Divorce and Business Valuation

When a person owns a business, divorce can pose special problems.  There is no “one-size-fits-all” solution, and a business owner who is going through a divorce (or a spouse of a business owner) needs competent and experienced legal representation to address valuation and tax issues.

Usually  in the context of a divorce, it is necessary to establish a value for the business in order to fairly include it in the property division spreadsheet.  And, usually a business appraisal is performed by a professional appraiser.  The appraiser seeks to answer the question – what would the average buyer pay to acquire the income stream.  There are various formulas that an appraiser might use, and the capitalization rate that he or she selects can vary from business to business.  Counterintuitively, the appraiser does not ask what an actual buyer might pay,  but, in light of the formula, what would an average buyer pay.

When valuing a business from the perspective of the outside spouse (the “outside spouse” is the person who does not run the business, and to whom the business itself is probably not going to be awarded) it is important to look at the spending patterns the business has engaged in in in the past.  Is the business paying the personal expenses of the owner?  For, example, is the business providing the owner with an automobile, is it paying his or her automobile insurance, and is it paying other expenses which could be considered personal to the owner?  Who owns the property that the business is situated on?  Is the business paying the owner rent?  Or, if the business is an office building or an apartment building, is it fully leased?  What are the durations of the various leases?

This information is probably not found in the business’s tax return.  An expert may have to review the business’s accounting ledgers, including sub-ledgers that provide details on individual expenditures.  There are many other kinds of documents that provide valuable insight into the inner-workings of a business entity, and you should select an attorney who knows what these are and who knows how to get access to them.

Sometimes a business owner has an ownership interest in a business in the form of stock shares or partnership shares.  While these have value, typically there are share transfer restrictions placed upon them when the business was formed.  A share transfer restriction places a restriction on who may own stock in the company.  Usually, when a share transfer restriction is in place, the only person who can buy stock is another shareholder, or someone else who is approved by the directors and/or shareholders.  A share transfer restriction can reduce the value of the stock because the stock is not freely transferrable.  Shares of stock that are publicly traded on a stock exchange do not have share transfer restrictions, and anyone can buy them.

Sometimes shares of stock are held in an Employee Stock Ownership Plan.  These, too, can be the subject of share transfer restrictions.

It is also important to obtain information about the equipment and fixtures owned by a business.  And, if the business owns intellectual property (trademarks, copyrights, patents, secret recipes, etc.) these also need to be valued.

If you are going to be involved in a divorce proceeding in which the disposition of a business is an issue, you should call attorney Dan Fiskum at (952) 270-7700 for more information and a free divorce case analysis.


Documents Needed for MN Divorce

If you are considering getting divorced, it is a good idea to assemble the documents you may need to refer to in the future and put them somewhere for safe keeping.  These documents can include state and federal income tax returns, monthly checking account statements, check book registers, house titles, deeds and abstracts, documentation from the sale or purchase of a home, documentation from the purchase of an automobile, monthly credit card statements, and recent paycheck stubs.

These are just a few of the primary documents that you should set aside.  Fiskum Law Office has developed a comprehensive list of necessary divorce documents and complimentary copies are available upon request.  Just send an e-mail request through this website.

Keep in mind that you should not open your spouse’s mail and you should not open his or her e-mail or other password-protected Internet accounts.

If you can assemble these documents before starting the divorce, you will save time and money.  During the divorce p0roceeding, the parties and attorneys can engage in a process called “discovery.”  Essentially, an attorney can formally demand that an opposing party produce copies of any documents that might lead to the discovery of admissible evidence.  All of the documents described above are relevant to a divorce proceeding and would be have to be produced.

The problem with discovery is that it is expensive.  It often takes hours or days to respond to formal discovery requests.  Also, it is difficult to obtain a document if it has already been destroyed.  You can get copies of some documents (summaries of tax returns, copies of bank statements, etc.) but some documents are not easy to get, once they have been destroyed.  This includes documents like check book ledgers, documents relating to the purchase and sale of a home, etc.  Also, it is very difficult to subpoena documents that are kept out of the State of Minnesota.

