Although horrifying tales of on-line romance scam artists swindling the life savings of the lonely are being highlighted on the airwaves, seeing how the love life of a client or his or her children can devastate well-established family businesses is more terrifying—and pervasive.

Let’s do the numbers. All marriages end. Either someone walks out or is carried out.

The good ones are when you are carried out. That’s a successful marriage. Does it not make sense for people to prepare financially for the devastating effects of death and divorce on a closely held business?

As Bob Dylan so brilliantly wrote in his song, “Subterranean Homesick Blues,” “You don’t need a weatherman to know which way the wind blows.”

Death and divorce are going to affect closely held businesses.

Import of the Increase in Divorce Rate

Over the past 30 years, the divorce rate has increased for people who qualify for membership in AARP. In fact, a new phrase came into use because of this trend “the graying of divorce.” Unfortunately, most of us over 50 know more about hair dye than about heirs and dying. Since the latter lasts longer, it needs to be explored with clients carefully as they tender substantial equity positions in family businesses to their children, siblings and others.  

There is no more environmentally conscious group in support of recycling than the matrimonial world. People used to have arranged marriages, and only divorced if their lives were in danger or if they could prove their spouse was committing adultery.

Once people started to marry for love, they started to divorce for the very same reason. When people realize they potentially have decades more of life, that they don’t have to be in danger or miserable or need to fall in love with someone else to get divorced; one can simply decide he or she is not happy enough to stay married.

You don’t need a reason, but you should always have a plan. That’s why everyone should know the laws of the state in which he or she resides or in which their spouse resides. Even the county you live in can make a profound difference.

When COVID struck in March 2020, future clients of mine fled New York City, some suddenly living full-time in their second home or relocating to a different part of the country or state. People realized Marie Kondo’s mantra to declutter your home of items that no longer “sparked joy” applied equally to relationships, especially marriages.

Open-ended time together, having another baby or taking vacations are kryptonite for shaky relationships. These changes usually are the tipping points that lead to consultation appointments for divorce. I truly see spikes in new clients after they have taken vacations with their spouse. 

Free time together allows you to recognize if the relationship is still of service to you in your life. Just as people have reevaluated their work/life balance during COVID and, consequently, changed jobs and even careers, marriages are often the collateral damage of reconceptualization of lives.    

Always listen to the meaning between client’s words. People may not always tell you how they feel about their loved ones, but their actions can speak volumes.

Is there a chance their marriage may not last forever, or even for that tax year? If so, you can provide your client with extraordinary guidance to help them do real, meaningful financial planning.

Importance of Jurisdiction in Divorce

The drafters of our Constitution decided they did not want to handle messy family and marital issues, so these issues were delegated to the states. As a result, married and unmarried lovers are subjected to 50 different dialects of love law. Each state has its own system of property distribution, support and custody.    

In 1970, California created a new fault line, when no fault divorces became a possibility there. The land of new beginnings and refabricated lives and bodies embraced no fault divorce and set into motion the avalanche of divorces that we now see. Once people could say “I do” and “I don’t” without proving how “wronged” he or she had been, divorce became much easier to order from the menu of legal possibilities.

Because the laws vary so greatly from state to state, if someone is properly advised, he or she can select the “right” state to create jurisdiction to obtain a more favorable set of rules from which to plan his or her exit strategy.

Merely relocating, however, may not be enough. To obtain a valid divorce in another state a person must carefully examine the local requirements as to jurisdiction. Most states limit the availability of their courts for divorce to their residents.

Incredibly, New York was the last state in the union to endorse no fault divorce. Until October 13, 2010, in New York state, unless spouses executed a formal separation agreement globally resolving all their rights and obligations, and abided by its terms living separate and apart for more than one year, we had to engage in a mudslinging battle to get a client out of a marriage while trying to preserve the parent-child relationship. Clearly, this was not the most constructive approach to peaceful resolutions.

Although one does not have to prove fault to be entitled to apply for a divorce, fault remains a factor in evaluating issues of property distribution, support, custody or counsel fees—economic fault, where a spouse’s actions deplete the marital estate, not marital fault, who first broke the wedding vows matters. 

What happens when people decide to end their marriages? One does not proclaim when waking up one morning, “We are getting divorced.” Before doing anything, one needs to understand the law, his or her rights and responsibilities, especially if children are involved. 

Privileged Communications

Again, everyone should make a thoughtful plan. It should not be reactive or vindictive; it should be purposeful and strategic. The goal is to defeat the problem, not the other party.

With whom a person chooses to discuss the concept of divorce is critically important. Speaking with a lawyer is privileged. This means one can talk freely with counsel knowing the conversations will not be admissible in court. This is attorney-client privilege.

