How Does Inflation Impact a Divorce?

Something that interests me as a divorce lawyer is how “black swan” events may impact the most carefully drafted divorce agreements. We seem to live in an era of such events, with pandemics, recessions, and now inflation.

Recall the image of people carrying around wheelbarrows of money during the Weimar Republic as inflation made even basic household goods worth thousands of valueless dollars? Hyperinflation, a true “black swan” event, even if its cause now seems predetermined by historians. Just imagine how the German divorce lawyer of 1923 felt when their carefully drafted divorce agreement became absurd as money became all but valueless.

How Does Inflation Impact Alimony?

When you negotiate a divorce, there are four primary ways to address alimony

  • Mutual waiver of alimony – This is self-explanatory, neither party will receive alimony.
  • Lump sum buyout – You determine the amount for a buy-out sum. This is often a one-time buy-out where a larger percentage of some other asset is given to pay for alimony. Care must be made here to make sure the buy-out is tax-effected.
  • Regular monthly payments that can be modified if there is a change in circumstances.
  •  Regular monthly payments that cannot be modified even if there is a change in circumstances. (Cases such as Lepis v. Lepis) provide that alimony can be modified if there is a “permanent and substantial” change in circumstances, but courts have held that the parties can waive this right to revisit alimony if they include “Anti-Lepis” language in their divorce agreements.

Now imagine what the impact of hyperinflation would be in a situation where there was a lump-sum alimony buyout. $100,000 today might have seemed like enough support to last several years while the alimony recipient gets their feet back on the ground. Now, perhaps $100,000 is only enough to purchase a jar of pickles. And that well-thought out plan to include “Anti-Lepis” language now has one serious winner, and one serious loser.

Of course, the above is a somewhat ridiculous example. There’s a reason why the Weimar Republic is still our go-to example of hyperinflation. Because it’s something that does not occur all that often. (It’s why we still discuss Tulipmania as well).

No respected economist is yet claiming we are in a period of “hyperinflation,” but the fact remains that we are in a period of inflation. Steady inflation, meaning that quarter over quarter the cost of basic goods such as food, fuel, housing, and transportation are increasing.

The current 6.2% twelve-month inflation percentage will have an impact on people’s lives, and thus it will have an impact on people’s divorces.

There are often good reasons to include modifiable alimony and good reasons not to do so. Every case must be treated based upon the data currently available. But unexpected events, such as inflation, can turn any deal sideways. And what is troubling is that there is little that can be done to combat such issues.

One tool that can be utilized is including a cost of living increase (“COLA”) when negotiating alimony. This ties alimony to the rate of inflation, often regional depending on which part of the state the divorce is filed.

But what about deflation? Should alimony decrease by a set percentage if deflation (which is generally rarer than inflation occurs)? Again, interesting topics to consider with no clear answer.

These issues may also impact child support.

How Does Inflation Impact Child Support?

Unlike alimony, which is based on a number of factors, child support is based upon guidelines—essentially an algorithm ordered by the State. That means that child support is generally revisited every three years or so (especially if run through Probation/Family Support Services) to determine how inflation or deflation may impact the child support number.

Accordingly, child support is more immune to issues of inflation.

Alimony and Equitable Distribution

Inflation should also be considered when determining timing events for equitable distribution. For instance, the “time value of money” principle becomes even more important in an era of inflation.

Conclusion

As you can see, inflation’s impact on alimony and other portions of a divorce agreement should not be underestimated.

Although inflation is not usually a primary factor in negotiating divorce, today’s high inflation environment is a good reminder to consider the “silent stealer of wealth” while negotiating your divorce.

 

Detangling Business and Personal Expenses in a Divorce

There are many reasons why divorce for W-2 earns are simpler than for business owners. Today I’m going to cover one of the more complex issues for business owners going through a divorce: determining income. More specifically, how can personal and business expenses be detangled.