If you have any questions, feel free to call me – Dan Fiskum – at (952) 270-7700.  I cannot give specific legal advice over the telephone, but I am happy to set up a free consultation to discuss your divorce case.

MN Divorce and Retirement Assets

Recently I was asked whether re-marriage can affect a person’s entitlement to receive retirement assets that were divided pursuant to a Qualified Domestic Relations Order as part of a divorce decree.  The answer is “No.”

Here’s the background: in Minnesota, assets acquired during a marriage generally are considered “marital” property.  Exceptions include inheritances, gifts made individually to one spouse and not to the other, and some components of personal injury settlements.  There are a few other exeptions.

In Minnesota, marital assets, including retirement assets are subject to an equitable division.  This includes retirement assets, including pension plans, 401(k) plans, IRAs, Roth IRAs, and other types of assets.

Generally speaking, IRAs and Roth IRAs can be divided rather simply, with a roll-over from one account to another account (in the name of the spouse receiving the asset).  Because of the way the internal revenue code is structured, pension plans and 401(k) plans require a more detailed treatment.  I believe this is because pension plans and 401(k) plans involve pooled assets.

To divide a 401(k) plan or a pension plan, the court needs to enter something that in Minnesota is called a “Qualified Domestic Relations Order.”  To put it simply, this is an order from the court to the plan administrator, telling the plan administrator to take a particular action, that is, to transfer all or part of an asset from one spouse’s name into the other spouse’s name.  (Keep in mind that this is an oversimplification, its a little more complex than this in real life.)

In Minnesota, the abbreviation for Qualified Domestic Relations Order is “QDRO.”  Once a QDRO has been entered by the court, it is served on the plan administrator.  The plan administrator then follows the directive of the recipient in either establishing a new account or transferring the assets.

Once the QDRO is approved by the court, it is final.  If a spouse receiving an interest in a pension plan or 401(k) remarries, he or she does not lose the benefit of the retirement asset that was transferred to him or her by a QDRO.  The property division became final at the time of the divorce.


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MN Divorce, Fear and “Discovery”

I am a Minnesota divorce lawyer.  I practice divorce law in Hennepin County, Minnesota.  Divorce varies significantly from state to state, because it is pretty much a creation of state (not federal) law.  However, one thing that I think is common in all divorces, regardless of where they take place, is “fear.”

One of the things that really sucks about divorce is fear.  Yep.  The garden variety, common, every day fear.  People who are getting divorced are venturing into the unknown.  Emotionally, financially, in just about every way, their life is going to change.  This causes many people to experience fear.  They might not call it “fear,” and their inner experience may resemble anxiety, depression, concern, etc., but in its most primal form, in my opinion the bigger problem is just fear.

Assuming that one is not a robot, I think that much of the emotional trauma that is attendant to divorce is unavoidable.  But, one way to alleviate some of the fear is to make sure that you have complete and accurate financial information about your spouse’s (and your) assets, income and debts.  Even if you and your spouse are going to reach an amicable settlement where you each sign a written agreement (a “Marital Termination Agreement” in Minnesota) and walk away, you need to know about your spouse’s assets, income and debts.

For some of you this is easy.  Your house is underwater, your spouse has been unemployed for years, and you have few retirement assets.

For some of you this is more difficult.  You each have retirement assets, some of which was accrued before, and some after, the date of marriage.  You have a house, cars, lots of bills, but also adequate income to pay most of the bills on time.

Before the divorce starts, you should make copies of important financial documents.  This includes income tax returns for the past several years, W-2 forms, 1099 forms, retirement account statements, documentation of the purchase of your home, recent paycheck stubs, credit card statements, bank account statements, check book registers.  I am not telling you to break into your spouse’s private records, but if copies of these documents can be made easily, you should do it.  Then, you should but them in a box and take them to your friend’s house for safe keeping, until you need them.