Many people falsely believe that this privilege extends to all professionals in their lives – even their hairdressers. Although I wholeheartedly believe therapy can be extraordinarily helpful to people going through a divorce, especially if there is a custody dispute, I caution clients about the limitations of the doctor-patient privilege. Most people do not realize this protected communication can be exposed by the court in its determination of a parent’s fitness to care for a child. As I also have explained to clients, the advice a therapist renders may be appropriate from the perspective of a mental health professional, but such guidance may have potential legal import, albeit unintended. Perfect example: therapist recommends a parent move out of the marital residence to enable the spouse to miss the absent partner. Such an action, while potentially sage advice therapeutically, could result in their patient losing the right to occupy the family residence or to have primary physical custody of a child.  

While clients and accountants generally do not have privileged communications, a major case called United States v. Kovel created a loophole that enables accountants who are assisting attorneys to have some confidentiality. Louis Kovel, a former IRS agent, was working as an accountant at a tax law firm when he was subpoenaed before a grand jury investigating possible tax fraud violations of a client of the law firm. The state contended attorney-client privilege did not extend to Mr. Kovel. The law firm and Mr. Kovel asserted it should be applied, as he was an employee of the law firm. Initially, Mr. Kovel was held to be in contempt and sentenced to one year in jail; he prevailed on appeal. His communications were deemed to be privileged when the appellate court analogized Mr. Kovel’s role in the case to have been as an interpreter. “Accounting concepts are a foreign language to some lawyers in almost all cases,” the ruling stated, “and to almost all lawyers in some cases.”  Therefore, when there are vulnerable issues requiring an accountant’s assistance where the Kovel privilege would be helpful, the attorney should be hired first and then the attorney should engage the accountant to assist.   

The reverse does not hold. If an accountant discovers something potentially incriminating, even if he or she is not compelled to report it, the accountant might be compelled to testify against the client. Thus, utilizing an accountant with a previous relationship with a client is a risk worthy of careful deliberation.  

Digital Fingerprints Are Everywhere

There is no pencil with texts and e-mails; they always are ink.  Digital fingerprints are everywhere. Years ago, I was mentioned in The New York Times as to how I used EZ Pass records in divorce cases to expose lies. Keystrokes unlock a treasure trove of evidence. 

Just as importantly, it is essential to know who your client is. Do you represent the entity, its owners or a particular owner? Always understand your role to avoid ethical minefields.

Understanding Principles of Property Distribution

Understanding the governing principles for property distribution in a New York divorce can aid you in recognizing the type of issues which need to be considered when someone falls in love and legalizes the relationship.

Prior to July 19, 1980, New York state was a common law property state. This meant when there was a divorce, the parties’ properties were distributed based upon title. If an asset was in only one person’s name, the titled spouse was awarded the property. That’s why my mother raised me to believe if he loved you, he would put the house in your name. Ironically, many decades later, I represented my mother in my parents’ very amicable divorce, and had to explain to her that a new set of rules governed her 1947 marriage that was being dissolved in the 1980s, without warning or notice.   

Since July 19, 1980, when New York State enacted the Equitable Distribution law, a court is obligated to divide marital property equitably, which does not necessarily mean equally.

The easiest way to think of a New York State divorce is you are served a variation of ICED T:

“I” — identify all assets and liabilities

“C” — classify all assets and liabilities as either marital property or separate property

“E” — evaluate all assets and liabilities

“D” — distribute all assets and liabilities; and

“T” — tax impact of the distribution of assets and liabilities.

Identification of all assets and liabilities is usually started with the preparation and exchange of statements of net worth that delineate every potential asset (contingent or actual) and liability in a party’s name or held with someone else as well as the formal and/or informal demand for additional financial information related to the assets and liabilities.  

For all actions in New York State started prior to January 25, 2016, the definition of assets included “enhanced earning capacity.” Thus, if someone earned a license or professional degree during the marriage, this was considered an asset potentially divisible if a divorce occurred. 

Because equitable distribution was intended to be a recognition of the economic partnership of marriage, the contributions of one spouse towards the other’s acquisition of a professional license was viewed as an investment in the economic partnership of the marriage and the product of their joint efforts. The potential distortions, however, were profound. I once had a client who wanted to end a short childless marriage during which time he had acquired an MBA, he was earning millions each year on Wall Street and his wife was not interested in his life, professional or otherwise. She suddenly became intensely interested, however, when a forensic evaluator appraised his MBA as having a high seven-figure value.

