June / July 2015 : Tailored Installment Payments to Balance the Scales without Breaking the Bank

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

The author’s recent experience indicates (1) the high value of using “tailored” installment payments to balance a property settlement involving a business interest and (2) the lack of awareness of many family law practitioners of the utility of this technique.

Thus, below is a repeat of a Tax Trends column published a few years ago.

The value of a closely held business or professional practice often dwarfs the value of other marital assets. If there are not sufficient suitable assets to award the non-owner spouse, installment payments are frequently used to balance the settlement.

In structuring the payments, two objectives often compete with one another:

1. Don’t Kill the Golden Goose – It is important not to impose an undue strain on the owner’s cash flow, part of which may also be required for spousal and/or child support.
2. Don’t Make Me Wait ‘Til I’m Old and Gray – On the other hand, it is generally not fair to require the non-owner spouse to wait a long period of time to receive his or her share of the marital value of the business.

Tailoring payments around other divorce obligations is a way to achieve both objectives.

Example

As part of their divorce settlement, H and W have agreed that he will pay her $200,000 for her half interest in his business. He will also pay combined transitional alimony and child support for their youngest child totaling $30,000 for each of the next 3 years.

H receives an annual salary of $60,000, supplemented by a bonus depending on company profit. He proposes that he pay the $200,000 by transferring a sufficient amount of his 401(k) plan to net W $50,000 after tax and that the $150,000 balance be paid over 15 years with interest at 4%, resulting in monthly payments of $1,110.

W responds that this is unacceptable; that it is unreasonable to expect her to wait so long for her share of the marital value of the business. She demands payment over 7 years, resulting in monthly payments of $2,050, almost twice what H proposed.

H claims he cannot afford to pay that much. The effects of new competition has reduced pro ts such that the business has not been able to pay bonuses of late. So, cash will be tight over the next few years with the alimony and child support obligations.

The attorneys meet with their joint CPA expert and work out the following payment terms to achieve both objectives.

• No payments of principal and interest for three years. Adding the $18,000 of unpaid compound interest brings the principal to $169,655 as of the beginning of the fourth year.
• Years four and five – $1,500 per month
• At end of year five – $50,000 balloon payment
• Years six and seven – $2,000 per month
• At end of seven years – $55,500 balloon payment.

Tailored to Fit – The above illustrates a way in which payments can be tailored to accomplish both objectives. The use of balloon payments enables the non-owner spouse to receive his or her share within a reasonable time frame. It also gives the owner spouse ample time to make arrangements to fund the balloon payments.

Practice Pointers

Consider Section 71 Payments ….

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)