If you cannot find copies of these documents, there is a process your attorney can follow during the course of the divorce proceedings called “discovery.”  Essentially, your attorney can compel your spouse to turn over copies of all important documents.  Your attorney can compel your spouse to answer questions about his or her finances, and anything else.  Your attorney can also subpoena other people and require them to provide information about your spouse under oath.  This could include your spouse’s employer, his or her banker, or anyone else who might have information.

Here’s the thing: discovery is expensive.  If you can obtain financial information informally, that’s best because it doesn’t cost as much money.

If you have any questions about this, call Minnetonka divorce attorney Dan Fiskum at (952) 270-7700.

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Online Divorce Scams

I spoke to someone yesterday who said she had paid $250 for so-called “online divorce.”  She said she didn’t get divorced and she didn’t get her money back. 

So called “online divorces” are a scam.  Do not waste your money.  Regardless of what the scammers say, you cannot get divorced online.  At best, all the so-called “online divorce” scammers can do is e-mail you some forms to fill out.  They cannot fill them out for you because they are not attorneys.   A non-attorney cannot fill out legal forms for you and file them with the court because that would be practicing law without a license, and that is illegal.

You cannot get divorced unless you file the correctly completed paperwork and pay the court filing fee.  In Minnesota, the court filing fee for divorce is $400 in most counties, and slightly higher in some counties.  If you have children and do not have an attorney representing each spouse, then you have to appear personally in court, before a judge or referee, for an in court review of the divorce documents.

Since the court filing fee is at least $400, it is impossible to get divoreced by paying someone $250.

Do not pay for divorce forms.  The divorce forms that you can buy on-line are garbage.  Minnesota has specific requirements that are different from those of other states.  You can get the best divorce forms for free right here: http://www.courts.state.mn.us/default.aspx?page=513&category=55

Now, just having the correct form does not mean that you know all you need to know about the law.  Generally speaking, you should hire an attorney.  But, if you cannot afford an attorney and need to get divorced, these forms are helpful.

Minnesota Divorce and Retirement Assets

Often people ask me about how to divide retirement assets when they get divorced.  As I’ve mentioned before, Minnesota is a marital property (or common law) divorce state.  It is not a community property divorce state.  (Most states are community property states.  Minnesota is not.) 

In Minnesota, a division of assets is supposed to be “equitable,” not “equal.”  These two concepts are not the same.  The reason this is important for you to know is that, depending upon the skill of the divorce lawyers, there can be a lot of “slop” when people get divorced.  Sometimes valuation dates get messed up, sometimes values are incorrectly determined, sometimes values change dramatically during the divorce process.  The result can be a property division that is not particularly “equal.”  But, it could be “equitable.” 

In Minnesota, a court can take up to one-half of a spouse’s non-marital property and award it to the other spouse.  Yep, you heard it correctly.  A Minnesota divorce court can take up to one-half of the property you had before you were married and award it to your spouse.  This does not happen very often, but it does happen. 

So, what about retirement assets?  There are several kinds of retirement assets–IRAs, Roth IRAs, 401(k) plans, and pension plans, to name a few.  IRAs and Roth IRAs can be divided by means of a direct rollover.  Essentially, the divorce decree describes the IRA to be divided and states how it is divided–that is, how much each spouse receives.  One spouse or the other takes the decree to the bank and the bank rolls a specific dollar amount into a new account for one of the spouses.  Its a pretty straight forward process.

401(k) plans and pension plans are not as easy to divide.  They require something called a “Qualified Domestic Relations Order” known as a “QDRO” for short.  A QDRO is a court order that conforms to requirements of federal law (mostly ERISA) that directs a plan administrator to take a particular action–in this case, to take some money from a 401(k) plan, for example, and give it to the non-participating spouse.  The end result is the same as with an IRA–the non-participating spouse gets some cash in his or her own account.  But, its a lot more work.  The QDRO has to be correclty worded and it has to meet with the approval of the plan administrator.  The reason for this is that if a distribution is made improperly, the qualified tax status of the entire plan can be jeopardized.  Depending upon the size of the plan and the number of participants, a mistake like this could be catastrophic for the plan administrator.  So, the QDRO has to be correctly written. 