Although courts generally awarded far less than half of these type of assets because of their intangible and speculative nature, if someone delayed filing their action in New York State until January 25, 2016 or after, a degree or license was no longer considered to be a separate asset to be distributed during equitable distribution.  

This is what I mean by planning: between the end of September 2015, when this law was enacted, and January 25, 2016, when this law went into effect, every client who came in for a consultation, or the ones who had been in earlier in the calendar year but were on the fence about whether to proceed or not with a divorce filing, reflected on the advantage or disadvantage of filing for divorce before or after January 25, 2016, based upon the exclusion or inclusion of this potential asset in a divorce. Highlighting to the client the window of 120 days, from when one files for divorce by the purchase of an index number for a summons for divorce and the time one has to serve it personally upon a spouse, allowed individuals to have an opportunity to reflect about whether or not to serve the summons and start the divorce.  

 The “C” in ICED T refers to the classification of property as either being “marital” or “separate” property. This part of equitable distribution is logical. Since marriage is an economic endeavor— remember, there is no romance without finance—anything acquired from the day one says “I do” until the day one says “I don’t” (which is the day the index number for $210 is purchased, along with the filing of  a summons for divorce) or the signing of a separation agreement is potentially marital property, unless it falls into an area of exclusion. The exclusions are receipt of an inheritance or gift from someone outside of the marriage during a marriage, as it was done because of the relationship between the recipient and donor, not because of the recipient’s marriage. One exclusion is a personal injury award received during marriage because it is awarded to make the injured person whole, not because of their marital choice; another is an exchange of separate property for other assets during the marriage that specifically are traceable to the exchange. Tracing these transactions is the key to preserving the claim for separate property.

In addition to the difficulty of tracing, other crucial areas for accountants in divorce are the identification of marital and separate property where there has been appreciation of the separate property or where it created income or was commingled with marital property.   

For instance, if a client’s grandmother left their beloved grandchild a rare Paul Revere teapot and the client polished it carefully every day, it would remain separate. On the other hand, if the grandmother had left the same grandchild an apartment building and it appreciated in value during the marriage, the key question regards which factors led to its appreciation. Was it due to the grandchild’s management of the property and investment of marital funds to renovate or repair it? When considering the idea of contribution to its value, clients need to realize if appreciation in value was due to a party’s toil or investment in the asset, the contribution would be credited as belonging to the economic unit of marriage—because, yet again, there is no romance without finance.

Significance of How Assets Are Transferred

In the case of appreciation of real estate, such as an apartment building, part of the appreciation may well be attributable to market conditions and part from investment of marital energy and/or resources. Imagine the complications when the inheritance or gift at issue is an interest in a closely held business. Its value, appreciation and income during the marriage could be the most contentious aspects of a divorce.

Counsel clients not only about the significance of how they acquire and maintain assets; they must understand the importance of the manner transfers of property are made to their children and grandchildren. The method of transfer can impact how the business will be treated in a divorce or if the beloved child or grandchild is survived by their spouse.  

How many times have you had clients tell you about their children’s new marriage and how they are helping them buy their first home? In an effort to minimize tax consequences, you might counsel them to gift half to their child and half to their in-law child, but you need to remember to tell your clients they may one day regret that wise tax advice, because that choice just gave significant separate property to their in-law child who may become an ex-law child and thus usable against their child if there were a divorce or it could be inherited by the surviving spouse’s exercise of a right of election if their child predeceased their spouse.

Thus, not only should your client and the gift recipient retain records of the gift; your client should be cautioned about how to write the check. If payable to them jointly, same problem; each would have received separate property from your client. Thus, although you always need to explain the tax consequences to your clients of gifting, you also should highlight the potential implications of a gift to in-law children, particularly if it is sizeable in nature. Prior to making a substantial transfer, consider recommending the possibility of a postnuptial agreement to address the handling of a significant gift in the event the parties’ marriage does not endure or their child predeceases the spouse.  

Prenuptial and Postnuptial Agreements

Although we all have heard the terms prenuptial and postnuptial agreement, it’s important to understand the legal requirements of what I call a “legal valentine” and the best ways to present the idea.

Ironically, one of the best ways to present the idea of a prenuptial agreement or postnuptial agreement where there is a family business or closely held business corporation is by analogizing the document to reality TV, movies or series like Law & Order. Popular culture shapes the thoughts and perceptions of many of our clients, so by using examples from public media, you are reframing an individual’s thoughts about the normalcy of a prenuptial or postnuptial agreement. I’m an incurable romantic, so when I suggest parties consider a prenuptial agreement, I am acting more like a sportscaster conveying a truthful version of marital statistics and how businesses can be impacted if anyone with authority in a company gets divorced or predeceases their beloved. Highlight to your clients the unpredictable events that have happened in their business as being either a home run or a failure, and it will be clearer to them that they need to consider the vaccination of a prenuptial or postnuptial agreement to keep their companies healthy.  

