“Don’t double-dip the chip!” Many of us have encountered the social misstep of double-dipping at a party, where someone repeatedly dips the same chip into a communal bowl of salsa or other shared food. Gross. In divorce proceedings, double dipping has a more intricate meaning, particularly for business owners. In some states, courts might count business assets twice when calculating alimony by considering them both as divisible property and as a source of income. This practice is often called “double dipping.”
Why is this bad? Well, double-dipping in divorce is essentially counting the same money twice. It happens when a business owned by one spouse is considered both as something to be divided in the divorce and as income to calculate alimony. This means the other spouse could end up getting a piece of the business and part of its profits, which isn’t fair to the business owner. This article will discuss double-dipping in different states and how a prenup can help.
Understanding double-dipping in divorce
Divorce proceedings can become particularly complex and financially burdensome when business assets are involved. Double-dipping is no exception. So, let’s dive into what double-dipping is.
Double-dipping can result in a double financial burden on the business owner because they may have to share the value of the business assets, potentially transferring a portion (or the value of 50% of their portion) to the spouse. Next, the income generated from the asset (like the business) can be used to determine ongoing spousal support payments. In essence, the non-business-owner spouse could benefit twice, receiving both a share of the business and a portion of its income stream.
Double-dipping example
Consider a business owner undergoing a divorce whose company is valued at $2 million. This valuation is used to divide marital assets. Additionally, the judge orders the business owner to pay spousal support based on an income level of $500,000 derived from business profits. Consequently, the business owner is financially impacted twice: once through asset division based on the business value and again through spousal support payments calculated from the same income. In states that permit double dipping, the recipient spouse may receive higher support payments in addition to a larger portion of the marital assets.
Proponents of the double-dipping method argue that the double dip is a misconception that unfairly deprives the non-monied spouse of a fair share of marital assets and adequate support. Conversely, opponents maintain that equity and fairness demand that the same funds not be used in both support calculations and asset division.
Real case law demonstrating double-dipping
California, New Jersey, Michigan, and Ohio are among the states that permit the application of the double-dip concept in divorce cases. The reasoning behind this approach is that spousal support and property division address separate legal matters, each with its own purpose. Therefore, if a spouse earns income from a business, that income can be included both in the support calculation and in the valuation of the business interest for division. Let’s take a look at some different states’ take on this concept.
New Jersey
In New Jersey, the court case Steneken v. Steneken established that “double dipping” is allowed in divorce cases. This means that when dividing a couple’s property, the court can consider the full value of a business. Then, when figuring out alimony payments, the court can also use the owner’s actual income, even if it’s higher than what was used to value the business. The court believes this is fair because it uses different methods for valuing the business and calculating alimony. See Steneken v. Steneken, 873 2d 501, 507 (N.J. 2005).
Michigan
Michigan employs a case-by-case approach when determining whether double-dipping will achieve a reasonable outcome. In Lotus v Lotus, the Michigan court rejected double-dipping in the context of spousal support and stated that the courts must employ an individualized approach when determining whether double-dipping will achieve an outcome that is just and reasonable. See Lotus v Lotus, 298 Mich App 21 (2012).
Double-dipping is not allowed in New York and other states
Some states, like New York, have addressed the issue of double-dipping and explicitly stated that assets that have already been divided in a divorce may not be used to calculate spousal support. In Grunfeld, the New York Court of Appeals stated, “Once a court converts a specific stream of income to an asset, that income may no longer be calculated into the [spousal support] formula and payout.” See Grunfeld, 94 N.Y.2d at 705.
How business prenups can help avoid double-dipping in divorce
The adverse effects of double-dipping can be easily prevented with a prenuptial agreement. For example, your well-drafted prenup may state that your spouse waives any current and future claims to the business, regardless of any increase in its value. And don’t worry, you’re not alone in this decision! A whopping 79% of HelloPrenup couples also opt to keep any appreciation on their separate property as outlined in their prenups.
In addition, outlining spousal support provisions that either limit what type of income may be used in calculating spousal support (i.e., removing the option of business income being included in the spousal support calculation), putting a cap on the amount, or eliminating the possibility of spousal support altogether may also prevent this double-dipping issue. And don’t worry—as long as your prenup is valid and enforceable, courts will oblige by your rules, not the state’s default rules (and spoiler alert: default state laws may include double-dipping business assets).
“But I started my business way before the marriage.”
Many assume that their business started way before getting married is automatically protected in a divorce, and while that’s often true in community property states like California, it’s not foolproof. Even if you started your business before marriage, your spouse may have a claim to part of it if they contributed to its success during the marriage, especially without a prenuptial agreement stating otherwise.
These contributions could be straightforward, such as a spouse being on the payroll, owning shares, or making investments, but they could also be more subtle. For instance, if you used joint bank accounts to cover business expenses or reinvested all your profits back into the business, your soon-to-be ex-spouse might argue that they deserve a share of the increased value of the business since marital assets were used.
“When a family business is part of the marital estate, the issue of double dipping must not be overlooked. Common sense would suggest the same income or cash flow cannot be used twice – first, as an asset divided and again to determine spousal support. However, the courts have not always agreed with this, so it is imperative attorneys be vigilant in cases where this could come into play. The best way to handle it is prior to marriage in a well drafted prenup. When a prenup is not in place, the attorney must understand how the business is valued and how the owner-spouse’s compensation is determined to prevent double dipping.” -Robert Gorton, CPA, ABV, CFF, and CEO of Gorton & Company.
The bottom line on double-dipping for business owners
As a business owner, knowledge is your best defense. Without a prenup, divorce courts could potentially “double-dip” into your hard-earned business assets, dividing them with your spouse while also using their value to calculate alimony. This double whammy can significantly impact your financial future and the business you’ve poured your heart into. A well-crafted prenuptial agreement acts as a safeguard for your business assets, ensuring your business remains protected. It’s an investment in your entrepreneurial dreams and your future.
Julia Rodgers is HelloPrenup’s CEO and Co-Founder. She is a Massachusetts family law attorney and true believer in the value of prenuptial agreements. HelloPrenup was created with the goal of automating the prenup process, making it more collaborative, time efficient and cost effective. Julia believes that a healthy marriage is one in which couples can openly communicate about finances and life goals. You can read more about us here Questions? Reach out to Julia directly at Hello@Helloprenup.com.
0 Comments