When Business Income isn’t Really Income

The two primary accounting methodologies accrual accounting and cash accounting. The basic difference is that cash accounting focuses on recording expenses or income when actually received, whereas accrual accounting focuses on recording expenses or income as such events naturally occur.

For instance, in accrual accounting you would record an electric bill the moment it is received, but in cash accounting you would only record it when you actually pay the invoice.

For business owners, what often appears as income may in fact be something else altogether. Perhaps the $20,000 ‘income’ this year has simply been held and earmarked for new equipment next year.

If you’re going through a divorce, the other side may then argue that the $20,000 ‘income’ be used in calculating alimony.

So instead, you purchase the equipment this year. And now the other side is arguing that you’re attempting to deflate your income to reduce your alimony exposure.

Divorce as a small business owner can often feel like a lose-lose proposition. Damned if you do, and damned if you don’t. And it’s not like you don’t still have a business to run.

And of course the $20,000 figure I used is completely arbitrary. Maybe it’s $40,000, or $100,000. To you it’s a necessary business expense, but to the other side it’s setting off red flags, and calls of divorce planning.

So what can be done?

Using Expert Witnesses in Business Divorce Cases

One thing that can be done is the retaining of expert(s) to provide business valuation reports. Perhaps they can speak to subjects such as expected expenditure in various categories, and what type of infrastructure, hiring, or upgrades is necessary for a business.

A written business plan can also be helpful in this scenario. Demonstrating that you have a plan, and that these decisions are not made in an arbitrary manner can go a long way in demonstrating good faith.

Another issue is separating personal expenses from business expenses. This is something both the Internal Revenue Service and your ex may have their eye on.

Separating Personal from Business Expenses

The car you lease, the restaurants you frequent, the vacations you take. The other side will be looking at these expenditures to analyze whether they are appropriate, or if you are attempting to reduce your business income. Remember, the other side is already skeptical, they know that many people attempt to reduce their income to pay less in taxes.

Now, with a divorce pending (or on the horizon), they believe you have every motivation to further reduce your income. Doing so can help in multiple ways: it can help reduce alimony and child support, and may also reduce the valuation of your business.

Here, as with many parts of your divorce, is where keeping solid records will be helpful. If you can demonstrate that your leased car is actually a legitimate business expense, for instance, then that can help you reduce your alimony exposure.

Consistency of expenses may be helpful here as well. There may be an “appearance of impropriety” if there is a sudden increase in expenses leading up to a divorce with no legitimate reason for the increase.

Other times, you may be able to demonstrate that increased expenses are necessary to take advantage of limited opportunities, or to increase the infrastructure of your business.

Some businesses legitimately maintain multiple sets of books, and you may need to address this with your attorney to make sure your legitimate business practices do not come across as shady.

If a court believes that a business expense is really better classified as a personal expense, then they may add that back into your income. Family court judges have a great deal of latitude in this regard.

Conclusion

Divorce cases are always fact-sensitive, and even more so when a divorce involves a business owner. Whether you are a single member LLC, an S-Corp, or a simple independent contractor, your business records may be discoverable as part of a divorce litigation.

Finding the right attorney to work through the law and the facts specific to your case (and business) can make all the difference.

What is Good Faith Retirement for Business Owners?

Alimony is often more difficult for the self-employed. It just is. There’s less consistency for most business owners in terms of their salaries, their work schedules, even how long they intend to remain in business.

Alimony is a concept that thrives on consistency, and for many business owners that sort of stability is simply not there. There are up years and down years, and success is not always linear. Industries change, goals change, and yes…people change….

And yet an alimony award is expected to hold steady. And for many payors, it is expected to continue until a good faith retirement is reached.

But what is that, in the context of entrepreneurship?

What Does Good Faith Retirement Even Mean?

In New Jersey, parties may negotiate the end of alimony. This may mean a specific date, but will frequently be more nebulous. The death of either party will end alimony, but so might the “good faith retirement” of the party paying alimony.