It can be a bit more tricky to divide a pension.  One reason for this is that many pensions have an indeterminate payout.  In other words, you know that when you retire, you’ll get a certain monthly payment.  But, you do not know how much that monthly payment will be until you actually retire.  Its going to depend upon how much money is in the retirement plan and how many retirees are sharing it. 

So, in that case, a QDRO is written that describes a fraction.  Without getting too technical, basically the non-participating spouse receives one-half of the monthly payment that is attributable to the years of marriage.  The participating spouse receives one-half of the monthly payment that is attributable to the years of marriage, plus all of the monthly payment that is attributable to the post-marriage years.  This is expressed by a mathematical equation that takes into account the years of marriage and the total number of years of participation in the plan.

There is also something called a survivor annuity.  You need to research this by getting complete information from the plan administrator.  Many plans have something similar to an “insurance policy” that allows for continued payments to a non-participating spouse when the participating spouse has died.  Often, when one takes advantage of this, the monthly payments upon retirement are somewhat less.  Also, many plans have a provision that when the non-participating spouse dies, the participating spouse’s monthly payment is increased to the amount that it would have been had an award not been made to the former spouse.  Check this out, and when writing the QDRO, do not leave money on the table.

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Hennepin County FENE

In Hennepin County, they have a program called “Financial Early Neutral Evaluation.”  It is similar to the custody and parenting time neutral evaluation program, but there are differences.  For example, there is only one evaluator and the parties are required to pay him or her an hourly rate. 

I have participated in Financial Early Neutral Evaluation proceedings in Hennepin County on numerous occasions.  My experience is that sometimes it is effective, sometimes it is not.  In my opinion, the difference is the quality, skill and experience of the neutral evaluator.   The hands-on evaluators who work actively to push both parties towards a reasonable settlement tend to get the best results.  The evaluators who seldom express an opinion, who rely on accountants or others to do their work, tend to get worse results.

Call me for more information and a free consultation at (952) 270-7700.

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Obtaining Financial Info in MN Divorce Cases

Often a party to a divorce proceeding will try to hide information about his or her income and assets.  There are various tactics an opposing attorney can use to try to obtain documentation about a party’s real income or assets.

There are, of course, the obvious sources.  These include income tax returns and paycheck stubs.  The problem is that people sometimes lie on their income tax returns and they often receive income that is not reflected on a paycheck stub, W2 or 1099 form.

If the person has a car loan or a mortgage loan, ask to see the actual loan application form that the person filled out when applying for the loan.  Even if the party is hiding income from the divorce court and the IRS, he or she will likely disclose all income to a bank in order to qualify for a loan.  If the party will not give up the loan application, depose an officer of the bank.

Mortgages are on file with the county.  Look at the person’s mortgage.  You can generally calculate what a person’s monthly mortgage payment is if you know the amount of the loan, the term, and the interest rate.

You can also determine the amount that a person paid for real estate by calculating how much tax was paid to file the deed.  The tax varies, depending on the cost of the property.

Often people who are self employed will hide income in their business.  Tney do this by having their business pay their personal expenses.  The business might pay for their car, car insurance, gas, car repairs, food, clothing, rent, etc.  So, the attorney investigating this needs to look at the business records, Quickbooks files, etc.

Sometimes you have to discover checking account statements and checking account records.  The most helpful record is the actual check book register that lists the check numbers, payees, and amounts.

Check court records to see what other lawsuits the party might be involved in.  You never know.  If the party was married before, review the court’s file from the prior divorce proceeding.

Finding undisclosed income and assets is not easy, and often it is not worth the cost.  However, if the income or assets are significant, and if the litigation is adequately funded, with some investigative work an attorney should be able to assemble a reasonable summary of income, assets and debts.

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MN Divorce and Bankruptcy

Minnesota Divorce and Bankruptcy: Often people who are contemplating a divorce are also contemplating bankruptcy.  Marriage relationships can deteriorate quickly when there is significantfinancial pressure.  In this circumstance, bankruptcy can be a reasonable option.