A prenuptial agreement is a contract made in contemplation of marriage by prospective spouses seeking to define their present and future property in the other’s estate. It is a valid and enforceable contract so long as it complies with certain legal standards. It is especially important for family and closed corporations to have as much protection for their businesses as possible from the romantic choices of its owners. Areas of concern can be far broader than current assets; these can affect inheritances, property not yet obtained and accounts that are acquired and built during a marriage.

When created, a prenup must be free from fraud, duress or misrepresentation. Handing someone a prenuptial agreement while en route to the altar is not the best idea; the mere fact the agreement is executed close to the wedding date or that the bride is very pregnant does not invalidate the document per se. 

The agreement must be fair and reasonable when made and not unconscionable at the time of the judicial review. Both parties preferably should be represented by independent counsel to ensure each party understands the terms and its impact. Understanding the document means comprehending what would happen if not for the document, as well as which other possibilities could be included in it.

There must be meaningful disclosure of each party’s financial assets and liabilities so that each party is intelligently and knowingly waiving certain rights, if so asked. The agreement must be supported by adequate consideration such as the exchange of marriage vows. Postnuptial agreements that are signed after the wedding also can be valid. 

Evaluate Tax Issues

All agreements need careful evaluation for potential tax issues. I remember a client who came to see me and wanted to give his fourth bride-to-be $500,000 before the wedding. He had given $100,000 to his first bride, $200,000 to his second and $300,000 to his third; his fourth, who knew of the prior gifts, wanted to be assured she was being treated respectfully. Fortunately, the groom came to see me before he completed the generous gift to his betrothed. After I explained transfers of property between spouses was not taxable, he understood his generosity should be delayed until after the exchange of vows. In fostering this type of postponement, I highlighted the gift also would be marital property, as interspousal gifts during a marriage are marital property, unlike premarital gifts. The best benefit of my plan, however, was completely unintended. Upon my newlywed client’s return to work, I had the most hilarious call from him. He said, “Barnett, I knew you knew how to write a prenuptial agreement, but I did not know how your idea would make my wedding night so special!” As a further cherry on their wedding cake, the acceptance of the $500,000 after the wedding reaffirmed the validity of the prenuptial agreement. This was a win-win for all, but Uncle Sam.        

Protection Without Prenuptial Agreement

Unfortunately, as the adage correctly states, “no good deed goes unpunished.” Parents’ generosity can create complex, expensive issues for litigation for a divorcing child. Clients of mine had an adult daughter with serious, lifelong debilitating problems that substantially compromised her ability to care for herself, much less support herself in any meaningful manner. Classified as disabled since she was a teenager, she properly received governmental benefits to supplement her, but her parents also generously and lovingly supported her, hoping to provide her the best quality of life. When a “gentleman” appeared to step up to the plate to care and love their disabled daughter and to make them grandparents, they eagerly wanted to make the young family’s life easier and better. Afraid of scaring their son-in-law off with a prenuptial or postnuptial agreement, they created a structure to try to protect their daughter and granddaughter. Note for clients: if someone is afraid to mention the concept of prenuptial or postnuptial agreement when a transfer is going to be made, warning bells—not wedding bells—should go off.

The parents purchased a luxury apartment for the daughter, but  carefully placed title to the property into a trust, allocating a mere 1% interest to their daughter. The parents consistently subsidized the young family by only requiring the son-in-law to pay the monthly maintenance fees and certain utilities. All appeared to be going well in the marriage until, of course, it wasn’t going so well.

Several years after their granddaughter was born, the son-in-law began to pressure his fragile wife to have the apartment transferred into their joint names. Their daughter desperately pleaded to appease him, but her family sagely did not do this. When the son-in-law instituted the divorce against their daughter, he summarily claimed one-half of the apartment had been given to him by his future former in-laws, based upon his paltry contributions to the apartment, as proof of his in-laws’ gifting intentions to him.

Thankfully, the documents of title for the apartment showed the facts; his wife only owned 1% of it. Her husband, however, very astutely utilized the stream of generous support the parents deposited into their daughter’s individual bank account as a regular source of income for calculating spousal and child support, because it had been consistently made to her over an extended period. Artfully and properly, the son-in-law had the court impute income to his wife based upon her parents’ gift making. His obligation to support his wife and daughter was reduced because of their generosity. If this is your client’s intention, of course, it is fine, but one should not sleepwalk into creating a transaction that will unwittingly impact their child negatively if he or she were to divorce one day.

