’s “best interests.” This can include who a child lives with, who has custody, what is the visitation schedule and whether or not a parent’s rights should be terminated.
There is no standard definition of a child’s best interests, but all states, the District of Columbia, American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands have laws requiring courts to examine them when making decisions.
According to the U.S. Department of Health and Human Services (HHS), “‘Best Interests’ determinations are generally made by considering a number of factors related to the circumstances of the child and the circumstances and capacity of the child’s potential caregiver(s), with the child’s ultimate safety and well-being as the paramount concern.”
Divorce and family law statutes vary from state to state. Here are some of the common guidelines and factors used by courts to help determine what is in the best interests of a child, according to HHS’ Child Welfare Information Gateway:
- The importance of family integrity and preference for avoiding removal of the child from
his/her home (approximately 24 States, American Samoa, Guam, Puerto Rico, and the U.S. Virgin
- The emotional ties and relationships between the child and his or her parents, siblings, family and household members, or other caregivers (13 States and the District of Columbia).
- The capacity of the parents to provide a safe home and adequate food, clothing, and medical care (eight States).
- The mental and physical health needs of the child (five States and the District of Columbia).
- The mental and physical health of the parents (six States and the District of Columbia).
- The presence of domestic violence in the home (eight States).
- The child’s wishes (Approximately 11 States and the District of Columbia). In these cases, the courts are required to consider the child’s wishes when making a determination. Courts will also consider whether the child is of an age and level of maturity to express a reasonable preference.
Your child’s best interests will be determined under the laws of your state. Consult with one of our attorneys with questions about your situation.
Two ‘Best Interests’ Cases
In one well-publicized, controversial case, a court in Ohio took an 8-year-old boy away from his family and placed him in foster care because he was obese. Caseworkers testified that the mother did not do enough to control the third grader’s weight, which was reported at more than 200 pounds.
The child was returned to his family in May of 2012 after losing approximately 50 pounds. “The best interest of the child has been protected and supported,” the judge stated. “The system worked.”
In another case that went to the U.S. Supreme Court, a Washington grandmother and grandfather petitioned a court for visitation with two daughters of their deceased son. The mother of the children opposed the petition.
A lower court determined that visits with grandparents were in the best interests of the children. However, the Supreme Court disagreed. Forced visitation, the ruling stated, “violated (the mother’s) due process right to make decisions concerning the care, custody, and control of her daughters.” (Troxel v. Granville, No. 99-138, 6/5/00)
(The HHS Child Welfare Information Gateway maintains a state-by-state database covering child-related laws. Click here to access it.)