Divorce and Partnership Super Profits – A Recipe for Depression

Article published in New Zealand, May 2013

As most readers will be aware, when a relationship comes to an end "relationship property" is generally split equally between spouses, subject to any adjustment for "economic disparity". The most common focus of attention within that relationship property pool is on the relationship home and any business interests or other investment assets accumulated during the relationship.

The relationship home is easily dealt with – registered valuation less debt, and divide by two. Other investment assets such as share portfolios or rental properties are similarly easily accounted for.

A business requires an expert valuation, with a multiple usually applied to the future sustainable earnings of the business. That process can be more complex than the other relationship assets referred to and often involves two expert valuers being involved – one for the wife and one for the husband – with some consensus ultimately being reached between the experts.

Once the "pot" of relationship property assets has been agreed, where achievable, one spouse will often retain sole ownership of the relationship home and the other the business or other assets, with some adjustment payment being made between them to equalise their respective half share each. Painful as it is, emotionally and financially, the former couple move on and ultimately rejuvenate their balance sheets as well as their new appreciation for romance.

Sadly, for those of you who "own" an interest in a current day "professional partnership" the outcome may be significantly more financially painful. Those readers who currently hold such an "asset" on their balance sheet will appreciate that, generally speaking, participation in a modern professional partnership requires borrowing a significant sum to play the game, working long hours under sometimes high levels of stress to "stay in", having less protection than your employees, carrying joint and several liability to creditors of the partnership and facing the constant threat of an "early exit" if performance drops below expectations. The "asset" is not transferrable, provides no value on retirement and its worth evaporates the day you stop working. Effectively, the partnership interest amounts to little more than a right to earn well while you are there.

One would think, from this perhaps slightly cynical overview, that no value would attach to this partnership asset on separation. Sadly this is not the case and on separation you will in all probability find yourself subjected to disclosure of all relevant partnership financial records to enable the super profits to be calculated and an appropriate multiple applied to those super profits. That figure can easily exceed the net equity in the relationship home, with the end result being one spouse retaining exclusive ownership of the former relationship home with the other (the professional partner) paying in, and being left with nothing more than a lonely debt ridden ferry ride into the city to retain participation in an asset that no one else would buy.

The most effective way to insure oneself against this risk is to enter into a Contracting Out Agreement removing the asset from the relationship property pool.

Managing partners would also be well advised to insist on Contracting Out Agreements being struck prior to promotion to partnership, as the stress on separation and the years of financial hardship thereafter can only diminish performance.

Better still, bill a few less hours, delegate more, come home earlier with a bottle of wine, and generally take whatever steps may be necessary to make this article of academic interest only.

The above article is provided for general information purposes and does not constitute legal advice.

The partners at Jones Law are internationally qualified and practise in the areas of cross-border tax planning, estate planning and acquisition structuring.

We invite you to contact us at info@jones-law.co.nz to discuss your specific circumstances.

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