But what is a “good faith retirement?” The law was modified in September 2014, to reflect a change in the burden of proof.

Pre September-2014, the burden was on the person paying alimony to show how they demonstrated a good faith retirement. Post September 2014 (the enactment date of the new law), the burden has shifted to the party receiving alimony to demonstrate how a good faith retirement has not been shown.

Post September 2014, good faith retirement is generally demonstrated by reaching the age of full social security benefits. So, if you were born in the social security band where you can retire with full benefits at age sixty-six, for instance, then there is a rebuttable presumption that you should be retired at that time.

Now, if a party continues to work, then perhaps that means they will continue paying alimony. But the important thing is that they will not be required to continue working while contributing to alimony.

And this is all pretty simple and intuitive…especially for W-2 income earners. You work the job and one day you retire with (hopefully) some form of social security. Maybe even a pension.

But maybe that’s not you. Maybe you’re a business owner. And if you are self-employed, then you can probably already see how this issue could become quite complex.

What is a Good Faith Retirement for the Self-Employed?

There are so many different types of jobs that fit under the umbrella of self-employed. Everything from working as an independent contractor to being the president of a large privately held business. I’m your self-employed local attorney, but maybe you’re running a large factory. We’re both self-employed, though our operations, income, and work expectations may be quite different.

Some jobs are extremely physically taxing. It may be difficult to work those jobs unless you hire staff to continue with the work.

Some business owners might sell their business at a young age and make enough money to earn an early retirement.

Many business owners cannot imagine ever retiring, although they may step into a different role.

But all such cases—along with those not mentioned herein—all must meet and be accessed in accordance with the New Jersey Alimony Reform Act, and its definition and consideration of “good faith retirement.”

Some of the factors that may determine good faith retirement for a business owner may include: 

  • Has the owner sold all or a portion of their business?
  • Is the alimony payor a majority or a minority shareholder of a business?
  • Has the payor really retired, or have they merely moved into a consulting role?
  • What is the specific alimony language contained in the parties’ Marital Settlement Agreement?
  • How many hours a week does the business owner work?
  • What type of net income has the business owner generated year over year?
  • How healthy is the business owner?
  • How health is the business owner’s business?
  • Are there outside investors in the business?
  • What is the valuation of the business?

And also, has the payee already received a portion of a business as part of the original divorce negotiation? 

Remember, New Jersey law does not allow for “double dip” payments. That means that you cannot be required to pay equitable distribution costs and alimony costs for the same asset.

In other words, you should not be required to pay out to your ex a portion of the business valuation, and to then also pay alimony on that portion. And yes, this can make for some tricky and complex accounting gymnastics.

Retirement and Personal Preference

I’ve had many entrepreneurial clients advise me that they could retire, that they are at a good faith retirement age, but that they feel conflicted. You see, they do not wish to continue paying any more alimony than necessary to their ex, but they also feel like they may have something to contribute to their business.

I advise such clients that this is often a personal decision. It’s easy to cut one’s nose to spite one’s face in divorce law. Too easy, if I’m being perfectly candid. But to borrow another idiom, there’s also more than one way to skin a cat.

The other side may be aware that you could good-faith retire at any time. Perhaps you and your lawyer can thus work out a buy-out of additional alimony, or lower the percentage of proceeds paid as and for alimony. That could be a win-win for both parties, perhaps. It’s best not to assume that the other side will merely be unreasonable. It’s always worth a bit of time and effort to have them reveal that themselves.

This is more of an issue in cases with open durational alimony (previously known as permanent alimony before the Alimony Reform Act of 2014). With alimony continuing on until the parties’ agreed to terminate it, or a court ordered the termination, some business owners find themselves paying alimony into their eighties or even nineties. In these types of situations, so long as you are earning money from your business, you may have an alimony obligation. Limited duration alimony, on the other hand, will have a natural end date so that you may work unencumbered by concerns about your ex taking a piece of your pie.

