One of the most challenging issues that can arise in a family law case occurs when the opposing party is self-employed. Simply put, throughout my career in family law practice, I can safely say that virtually every self-employed person in litigation reports a downturn in business that is coincident to the legal case, whether it is a divorce or a paternity/child support case. In a divorce case, a spouse-owned business will generally be treated as a marital asset. The value of the business determines what the non-owning spouse will be awarded as his/her share of the business upon dissolution of the marriage. In addition, the income stream of the business will drive issues pertaining to child support and spousal support (alimony).
The reason self-employment creates challenges to the family law lawyer is precisely because the business-owning spouse will invariably report that business is tanked and worth little to nothing in an effort to thwart the non-owning spouse’s claims to a share of the business value and income. It is up to the family law attorney to prove otherwise. While this article is not intended to be a primer on how to prove business value and income, it is intended to emphasize that this can be a significant undertaking – made more complex when the business-owning spouse makes deliberate attempts to hide the money. In my experience, unless the business is a relatively small and simple, and records are well-kept, it is almost always necessary to bring in a forensic accountant to follow the money and find it – no matter how well hidden it might be. That is a costly undertaking, and the outcome is unknown, so there is financial risk involved in doing so. Whether the risk is worth the investigation cost is an important issue to consider, and should be thoroughly discussed with your lawyer.
An example of “worth it:” I recently took to trial a post-divorce case where the business-owning ex-husband claimed poverty and requested a reduction of his $5,000 monthly spousal support. The business employed a number of people, and undertook a variety of projects. Bank statements produced in response to a discovery request discouraged me – it did appear the business was performing poorly, but I recognized that the situation was complex and that I lacked the expertise to follow the money trail myself. Also, my client insisted that her ex-husband’s lifestyle far exceeded what his income looked like on paper, so I brought in a forensic accountant. In the course of the expert’s investigation, it was determined that, among other things, the ex-husband had used his late father’s trust account to “launder” a $100,000 check that was re-directed from the business we were evaluating to a new business venture out-of-state. These were two significant findings, and not the only ones that led to a favorable outcome for the client. In that case, not only did my client end up with a good spousal support decision, but the ex-husband was ordered to pay a very substantial portion of my attorney fees and virtually all of the expert’s fees for the forensic work and two days of appearing to testify in court on behalf of my client.
An example of “not worth it:” In another recent case, my client and I were able to successfully negotiate a settlement over the ex-husband’s disputed income. He worked for a company but ran a business on the side. After reviewing bank statements and general ledgers, we were convinced that he was earning more than $50,000 annually from his side business. But, given the cost involved in bringing in a forensic accountant and taking the case to a full hearing, the parties were both convinced to settle. We agreed on a number to impute to the ex-husband for child support purposes, and the case wound down with both parties satisfied. It was not worth the investment in a forensic evaluation because the sole issue was child support, so the value of the business was irrelevant (that is, my client was not going to be awarded a share of the business; it was strictly a child support review case). The child support adjustment, based on the agreed-upon amount of self-employed income we settled on was significantly favorable for the children without representing a draconian increase in the ex-husband’s monthly support obligation. Neither party is wealthy; neither party wanted to invest a great deal of money in attorney and expert witness fees. Both wisely recognized that the money is best spent on the children.
It is important to share with your lawyer all the information you may have about your spouse’s/ex-spouses or domestic partner’s business and lifestyle. Oftentimes s/he will be motivated to settle to discourage a more thorough examination of the business books and records, and the settlement amount is reasonable under all the circumstances. But, where there is a large amount of money at stake, it may well be worth investing money in a forensic accounting to determine real business value and income stream. Your attorney can and should help you engage in this analysis and make a cost-effective decision.
