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Big Update to Florida’s Property Division Law

Posted by Ron Kauffman on

There have been big updates to Florida’s property division law after Governor Ron DeSantis signed an important House Bill this month. Many divorce lawyers will be interested in the changes to the equitable distribution statute this bill makes and it can impact your divorce right now.

Property Division Law

Dividing up property in divorce

In every divorce case, courts have to equitably distribute of assets and liabilities between the parties. In order to do that, the court first has to evaluate what assets and liabilities exist, then determine which are “marital” and which are “non-marital.” A new law makes some interesting changes to what are marital and non-marital assets, and how to distribute them.

Marital assets include things like, any assets and debts acquired during the marriage, the enhancement of value and appreciation of non-marital assets due to the efforts of either spouse or the contribution of marital funds or other marital assets; interspousal gifts during the marriage; retirement, pension, profit-sharing, and other similar funds during the marriage

A court always starts with the premise that a distribution of marital assets and liabilities should be equal, unless there is justification for an unequal distribution based on certain factors.

The new bill tries to clarify different aspects of the equitable distribution process. For example, the bill clarifies what sort of circumstances justify an temporary partial distribution during a divorce, and even provides a list of factors for the court to use in making a determination on whether there is good cause to make a temporary partial distribution.

Can you give your house away as a gift?

Believe it or not, there were cases in Florida where spouses accidentally gifted non-marital homes to their spouse by Valentine’s Day card or birthdays cards not knowing they would be found to have the proper donative intent.

The new law now prohibits interspousal gifts of real estate unless there is written documentation that complies with the provisions for conveyance of real property under the statute governing deeds to property. The mere inference of a gift of real property will now not meet the threshold required for an interspousal gift unless there was written documentation for a conveyance.

The bill also makes it clear that when a spouse merely signs a deed for the sole purpose of conveying a homestead property – other than the other spouse or both spouses jointly – does not change the character of the real property.

Finally, the new law changes the definition of non-marital assets and liabilities so that real property acquired separately through non-interspousal gift, bequest, devise, or descent and in which legal title has not been transferred to both parties as tenants in the entireties, remains non-marital property.

How do you value the family business

Your small business can be a marital asset, and difficult to value. That’s  because of the concept of “goodwill.” Goodwill is that intangible value of your business above and beyond the value of its physical assets. Things like, your company’s brand, reputation, amount of loyal customers, employee relations, and proprietary technology are aspects of goodwill.

One kind of goodwill is called “enterprise goodwill”, the value that exists separate and apart from the reputation or continued presence of the spouse who owns the business. Enterprise goodwill is a marital asset equitably distributed in a divorce. On the other hand, “personal goodwill” is the goodwill attributable to the spouse, not to the business itself, and is not a marital asset. That begs the questions, what is and isn’t personal goodwill?

Under the new law, courts have to consider evidence that a non-compete clause or a similar restrictive covenant may be required upon the sale of the business. The law clarifies that the mere existence of a non-compete provision is not dispositive as to whether the goodwill is considered enterprise goodwill. So, even if the valuation of a business is based on the requirement for a non-compete contract, the court can still determine whether the goodwill is enterprise or personal and subject to equitable distribution.

The new law becomes effective July 1, 2024 and is available here.

Divorce and Business Property Division

Posted by Ron Kauffman on

When one of Zach Hendrix’s three business partners said he was getting divorced, sympathy turned into shock as everyone realized that a soon-to-be ex-wife could become a co-owner. Understanding the law around business and property division in a divorce is the first step to protecting yourself.

business property divisions

Open for Business

When a small business owner divorces, the company can become part of a property fight; the battle can end with owners losing all or part of their businesses. Or, they or the company may be forced to take on debt to prevent an ex from sharing ownership.

Even when ownership isn’t at stake, the rancor and uncertainty around a divorce can take a toll on a company — owners may be distracted and unable to focus on what the business needs.

Hendrix and two of his co-owners had to borrow a combined $250,000 to buy out their partner in 2017 after he announced his divorce plans. A startup, and not in a position to get that much credit, the three had to personally guarantee the loans. They were able to repay the debt in a year and a half out of their profits.

The divorce was a learning experience for the partners. When they started, they hadn’t written what’s known as a buy-sell agreement that creates a process and sets a price for buying out a partner.

Florida Business Property Division

I have written about property division recently. Florida is an equitable distribution state when it comes to dividing businesses in divorce.

In a proceeding for dissolution of marriage, in addition to all other remedies available to a court to do equity between the parties, a court must set apart to each spouse that spouse’s non-marital assets and liabilities.

There are several factors to know whether a business interest is marital. First, you will need to look at the date of marriage and the date the business interest was acquired.

Additionally, you should look to the source of funds used to start the business, and also if there were money and labor contributions to the business given by either spouse during the marriage. In distributing the marital assets and liabilities between the parties, the court must begin with the premise that the distribution should be equal, unless there is a justification for an unequal distribution.

Whenever an agreement cannot be made between the spouses, the court’s distribution of marital assets or marital liabilities must be supported by factual findings and be based on competent evidence.

Once you have determined whether an interest in a business is marital, how do you actually determine what that interest is worth?

