DIVISION OF ASSETS IS COMPLICATED

Question: I started a service business during our marriage with money I inherited from my uncle. Based on advice from my CPA, when I incorporated, half of the stock was issued to me and half to my wife. Although I worked in the business and she stayed at home with the children, in order to save money, my wife answered the phone and did the billing. Again based on the advice of our CPA, the business paid salaries to both of us -- hers mostly to increase her Social Security entitlement. When we began doing very well, our CPA advised me to have the business establish pensions for both of us which have been heavily funded over the past six years. While we have done well financially, unfortunately, many years of hard work on both our parts have taken a toll on our relationship.

I went to see a divorce lawyer who told me that in addition to an interest in the corporation and other assets, my wife will get alimony -- since she does not work outside of the home -- and child support. He told me that even though half the stock is titled in her name, she won’t necessarily be entitled to half of the corporation. If we divorce, I certainly don't want her in business with me; however, it seems to me that she will be getting a "double dip" if I have to buy her out of the business, give her assets, and then continue to pay alimony from my salary which comes from the business. I realize she has put 15 years into this business on a part-time basis and that she can't make the kind of money at a job that she is making here, but fair is fair. My lawyer says that before the assets are divided, we must value the business. How do we go about deciding on a value? If she owns half of the stock, why might she not get half? And what about the unfairness of her getting cash as a buy-out from the business and then getting continuing alimony from me?

Answer: You have asked a number of questions that call for very complex answers that can not be answered fully here because of space limitations, so here's a thumbnail of what needs to be accomplished through your lawyer and a qualified certified public accountant and possibly other professionals.

If you and your wife owned stock in a public company which is traded on the open market, the fair market value of your shares could be determined by averaging the high and low quoted prices on the "strike date" or date of valuation. But when, as here, there is not a ready market for the stock, the court will be the final arbiter of the fair market value based on the opinions of experts who look at such factors as (i) the kind of business and its history; (ii) the economic forecast and condition of the industry; (iii) the book value of stock and financial condition of the business; (iv) the company's earning capacity; (v) whether the business can pay dividends; (vi) goodwill; (vii) prior sales and size of the block of stock to be valued; (viii) market price of similar listed companies, if any; and (ix) restrictive sales agreements or repurchase options, if any.

In equitable division states, title is not determinative of entitlement. This means that even though one spouse owns title to all marital assets, the other is still entitled to an equitable share, the percentage of which depends on the facts of each particular case and the state in which you live. Here, since you started the business with non-marital funds (which became marital), the court may find that your wife may not be entitled to half. Depending on the values, the court may award you the business and your wife the pensions, the house, and other assets. Since there are no hard or fast rules, the professionals you hire to represent you must develop your facts in a careful and focused manner.

As far as alimony is concerned, should your wife be entitled, the award should be coordinated with the award of property division so that income derived from the division of assets should offset at least part of your responsibility. Child support is based on formulas in each state.

You left out one very important and complex question that must be considered: What are the tax consequences of divesting your wife of her ownership interest in the business? This is a very difficult issue that requires guidance from experienced professionals.

SoloFact: Be sure to watch for NextSteps, a weekly column devoted to problems facing the elderly and disabled from the authors of Flying Solo. Coming in August.

Jan Collins is an award-winning writer and editor. Jan Warner is a matrimonial, elder, and tax lawyer. Please send your questions by e-mail to janwarner@flyingsolo.com or by mail to P.O.Box 11704, Columbia, South Carolina 29211.