Setting aside issues of child custody, divorces break down into two main issues: 1) division of property, and 2) spousal and/or child support. Various things can make a divorce complicated. But, for the most part, these two issues drive the divorce proceeding, and they aren’t that complex.
However, what if one of the spouses owns his own business – like a dental practice, a construction company or an architectural firm? According to some people, the business owner didn’t build that business; but divorce courts will make him pay twice to his ex-spouse. Here’s how.
All of the couple’s assets are valued so they can they be evenly divided. As a part of valuing a business, its accounts receivable are included as an asset of the business. So, assume that assets and goodwill are worth $500,000 plus accounts receivable of $300,000; the business is worth $800,000. The business owner will have to pay his spouse $400,000 to keep his business. That seems fair enough.
Next comes the calculation of support (either spousal or child or both). Support is based on income the court expects the spouses to earn in the future. In determining future income, monies received in the future by the business owner from accounts receivable is counted. It’s not unusual for spousal and child support to amount to about 40-50% of the business owner’s income. Thus, at the 40% rate, the business owner will pay his ex-spouse $120,000 in support (40% x $300,000) as the accounts receivables are collected. This is in addition to 40% of the business owner’s income not from pre-separation receivables.
Thus, in this example, the business owner will pay his spouse $280,000 of his $300,000 accounts receivables.
The same is true for assets like pensions. If the spouse keeps his pension, he’ll have to give offsetting assets to his spouse for half of its value. Also, spousal and/or child support will be taken as a percentage of the full amount of pension benefits as the husband collects them.
Courts rationalize this double-counting by explaining that an award of support is discretionary and that the court has wide latitude to evaluate many criteria in setting support. In theory, that rationale holds water. Yet, in practice, courts generally ignore the assets of the parties and look solely to their income. This results in a real and often substantial unfairness to the business owner or pensioner.