Recent Articles

October 2016 : Revisiting Holder’s Interest Value – or Value to the Owner

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Of late, the holder’s interest standard – or measure – of value for appraising professional and commercial enterprises for divorce has been subject to criticism. The following addresses issues raised.

Background

Holder’s Interest Value—“Holder’s interest” value – also referred to as investment value to the owner – of a business appraised for divorce settlement purposes is essentially the value to the current owner based on financial benefits consistently received from the business, unless there is reason to believe the business will soon be sold or discontinued.

The underpinning is that financial benefits provided by the company are often the product of contributions by both spouses during marriage such that both should share in that value in a divorce settlement.

If that value is not transferable in a sale – such as a surgeon’s referral sources or a widget maker’s personal relation- ship with a valuable customer – it will only be reflected in the business value if it is assumed the current owner will continue the enterprise after the divorce.

Fair Market Value—Holder’s interest value is distinguished from the most commonly known standard/measure of value – fair market value (FMV) – defined as the price at which a business would sell between a willing buyer and a willing seller, both well informed and acting at arm’s length, and neither acting under duress.

The principal difference is that holder’s interest value is premised on the current owner retaining the business post- divorce, whereas FMV is premised on a hypothetical sale to a third party.

In determining FMV of a non-marketable closely-held business, a lack of marketability discount, typically in the 25%-35% range, is deducted from the calculated value – that is, between 1/4 and 1/3 of the total value is eliminated based on the assumption of a hypothetical sale. Aside from this significant discount, valuable but non-transferable attributes of the enterprise – such as noted above – will not be captured in the hypothetical sale value.

Premise of Holder’s Interest Value—Jay Fishman, a nationally renowned business valuation expert, at an American Academy of Matrimonial Lawyers 2006 seminar, presented the following quote from the California appellate court in its landmark Golden v. Golden opinion in support of value to the owner:

“… in a matrimonial matter, the practice of the sole practitioner husband will continue, with the same intangible value as it had during the marriage. Under the principles of community property law, the wife by virtue of her position of wife, made to that value the same contribution as does a wife to any of the husband’s earnings and accumulations during marriage. She is as much entitled to be recompensed for that contribution as if it were represented by the increased value of stock in a family business.”

In this regard, there is no substantive difference between community property law and Michigan’s equitable distribution statute concerning contribution of the non-business owner spouse.

Michigan Court of Appeals Holder’s Interest Decisions

—As summarized at the end of this article, the Michigan Court of Appeals has consistently approved use of holder’s interest value where there is no indication that the owner will not continue to operate the enterprise post-divorce.
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Continued in PDF file below… “Revisiting Holder’s Interest Value – or Value to the Owner”
View / Download October 2016 Article – PDF File

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

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Aug / Sept 2016 : Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Consider the following example:

  1. Parties – A and B – were married on 7/1/96 and divorced 20 years later on 6/30/16
  2. B has been a participant in her employer’s 401(k) plan since before marriage. At marriage, the account balance was $30,000.
  3. B had no plan loan balance at time of marriage, but she drew a $50,000 loan from the plan during marriage to provide funds for a family vacation home in northern Michigan.
  4. At divorce, the 401(k) account consisted of $100,000 in investments and a remaining loan balance of $20,000.
  5. Since the loan funds were used for marital purposes, the unpaid plan loan is a marital debt.
  6. Based on these facts, A and B will divide the $70,000 net increase in the account during marriage. A’s $35,000 will be paid from non-loan plan assets.
  7. B will also receive $35,000 of non-loan assets as well as the $20,000 plan loan receivable for which she is responsible to repay (essentially, to herself).
  8. The following presents the division of the account value, including the plan loan receivable.

……

Continued in PDF file below… “Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?”
View / Download August/Sept 2016 Article – PDF File

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

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June / July 2016 : Changing Beneficiary Designations

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Two recent Court of Appeals decisions on disposition of (1) 401(k) account and (2) life insurance proceeds in disputes between decedents’ estates and former spouses who were the named beneficiaries. Patrick Estate v. Freedman, Mich App No. 324438 (2/11/16); Lett Estate v. Henson, Mich App No. 326657 (3/17/16).

Facts – Patrick Estate v Freedman (Unpublished)

  • During their marriage, H designated W beneficiary of his 401(k) plan account.
  • In their 2007 consent judgment of divorce (JOD), it was provided that W be designated beneficiary for the amount assigned to her if H died before her share was segregated into an account for her.
  • e JOD also provided – “Except as otherwise provided herein, any rights of either party as beneficiary in any pol- icy or contract of life, endowment or annuity insurance of the other, as beneficiary, are hereby extinguished.”
  • And further – “Except as otherwise stated herein, each party shall retain exclusively any retirement benefits to which they are or shall become entitled to due to their employment, and any claim thereto by the other as beneficiary or otherwise is extinguished.”
  • H died in 2014 without having changed the beneficiary designation.
  • At W’s request, the plan administrator distributed the proceeds of H’s 401(k) account to her.
  • H’s estate led a complaint claiming that she was not en- titled to the 401(k) account.
  • e trial court ruled that while it was proper for the plan to distribute the 401(k) account proceeds to W, the beneficiary on record, but, under the terms of the JOD, she did not have the right to retain them.
  • W appealed.