What can we learn from this tale of designer woe? Good news: the family preserved the substantial equity in the apartment because they had properly structured the gift to their disabled daughter. Bad news: their daughter was harmed by their generosity as it reduced his support obligation.

Thus, it is critically important to recognize that when parents support their adult children, which is occurring more often than people realize, they not only are eviscerating their own potential retirement plans, but they potentially are damaging the claim of their child for spousal or child support from the truly responsible person, their spouse. Thus, if a client is considering doing this, you should discuss options, such as having a proper promissory note being executed by their adult child to themselves instead of making an outright gift.   

When clients have gifted property to a child, but did not paper it properly, it is not necessarily too late to fix. Several years ago, a client   whose father was a Holocaust survivor created a successful jewelry business. When he retired, to ensure a steady income stream for himself, he sagely transferred the business to his son, who had worked in the company for years. Recognizing his children would not be good business partners, he concurrently gifted his daughter, my client, a vast collection of valuable stones, in addition to the jewelry and stones he had gifted her throughout the years, all of which she maintained in her personal safe—undocumented, of course—by insurance. Sadly, he did not tell his son about this.

My client understood her father’s decision to transfer his business to her brother, but when I was preparing her statement of net worth for her divorce and learned of the vast, stunning collection of uninsured gems, I naturally requested any documents confirming the gifts. Unable to locate any such records, as her father had handed her the treasures—not only over the years and at his retirement, but in an informal, but loving manner—I decided to make the record match the facts. Fortunately, her father was still alive, albeit in his 90s, so I asked him to sign an affidavit confirming the gifts he and his wife had given to their daughter over the years, so I could confirm it to be her separate property in case her husband refuted the claim in case her father was not alive to testify as to the separate property nature of the jewels. I suggested the affidavit might be of use after her father passed for other reasons. She thought I was being overly cautious, but it was very fortuitous as her father also followed my recommendation to file appropriate gift tax returns.  As luck and excessive preparation would have it,  the matrimonial matter was settled without going to trial. The exquisitely detailed affidavit from her father, however, proved of enormous value several years when her father died. Suddenly, her brother claimed my client wrongfully had taken assets from the business. Yet again, the pen is truly mightier than the sword—when it is a notarized writing.

When you represent closely held businesses, it is crucial you consider all the possible gremlins that might crawl out from under the family bed. Having started my legal career in bankruptcy law and only later focused on matrimonial issues, I always suggest to preview what can go wrong, and you will have a better chance of things going right.     

With a divorce rate of approximately 50%, marital dissolution is like carbon monoxide—silent and odorless, but lethal. Remember, there always is a silent potential claim once someone says, “I do,” and it can strike in unexpected ways, because there is no romance without finance.  

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Jacalyn F. Barnett, Esq., brings a wealth of knowledge and experience in matrimonial and family law, initially when she headed the matrimonial department at the law office of Shea & Gould prior to creating her boutique practice, The Law Office of Jacalyn F. Barnett, P.C. in 1993. Having testified as an expert witness on New York State divorce law, Jacalyn has been a frequent legal commentator on NBC, ABC, CBS, MSNBC, CNN, Fox News, COURT-TV and CNBC among others on issues concerning divorce, family law and children. She contributed the chapter on Cross-Examination in a Deposition to the book “Take the Witness: The Experts Speak on Cross Examination” published by Juris Net LLC, and was the lawyer featured in the matrimonial chapter in the book “Lawyers at Work” published by Apress. She was selected for Crain’s New York Business 40 Under 40. She has been cited regularly in numerous periodicals and newspapers such as The New York Times, International Herald Tribune, Crain’s New York Business, Wall Street Journal, Money Magazine, Wall Street Journal, Bride’s Magazine, Forbes, Harper’s Bazaar, L.A. Herald Examiner, L.A. Times, Manhattan Lawyer, Time Magazine, USA Today, Women’s Wear Daily, New York Post and Vogue Magazine. She has served as a legal consultant to Salomon Smith Barney on “Women in Transition”, a nationwide educational program offering financial advice to women involved in divorce or widowhood. Jacalyn earned her BA from the University of Wisconsin at Madison in 1974, studied at the University of London and received her law degree from Brooklyn Law School in 1977. Jacalyn has been a member of the bar in New York State and U.S. District Court, Southern and Eastern Districts of New York since 1978 as well as is a member of Screen Actor’s Guild since 1999, The Women’s Forum since 2018 and a Distinguished Delegate to the White House and Capital Hill for The Creative Coalition in 2019, 2022 and in 2023. She can be reached at jbarnett@jacalynbarnett.com.