The division of assets in a divorce is crucial to the financial futures of the spouses. A fair division of assets is required under New York state equitable distribution law. For many couples, a professional license or practice (think doctor, lawyer, or dentist) or a business is a key asset in their divorce.
The value of that asset must be distributed among the spouses in the divorce. Still, the income from that business or practice may also be considered when setting an award of spousal maintenance (a.k.a. spousal support or alimony). There is an exception to this, and it is called double-dipping.
What is Double-Dipping?
Double-dipping occurs when a spouse is awarded a distributive award in the divorce based on the value of the future income of a business or practice and then is also awarded spousal maintenance and/or child support based on the income of that same business or practice. The value of that business or asset is used twice to calculate distribution and support payments.
Tangible vs. Non-Tangible Assets
In New York, double-dipping is not permitted when it involves an intangible asset. A business is generally considered a tangible asset if its value can be determined by looking at its balance sheet, just as a value can be calculated for a home or a stock portfolio. The business is distributed in the divorce, and then spousal support can be calculated based on the income that is received from that asset.
An intangible asset is one in which the spouse's actual services are what create the value of the business. If a spouse's own work is what creates the value in the business or practice, it is an intangible asset and double-dipping is not allowed.
The distinction between an intangible and tangible asset can seem a bit confusing because many businesses involve a spouse's personal labor or services. In 2000, the New York Court of Appeals decided Grunfeld v. Grunfeld, which remains the seminal case on this matter. In this case, one spouse's business was valued by projecting the future income stream it would produce (using discounted cash flow valuation) and designating it as an asset.
The business was then distributed in the divorce based on this valuation. The trial court then also created a maintenance award that was based on this same projected future income stream. The Court of Appeals held that once a projected future income stream (an intangible asset) is converted into a tangible asset for distribution purposes, that same income stream cannot be used to also calculate maintenance or spousal support because it is double-dipping.
New York stands alone in this ruling, something that it is important to keep in mind when considering your residency for the divorce filing. Other states do not consider this situation to be double-dipping, and if you were to establish residency in another state and file for divorce there, this would not be an issue.
Aftermath of Grunfeld
Cases following the Grunfeld decision held that it was double-dipping to count future projected business income as an asset for distribution and to rely on it for a maintenance award in several industries, including:
- Accounting practice
- Medical practice
- Psychiatric practice
- Orthopedic practice
- Master Electrician license
In cases that followed Grunfeld, New York courts have sought to further define when projected future income can be used to value a business and when it is considered double-dipping. The Keane case points out that when the asset has no value unless projected income is considered, it is not double-dipping to include the projected income in the valuation for distribution.
In Palydowycz, the court held that a medical practice and an interest in an ambulatory surgical center were tangible assets, because there were other doctors at the practice and the value was not dependent on the spouse's own work. Thus, the business could be valued by considering future income and that same income could also be used to set an award of maintenance.
How to Avoid Double-Dipping
This court ruling may seem to place a roadblock if a spouse is seeking distribution and maintenance based on the other spouse's business. If the property division includes the business projected income stream, there can be no maintenance based on that same income stream. The way around this is to use a different valuation method to place a value on the business or practice.
The business or practice can be valued using an asset approach. The asset approach is similar to a balance sheet in which future projected income is not considered part of the valuation calculation. The business's current assets and debts are compiled and totaled to achieve a total value for the business.
The current market value is used to determine the value of the assets. An asset within the business itself need not be actually tangible to be considered as part of the valuation. For example, a patent or trademark is valued as part of the valuation process, and so are products and intellectual property that are currently in development. The business's future earnings are not calculated or considering when setting a value using this method of valuation. Only the current value is considered.
Double-Dipping and Retirement Assets
Double-dipping can also happen with retirement assets. The value of the asset is calculated based on the income it will payout. It is then divided as part of the property division. If an award of maintenance is increased once the asset starts paying out the projected income stream, double-dipping occurs and is not allowed.
Because the law about double-dipping is so complex, every spouse considering divorce with a multitude of assets needs an attorney with a deep understanding and familiarity with this sophisticated area of the law. How a business is valued and whether projected income is included in the valuation has severe implications for property division as well as spousal maintenance in your divorce.