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Speculative Asset Division in Divorce

SPECULATIVE ASSET DIVISION IN DIVORCE

Upon divorce most all assets which accrued during the marriage will be divided between spouses. That being said, there are some assets which may be earned during the marriage but their receipt is speculative. Moreover, there are other assets whose liquidity is not only speculative but determining when the asset was actually "earned" may be difficult. If we determine that an asset was effectively earned either wholly or partially during the marriage then we should divide that portion that we deem earned during the marriage between the parties.

This uncertainty in our ability to determine when the asset was earned will often come about within the context of stock options. Stock options can be defined as a right to buy or sell a specified amount of stock within a designated period of time for a determinable price. Stock options may be classified into different groups, the distinction of which is important within the context of divorce. Stock options may be accrued and matured, accrued but unmatured, and unacrued and unmatured. The certainty of the value of such asset declining with each respective classification.

When an employer grants these stock options to a spouse employee it can be difficult to ascertain if these options were granted to the employee spouse for past, present, or future services. To make this determination we have to look at the context within the specific case. For instance, if we see from the facts that the employee spouse took a reduction in current salary in lieu of stock options then we can ascertain that these options were granted for current employment. Other times, and frequently, the stock options may have been granted as a retention incentive. Thus a certain percentage of options will vest in the upcoming years. If we can determine that these options were given for the purpose of incentivizing long term employment then we know that they are for future employment and thus possibly not earned during the marriage thus not marital property subject to division.

Secondly, even if we determine that the speculative asset was granted for current employment we may have to do more work. The actual receipt of that asset may still be speculative. For instance, receipt of that asset may be contingent upon continued employment or even solvency of the granting company. When this is the case we have to determine how we will divide this asset which is yet to become liquid. If the employee spouse buys out the non-employee spouse and then such contingencies never come to fruition then the employee spouse takes a loss. If the court retains jurisdiction over the asset until it potentially becomes liquid then the parties remain tied together, post-divorce, until this time. A third option is to apply a set off or buy out of the non-employee spouse's interest but then to apply a discount rate to the purchase price of this speculative asset. The discount rate effectively discounts the value of the speculative asset according to both the likelihood of the asset actually becoming liquid and secondly the potential value of the asset upon reaching this liquidity. The problem with any type of set off or buy out of course is that it requires much speculation on the part of an expert. The exact value of a potential asset is typically uncertain, leaving one spouse treated unfairly.

Another speculative asset that courts regularly have to deal with is that of the pension. Pension benefits may be vested or they may be unvested. If the pension is vested that means that the employee has an absolute right to that pension. Thus neither the employer nor any other 3rd party can deprive the vested employee of that benefit. That being said, an employee may be vested in his or her right to the pension yet still not be able to receive those pension benefits until another contingency occurs. This other contingency typically consists of reaching retirement age. Thus although the pension is vested there is still some possibility that the employee may not reach retirement age and thus never receive this benefit. Courts typically treat vested pension rights as marital property and not as "mere expectancies". Thus these property rights are subject to division, the only question is how such division of this pension benefit should occur.

Similar to that of a stock option mentioned above the court may Order an immediate set off or buy out, or a deferred distribution method. The immediate set off method assumes educated guesses as to future values but has the advantage of finality. The differed distribution method eliminates or minimizes uncertainty but foregoes the advantage of finality.

Unvested pension rights on the other hand are more speculative in nature than vested pension rights. The employee spouse has yet to earn an absolute right to his unvested pension. This is typically the case because the employee spouse has yet to remain with the company for the requisite number of years which would qualify him or her for vesting. Although these unvested pension rights are more uncertain than those of vested pension rights, Nevada is in line with the majority of states which consider these unvested pension rights to be marital property. Given that there are more uncertainties attached to unvested pension rights it may make sense to apply a deferred distribution method to the distribution and division of this type of asset. An immediate offset method places the entirety of the risk of non-payment on the employee spouse.

Goodwill is another asset that is difficult to quantify and thus speculative in nature. Goodwill is defined in accounting as what one company will pay to acquire another company above and beyond the fair market value of the net assets of the acquired company. It is thus an intangible asset. Goodwill can further be defined as professional goodwill and practice goodwill. Professional goodwill is that goodwill that attaches solely to one individual who is employed by the practice. Whereas practice goodwill is that goodwill that is attached to the entirety of the practice. The majority of states have determined that practice goodwill is an asset of the estate. Fewer states are willing to accept that professional goodwill is an asset of the marital estate. To value goodwill we look at things such as actual offers made on similarly situated practices. We can also look at offers made for the specific practice or similar such practices. Another and common mechanism for goodwill valuation comes from a qualified expert in business valuations. When we make professional goodwill assessments we look to things like the age and health of the employee spouse as well as that professional's historical earnings, reputation, skill and knowledge.

If a court takes into consideration professional goodwill as a marital asset and thus effectuates a division of property for that asset then the court must take note of this distribution when considering alimony. If an alimony determination is dependent on future earning capacity and the non-employee spouse has already received property for this contribution in terms of marital property then that spouse could be double dipping if he or she is to receive alimony for this same future earning capacity. From my experience, in Nevada, courts are more likely to effectuate an alimony award rather than a property set off for professional goodwill. This reasoning makes sense so as to avoid double dipping while it also allows for future modifications in the event that future earnings turn out to be different than anticipated. For more information on division of goodwill as a marital asset please see my blog on that subject which can be found on our website.

Arguments have been made that potential future tax consequences should be figured into present valuations. The argument is essentially that if and when property is eventually sold there will be a tax consequence and thus the court should factor that future consequence into the present value of the asset. Most courts have been reluctant to do so. Most courts are only likely to consider such tax consequences when such taxable event has already occurred as a result of the divorce or equitable division of property or it is otherwise certain to occur within a predictable timeframe so that the exact tax consequence can be predicted. Without the current or imminent tax consequence courts typically conclude that to factor such consequence into the calculation requires too much speculation.

Categories: Family Law