Conclusion

But of course, the important thing is to consider what works best for your life. I’ve heard some W-2 employees claim they will not work overtime, because they will have to pay more in taxes. This never made a lot of sense to me, as they would also be making more money.

It’s a similar sentiment for many when it comes to alimony. They would rather take 0%, then take 80% and share the other 20% with an ex.

I’ve heard a few people claim they enjoy paying taxes, rare as that sentiment may be. I’ve yet to hear a similar claim about paying alimony to an ex.

As with many issues in divorce law, good faith retirement for business owners is highly fact sensitive. It’s best to discuss your specific facts with a lawyer to determine if you have reached good faith retirement under the New Jersey alimony laws.

 

 

How Divorces Are Like Horror Movies

Tongue somewhat in cheek, as Halloween 2021 winds down, today I am going to write about what divorces and horror movies have in common.

The Final Scare

I am not going to write about how divorce can be hell, or make light of how divorces can be frightening. They can be, and all too often are, especially when people do not go in with the mindset of operating in their own or their children’s best interests.

Instead, I am going to discuss one element in a divorce that reminds me distinctly of the final scare in a horror movie.

Anyone who has watched a horror movie before—particularly a classic slasher film knows the scene….The presumed killer has finally, finally been subdued. The camera hovers over the body, lingering, perhaps cutting to the face of the protagonist who can finally flash that look of relief. And then….

Boom….the villain’s arm reaches out for that final scare.

It’s a cliche, but it’s also something we frequently witness in a divorce. That terrifying final gasp. It may present in various ways:

  • The parties seem to have worked out an agreement, but now one side is becoming intractable.
  • Not happy with settlement negotiations, a party files a bloated and unnecessary Motion, or doubles down on litigation tactics.
  • The divorce is finalized, but now at the uncontested hearing one party refuses to be bound by the terms.
  • Or the the divorce has been finalized, but now the other party refuses to be bound by the terms of the divorce agreement.

What Can You Do to Protect Yourself?

This is why it’s so important to have experienced divorce counsel.  This is why it’s imperative that you and your attorney document everything throughout the divorce process. This is why such care is given to crafting clear language in your divorce agreement.

Sometimes, in the relief of what one hopes is the end of a case, a party neglects to take due care in wrapping up their divorce. They may agree to terms that do not make sense, such as a parenting time schedule that involves too much driving. They may give up retirement funds that they are truly going to need one day. They may fire their lawyer, and attempt to go it alone because their finances are running low or because they are exasperated with the system.

As I’ve often said, divorces are more often a marathon than a sprint. That’s why I created my book on New Jersey Divorce, Happily EVEN After: the Guide to Divorce in New Jersey—in an attempt to educate consumers and clients, and to help answer common questions without increasing legal fees.

Divorces are fluid situations, and that makes them different from most types of litigation. This is not a one-time car accident, but a moving picture of lives once bound and now unwinding together, often at different rates.

By taking care of yourself, and your case, you can help maximize the outcome for you and your children.

Going through discovery, for instance, can often be costly and sometimes frustrating, but it can also provide what you need should your divorce proceed to trial. Many times, discovery is exactly what settles a case, thus foregoing the need for a trial.

By not cutting corners, you can help avoid that final scare in your divorce case. And if you need to pursue enforcement actions after the divorce is finalized, you can help ensure greater success.

Conclusion

Many people consider their divorce once of the most frightening and, yes, horrific moments of their lives. But by being focused on the case and taking care, you can help make sure that once it is over, it really is over.

Because if there is one thing nobody likes, it’s a pointless sequel.

Happy Halloween ’21.

 

My Spouse Won’t Let Me See Our Finances

Money can be a tricky thing in any marriage. When you fear your spouse may be divorce planning, red flags can swiftly become real wounds. In this blog post I’m going to review a common situation for many of our firm’s divorce clients: they are being locked out of their own finances by their spouse.

