Family Law is often thought of as the most uncomplicated area of the law any lawyer can do. Too many clients believe that. That common opinion couldn’t be further from the truth. The harm that does to your case is exacerbated when too many lawyers believe that as well. Only a few hundred are really good out of at least five thousand who practice it full time; and of that number only 25 to 50 may be right for you. And this would be true in the big population states like California, N.Y., Florida and Texas and the number would be proportionately less in the smaller population centers.
There are many reasons for this. One reason is that very few cases will be tried. Settling the case involves as much skill as trying it. And unless enough cases are tried by that attorney, your lawyer’s ability to settle for a fair settlement is greatly diminished. Lawyers frequently exaggerate about their experience, and you must have reliable information to make a good choice. The chances improve with a recommendation, and too few are qualified to recommend the right attorney for you.
This discussion is aimed at spouses with significant assets to divide, referred to as high end; but even spouses in smaller cases can gain insight reading this post. A bad choice can cost megabucks. And because these high-end clients understand these high-end lawyers are not inexpensive, they generally make better choices. Yet most do not make the best choice for themselves. The quality of their choices depends on a number of factors, including understanding of what choices in the methods of litigation they have, their strong and weak points and how it relates to the type of assets they have that require division.
An asset may have started out as non-marital but transmuted into marital property either by commingling it with marital funds or marital labor. When that occurs, it must be determined whether the funds can be separated into marital and non-marital components, which when it can it requires considerable labor applying several different state statutes. This may be related to proving whether both spouses have access to the funds. But when the funds sit inside a jointly titled account it seldom can be separated because that involves overcoming a presumption of an interspousal gift that can be successful only in the rarest of circumstances.
Employer loans that involve notes can be entirely forgivable and are used by brokerage and investment firms to pay their best producers and do create marital property, even when technically they must be paid back. These loans can be millions of dollars. They are structured with a separate bonus schedule that automatically repays the note as each payment falls due, provided that the employee continues to work for the employer.
Bonuses paid as loans are far better for the employee going through a divorce because the entire bonus can be accessed on the first day the loan proceeds are received but they create no marital property in the first year. That means that they have complete access to the entire proceeds when received and do not pay a dime in taxes then. They pay taxes on the bonuses that repay the loan as received. The loan contract is like any loan contract that is indistinguishable from one that creates real loan liability.
The bonus contract appears like any bonus contract that pays bonuses upon satisfaction with the terms or benchmarks set forth in the bonus contract. It requires fully reading the bonus contract before noticing that there are peculiar things about this contract that distinguish this from the normal bonus contract. First there is no bonus paid in the first year. The normal bonus schedule pays the highest bonus amount in the first year. When the bonus is paid beyond one year, its purpose is to incentivize high quality future work, and to do that the bonus is conditioned on benchmarks met.
There are also two additional provisions that make this bonus schedule like no other. It provides an acceleration clause that commutes the entire future bonus schedule to a single sum value in the event of the employee’s death or determination of permanent disability. Nothing in the note contract makes it look different than any other note contract other than the note becomes due in full the point of the employee’s death or permanent disability. Each separate contract lends no clue to its objective. But each contract provision of the acceleration clause on death or disability is identical suggesting that these two separate contracts were meant as one and were probably fashioned this way to conceal their purpose.
As with two separate contracts, they don’t reveal that their secondary purpose is to minimize the tax exposure as an additional benefit while they retain these high performers working for the company. But it actually can chase them away unless the employer provides another loan/ bonus before the first one is repaid. In the late stage of repaying the loan payments that is when the highest bonuses are received and when most of the note’s balance is repaid. Most of the loan proceeds are long ago spent and all the employee is really receiving is their commissioned income, but much of the commissioned income is eaten up by the extra taxes on the bonuses that directly pay the loan. The employee really feels the pain and will seek reduction in their support payments. When the loan is initiated that represents a tremendous increase in ability to pay seldom recognized by the family law attorney. It should never be used to provide downward modification but getting the right result requires attorney understanding and explaining the transaction to the court. Yet this problem is very real for the employer that still has an unpaid balance knowing their employee is looking to change jobs in order to get a signing bonus.
Their current employers wouldn’t be in this bind if they provided most of the bonus upfront, the way bonuses traditionally are paid. If the readers are left clueless about why, they didn’t, recall what had transpired on October 3, 2008. The stock market crashed and was still in freefall. George W. Bush signed into law that day the Emergency Economic Stabilization Act that provided an $800 billion floor to Wall Street. Part of that Act created rules providing who could access the funds and how they could be used. That section of the Oct 3rd Act was known as the Troubled Assets Relief Protection, “TARP,” which forbade one dime of this money used to pay Wall Street’s biggest producers regarded mostly responsible for the economic instability while American workers were starving. Yet billions of dollars were used to pay bonuses as loans to Wall Street’s top producers and no required reporting would reveal this. These were not paid out December 31, 2008, as a bonus would but in the beginning of 2009 just when loans to help people hurting would be paid.
This closes out this first post. There will be many more posts dealing with different issues involving huge bonuses. Like the forgivable note they involve complex financial concepts and the attorney dividing them does not understand them. Sometimes that misunderstanding favors the employee, and sometimes it favors the spouse. Lack of understanding does not favor either side. But a windfall to one hurts the other side.
Any suggested topics you want to see covered drop me a note with the links provided on this page. At the end is a comment where you can leave a comment or ask a question related to this section. If you need help with your case, use the links to contact me.