Court of Appeals Decision…

Continued in PDF file below… “Changing Beneficiary Designations”
View / Download June/July 2016 Article – PDF File

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

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May 2016 : Court of Appeals Upholds Equal Division of Federal Tax Refund

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Court of Appeals Upholds Equal Division of Federal Tax Refund, Demil v Demil, Mich App No. 323205 (10/20/15), and Tips on Providing for Tax Overpayments and Estimated Taxes

Facts

  • The parties agreed to a settlement in June 2013 which, inter alia, provided that they would split the federal tax refund resulting from their 2012 joint income tax return, as follows:
    • “IT IS FURTHER ORDERED AND ADJUDGED that the parties shall equally divide any refund they receive from the 2012 Federal Tax returns. (sic) The defendant shall provide proof of the refund received directly to the Plaintiff within one week of receipt.”
  • Neither party signed the return which was led electronically by their tax preparer in April 2013.
  • The refund was represented to be “in the approximate amount of $2,372”.
  • In fact, the refund was $34,318, of which H applied $23,000 to his 2013 federal tax liability.
  • During the divorce proceedings, H had represented that $2,300 “was a correct characterization of the refund and that he did not have any other assets to disclose to the court.”
  • W later learned that the refund was substantially more than what had been previously indicated and led a mo- tion to enforce the provision in the judgment for equal division.
  • e trial court rejected H’s claim that a large component of the refund was attributable to his father’s income which was reported on the joint tax return ”for estate planning and income tax purposes” and ruled the $34,318 refund be divided equally.
  • H appealed.

Court of Appeals Decision

  • The Court upheld the trial court’s decision ruling that it did not err in its interpretation of the tax refund provision in the judgment of divorce.

Tips on Providing for Division of Tax Overpayments Joint and Several Liability

  • Joint Tax Refunds
    …
Continued in PDF file below… “Court of Appeals Upholds Equal Division of Federal Tax Refund”
View / Download May 2016 Article – PDF File

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

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April 2016 : HUDSON V. HUDSON, Mich App No. 322257

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

View Full PDF file

In a published case, the Court of Appeals rules on availability of a single life annuity for H in W’s teachers’ pension where same is not available to W in H’s federal pension. Hudson v. Hudson, Mich App No. 322257 (1/2/16)

Facts

  • The 2013 divorce judgment provides that (1) W is to receive a 50% interest in H’s accrued Federal Employees Retirement System (FERS) pension and (2) H is to receive 39% of W’s accrued Michigan Public School Employees Retirement System (MPSERS) pension.
  • H presented an EDRO for entry in which he elected to receive his 39% interest in W’s MPSERS pension as a single life annuity (SLA) based on his life–one of the three options offered in the Office of Retirement Services (ORS) model EDRO form.
  • W objected to the EDRO because FERS does not o er an alternate payee the option of a SLA based on the alternate payee’s life.
  • The trial court signed the EDRO, ruling, in part, that MCL 552.101(5) allows an alternate payee such as H to select whatever option is available under MPSERS.
  • MCL 552.101(5) provides, essentially, that, unless specifically excluded, a proportionate share of all component parts associated with a pension are transferred with part of a pension via QDRO or EDRO.
  • The trial court stated that, since the right to elect a SLA on his life was not expressly excluded, H was entitled to do so under MCL 552.101(5).
  • The trial court also ruled that the agreed on judgment provided for division of the pensions and that, under court rule, the parties are bound by what “they put on the record in the courtroom.”
  • W appealed.

Court of Appeals Decision

  • The COA (Court) upheld the trial court’s decision, but not based on MCL 552.101(5).
  • Rather, the Court ruled that the right to elect a form of benefit–such as a SLA on one’s life, or a joint & survivor annuity–is not a “component” of a retirement benefit.
  • Thus, the Court distinguished selection of a form of benefit from “components” such as cost of living adjustments, survivor benefits, early retirement supplements, and death benefits.
  • But, the Court agreed with the trial court that “the parties were bound by the language of the judgment of divorce.”
  • The Court stated that the fact that W could not also elect a SLA based on her life does not “render the resulting division contrary to the parties’ stated intent in the judgment of divorce.”
  • The Court noted that the parties had the opportunity “to fully explore available form of payment options” before agreeing on a settlement and that it was “incumbent on the parties and their counsel to include within the judgment of divorce a determination of all rights of the parties relative to each other’s pension plans.”

Comments on the Case

  • The case illustrates the importance of discovering the pertinent features of each retirement plan involved in a divorce.
  • This is important so that an equitable division of such benefits can be achieved.
  • It is also important so that a divorcing party knows before agreeing to a settlement what income – and the timing thereof – will be available post-divorce.
  • Finally, it is simply good practice to be as specific as possible in the retirement benefits provision of a judgment of divorce or settlement agreement.
  • Doing so minimizes disputes and misunderstandings concerning what a party believed he or she was to receive.
  • Since the COA rarely publishes family law cases, evidently the Court wanted to send a message about the importance of clearly specifying the rights of parties concerning retirement benefits divided in divorce.
View full PDF file below… “Hudson V. Hudson, Mich App No. 322257”
View / Download April 2016 Article – PDF File

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