My Spouse Won’t Share Our Financial Information

There are various reasons why your spouse may not choose to share financial information with you, and they do not all spell divorce. Perhaps your spouse is simply secretive by nature, perhaps they are involved in something like gambling or some other habit they do not want you to be aware of, maybe it’s an affair, and maybe it’s nothing at all. That’s what makes these types of situations so difficult: you may not know exactly what you’re dealing with.

Here are some questions to ask when you’re concerned about a lack of transparency in your marital finances:

  • Is there a change in behavior, or has there always been a lack of transparency.
  • Are there any good faith reasons your spouse would not want you to be involved in your marital finances?
  • Have you always kept your finances separate?
  • Are you providing your spouse with more information and access to your finances than is being reciprocated?
  • What is your gut telling you?

Even if your spouse is not seeking a divorce, “shady” behavior could be indicative of anything from engaging in potentially illegal behavior (tax fraud, for instance) to something as innocuous as wanting to surprise you with a gift for your birthday. Again, it’s the inability to know that makes these types of situations so precarious.

Marriage Means Joint Finances, at Least in the Eyes of the Law

Even if you choose to maintain separate finances, court’s and judges often view marital assets and liability as just that—joint. If your spouse is incurring debts, then you may be equally as responsible for them.

With the exception of certain classes of assets such as non-commingled gifts, inheritances, personal injury awards/worker’s compensation awards (the portion relating to pain and suffering), and premarital assets, most items are subject to equitable distribution in a divorce.

Should I Be Concerned That My Spouse Is Not Sharing Financial Information? Is it Divorce Planning?

Many times a party going silent to finances may be a red flag for what is known as “divorce planning.” For instance, a spouse may stop sharing information about assets so that they may be shifted or hidden in cash, in other asset classes such as Bitcoins, or the like.

As my national article for other divorce lawyers on cryptocurrencies and divorce explains, there are many methods at play for the hiding or attempted hiding of assets in a divorce (or as part of divorce planning).

So the short answer is yes, you should be concerned about divorce planning if your normally transparent spouse is now acting shady or attempting to hide financial information from you.

Such actions also make it harder for you and your divorce lawyer to understand how to proceed in the negotiation or trial of your divorce. Too many times have I sat across from someone at an initial consultation and it has not been as helpful as it should be for them, because they have been locked out of their own finances.

And although there are ways to track down finances, including hiring experts such as forensic accountants, it’s harder to delve into the past and to strategize when such information is unknown. It’s also more costly. The longer this goes on, unchecked, the more difficult it may be for you to receive what is fair in your divorce. And if you do, it may be at great cost.

How Can I Protect Myself from Divorce Planning?

Transparency should be the rule in most marriages when it comes to finances. Although every couple has their own unique financial quirks, more communication is often better than less.

Here are some ways you can ensure you are protected from a spouse’s attempts at “divorce planning.”

  • Request to be a joint owner of all assets (as feasible, it’s not possible to be a joint owner of certain assets such as IRA retirement funds, for example).
  • Ask to have a weekly or monthly meeting to discuss your finances. (Check out my podcast episode on marriage and personal finance where I discuss my wife and my best practices in this regard).
  • Ask for all passwords and login information for your finances and debts.
  • Ask to be present at meeting with your accountant and other financial experts.
  • If you don’t believe your spouse is being one hundred percent forthright with you, then consider meeting with a marriage therapist together, or a divorce lawyer (on your own) to discuss.

By being part of the decision making, you stand a better chance of not being frozen out from your own marital finances. And remember: in most marriages in New Jersey those finances are joint whether you and your spouse consider them to be or not.

Conclusion

As with many things, an ounce of prevention is worth a pound of cure. By working with your spouse, you help protect your own interests while helping to ensure the strength of your marriage. Financial issues are the cause of most divorces, and finances become one of the most important topics in almost any divorce that proceeds.

Make sure you are protected now, to mitigate against future harm.