There are three approaches to value a business interest: (1) the asset approach; (2) the income approach; and (3) the market approach.  Each approach has inherent strengths and weaknesses.

Any valuation expert should consider all three approaches; however, it is often the case that all three approaches cannot be applied.

Back in business

The emotional fallout from a divorce can affect co-owners and employees. In his settlement with his wife, Jeffrey Deckman agreed to pay her $100,000 over four years; that amount was half what his telecommunications business was valued at.

Deckman borrowed money to make the payments, but having that debt hanging over him created stress that spilled over to his company.

“I started getting edgy, short-tempered, pushing hard for (sales) numbers that I never pushed so hard for before.”

He began fighting with his two business partners, and the discord affected everyone who worked there. It took six months for Deckman to realize what he was doing. “It showed me on a certain level that I hadn’t accepted responsibility for the deal I made,” he says.

But by the time Deckman understood that “I was making people pay,” he had damaged his relationship with his partners and staffers. In 2005, two years after the divorce, he realized that he needed to withdraw from working in the company, and in 2008 he sold his stake. Deckman, who now does consulting for small and mid-sized companies, believes despite losing his share of the business that he did the right thing in his divorce settlement.

He says of his ex-wife: “Today, years later, we are great friends and our children benefit greatly because of it.”

The Detroit News story is here.

 

Divorce Time Flies

Posted by Ron Kauffman on

The New York Times is the latest media outlet noting that a new tax law – that took effect in January – has added a new urgency for many Americans contemplating divorce. Why would a new tax law have such an impact on divorce?

divorce time

Beat the Clock

As the New York Times article notes, several key changes in the tax law may determine whether it is better to complete or update a divorce agreement by Dec. 31st or wait until the new year.

One of the biggest changes affects alimony, which will not be a tax break for Americans after this year. The new tax law is also causing parting spouses to look more closely at benefits for their children and the values of privately owned businesses and partnerships.

In the Nick of Time

I’ve written about the area of divorce and taxes before, but the Times article notes four areas that couples considering a divorce should examine before the end of the year:

Alimony

As many people have heard, the tax law is going to turn the calendar back on alimony. 77 years in fact. That was the year the Revenue Act of 1942 first made alimony deductible for the spouse paying it and taxable for the spouse receiving it.

The new tax law could become a problem in divorces settled after December 31, 2018, because under the new law, the alimony payer will be taxed on the full amount while the recipient will pay no tax on it.

Prenuptial Agreements

It is common in prenuptial agreement to have language calculating alimony payments based on years of marriage, and a clause saying alimony payments are deductible for one spouse.

In the absence of guidance from the I.R.S., a document calling for deductible alimony might not be honored if alimony is no longer deductible.

Business Valuations

Business valuations have always been an important component of divorce. The new tax law increases the cash flow of certain pass-through entities — businesses where the taxes are picked up by the owner, not the company — in a way that raises their value.

However, a higher cash flow – because of the change in the tax law this year  – may not be known until the business owner files a tax return next year.

Other Assets

Should you ask for the house or retirement? The new tax law, particularly in states where deductions for high state and local taxes have been capped, may make the home less valuable than a retirement account with a similar value.

Spouses who get the retirement account will not be able to draw down on it until age 59½, but they will have a more solid financial base in their later years. And by opting for the retirement account over the house, they can avoid paying those property taxes.

The New York Times article is here.

 

Business Valuation Changes

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By The Law Offices of Ronald H. Kauffman of Ronald H. Kauffman, P.A. posted in Equitable Distribution on Wednesday, October 19, 2016.

I was honored last night to be sworn in as the President of the First Family Law American Inns of Court in Miami by the Hon. Reemberto Diaz, circuit judge. There was also a discussion on equitable distribution of business interests.

The American Inns of Court is an association of lawyers, judges, and other professionals from all levels and backgrounds who share a passion for professional excellence.

Our Inn was founded 20-years ago by the Hon. Richard Yale Feder, circuit judge. Judge Feder was not only a founder of our Inn, he was the primary motivator behind establishing the Family Division Courthouse in Miami-Dade County, Florida.

Last night’s presentation was not only a humorous look at family law statistics nationwide, but a cutting edge presentation on the new I.R.S. regulations impacting business valuations in matrimonial cases by Philip J. Shechter, CPA/ABV, CVA from Cherry Bekaert LLP.

I’ve written about equitable distribution before. Business valuations in divorces usually contain discounts. The two primary discounts are:

– discounts for a lack of control or a minority interest discount, and

– discounts for lack of marketability.

Initially the IRS stated that discounts were not available when valuing an interest in an entity that was controlled by family members. Discounts have become very popular in business valuations, and because of the increase in use if discounts the IRS has tried to limit claimed abuses and loopholes.

Section 2704 states that the Secretary of the Treasury may provide in regulations new restrictions that are to be disregarded in determining the value to a family member if the restriction reduces the value for estate tax purpose but does not ultimately reduce the value of the interest to the transferee.

The proposed regulations to section 2704 severely restrict the ability to use discounts in cases of family ownership. It anticipates work arounds, such as having a small portion of ownership in non-family members and prohibits using discounts in those situations too.

The new regulations could go into effect before year-end 2016.

A copy of the new regulations is here.