If you are considering bankruptcy at the same time you are considering divorce, you need to consult with both a bankruptcy attorney and a divorce attorney.  And, your spouse and you should not use the same bankruptcy attorney, nor should you use the same divorce attorney.  Your interests are not the same.

In Minnesota, it is a violation of the rules of ethics governing attorneys for an attorney to represent both parties to a divorce when children are involved.  While it is technically not a violation for an attorney to represent both parties to a divorce when no children are involved, this is not a good idea for the parties or for the attorney, and I strongly recommend against it.

One notion that can confuse couples going through bankrutpcy is that the definition of the marital estate that is provided by Minnesota divorce law does not exist if a divorce is not pending.  Here’s an example: in Minnesota, a spouse has an interest in real property owned by his or her wife or husband, even if the spouse is not shown on title as an owner.   However–this “marital interest” comes into place only when a divorce proceeding has been started (or possibly when the property is sold).  In a Minnesota divorce proceeding, who’s name happens to appear on title to property does not mean very much.  In a bankruptcy proceeding, the name on title can be very significant.

Also, in Minnesota divorces the court will allocate responsibility for payment of debt to one spouse or the other.  If a bankruptcy is looming, the spouses may want to consider an agreement that either or both of them can discharge the debt in bankruptcy.  Without that agreement, a former spouse can make it difficult for a party to discharge certain debt in a Chapter 7 bankruptcy proceeding. 

Another issue that comes up: often one spouse will obtain credit in the name of the other spouse, without that spouse’s knowledge or consent.  In a case like this, the attorney for the spouse who may be facing unknown debts should conduct some formal discovery to comple the other spouse to disclose all debt obligations that he or she may have incurred in the name of the client. 

For more information about Minnesota divorce, feel free to contact me at (952) 270-7700.

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401(k) Plans and Financial Emergency

People who get divorced often have 401(k) retirement plans.  The funds in a 401(k) plan are “qualified” funds.  This means that the income tax on these funds, and income tax on the interest or gain realized by these funds, has not yet been paid.  The income tax is paid later, as the funds are withdrawn from the account.  The withdrawal usually occurs after retirement, when the person taking the funds is in a lower tax bracket. 

Typically, funds cannot be removed from a 401(k) plan prior to retirement.  Employers often give loans which are secured by 401(k) plans, but these are loans.  It is not a withdrawal from the plan.

At divorce, the assets in a 401(k) plan can be allocated between the parties.  The court does this with an order called a “Qualified Domestic Relations Order.”  While language in a QDRO can be included in the divorce Judgment and Decree, usually it is contained in a separate order, entered after the Judgment and Decree is entered.  This is not a requirement, but it is common practice. 

A QDRO is essentially an order that tells the plan  administrator to establish a new account in the name of the non-participating spouse.  The QDRO tells the plan administrator to transfer an amount of money into the name of the non-participating spouse (that is, the spouse who does not work for that employer).

Usually, the non-participating spouse can direct that his or her portion of the 401(k) asset be rolled over into an Individual Retirement Account.  This is a non-taxable event.  Again, the tax will be paid when the money is withdrawn, usually during retirement.

However, often a person will withdraw funds from an IRA before retirement.  This is a taxable event, and it is also subject to a penalty.  In addition to paying federal and state income taxes, the spouse also pays a 10% penalty.   Depending on one’s tax bracket, almost half of the IRA withdrawal could be paid to the Internal Revenue Service and the MN Department of Revenue in taxes or penalties.  So, this is not a particuarly good deal.

There is a little know provision of the Internal Revenue Code that allows the party receiving the transfer of some of the 401(k) asset to withdraw cash without paying the 10% penalty.  The withdrawal has to be made within 60 days of the divorce, and there has to be a financial emergency.  Of course, the income tax on the withdrawal does have to be paid.  That cannot be avoided.  But, with proper drafting, the 10% penalty can be avoided.

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