Gouras & Amis P.L.L.C.

GOURAS & AMIS P.L.L.C.

Financial Information:
About Executive Divorce

 

Executives or other highly compensated individuals pose a significant challenge. Vested and non-vested stock options, non-liquid partnership interests and other unique assets often come into question.

For the "homemaker" the largest short-term issue is cash flow, which is paid by child support and maintenance (alimony) in order to maintain the household during the divorce proceedings. This can often be problematic, especially if the there is a downturn in the business, or the parties and/or business are heavily in debt. Long-term issues involve the valuation of business interests and the disposition of non-liquid assets. No matter how large the estate, Washington state requires a fair and equitable distribution of the assets. This does not necessarily mean 50/50, and a great deal of effort can be spent convincing the court of what is fair under the circumstances.

For the executive, the largest short-term issue also tends to be cash flow. Often the parties have been living an expensive lifestyle that was manageable when they were married, but becomes impossible to maintain when two households are being supported. Another significant short-term issue is the other spouse's employment if they have been working for the business. Longer term, the valuation of the business tends to be a significant issue. Washington state not only divides the value of the business, but the "goodwill," which is an intangible asset that cannot be sold and converted to cash to pay off the other spouse. This often leaves the executive with having to incur significant debt to satisfy the award to the spouse.

Child support can also be difficult to calculate for highly compensated individuals. Basic child support is calculated according to a set schedule. For individuals with net income of $5,000.00 per month or less, support is determined by a set schedule. For individuals with net income of $5,000.00 to $7,000.00 per month, the schedule is discretionary, but usually adopted by the court. For individuals with net income over $7,000.00 per month, the court has discretion to award far higher amounts. Some attorneys use software to "extrapolate" the schedule to the higher income levels. While the court will often consider these extrapolated amounts, the argument almost always centers on what amount of money is needed to maintain the child's prior lifestyle. From the receiving parent's perspective, the child should not be punished because their parents are getting divorced. From the paying parent's perspective, the concern is often that the money intended for the child will actually go to the support of the lifestyle of the custodial parent. Because child support cannot be deducted from your income taxes, and because the payments in executive divorces are often significant, this tends to be a major area of dispute.

The issue of stock options has largely been settled under Washington law. In the case of In Re Marriage of Short, 125 Wn.2d 865, 890 P.2d 12 the court created a formula for calculating the community portion of the stock options. Typically an accountant is retained to provide a calculation according to the formula. This issue has taken on less importance since the downturn in the stock market with the result that many stocks are trading below the strike price of the option.

For business owners, the value of the business is undoubtedly the largest issue in the case. In the case of Marriage of Hall, 103 Wn.2d 236, 692 P.2d 175 the court delineated five methods of determining the value of a business: 1) The straight capitalization accounting; 2) The capitalization of excess earnings method; 3) The I.R.S. variation of capitalized excess earnings method; 4) The market value approach; and 5) The buy/sell agreement method. Which method is best for the business in question is often in dispute. Experts are usually retained to provide an opinion as to which method is appropriate and what the value will be.

In general, the divorces of executives and business owners are more involved and more expensive. Competent counsel should be retained early on to prepare the case for mediation and/or trial.

 

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