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  • 19 Jan 2022 9:56 AM | AAML NJ Administrator (Administrator)

    By Alex Krasnomowitz and Rory Gannon | Smolin Advisory, AAML NJ Gold Sponsor

    Divorce is often a stressful and time-consuming process. For family law attorneys, you may find that estate planning is the last thing on your clients' minds during their divorce proceedings. Still, it's vitally important that they update their estate plans to reflect their new situation.

    Here are a few estate planning strategies you can use to help your clients protect and control their assets after a divorce.

    Using Trusts to Control Assets

    It's unlikely that an ex-spouse will directly inherit a client's property since divorce usually extinguishes an ex-spouse's rights under a will or other trusts. However, it's still possible that an ex-spouse could have more control over their wealth than they'd prefer, especially if they have minor children.

    When a minor inherits property, that property is generally held by a custodian until the child reaches the age of majority, which may be either eighteen or 21, depending on the state. A surviving parent (including an ex-spouse) may act as the custodian in some cases—and this could allow them to make decisions about how inherited assets are spent or invested until the minor child comes of age. 

    Creating a trust (or several trusts) for the benefit of your client's children is an excellent way to avoid this situation. Trusts allow the grantor to appoint a trustee with authority to manage the trust's assets and make distributions. Since the grantor can choose this trustee, your client will ensure that assets within the trust won't be controlled by their ex-spouse.

    Different Types of Trusts to Consider

    The following types of trusts may play a valuable role in the estate planning process for recently divorced individuals.

    Revocable Living Trusts

    This type of trust allows grantors to arrange for the transfer of specific assets to designated beneficiaries. Revocable living trusts are commonly used to complement a will, as they allow the assets they contain to bypass the probate process. 

    Irrevocable Life Insurance Trusts (ILIT)

    These trusts allow the grantor to remove the proceeds of their life insurance policies from their taxable estate by transferring the policies to the trust. An ILIT also allows the grantor's family to pay estate costs using the life insurance proceeds from the trust.

    Credit Shelter Trusts

    Credit shelter trusts can allow the grantor to maximize the benefits of the estate tax exemption and are particularly useful in cases where the grantor has children from a previous marriage and intends to ensure a new spouse's financial security. 

    Qualified Terminable Interest Property (QTIP) Trusts

    These trusts may be helpful for clients that have divorced and then remarried. The surviving spouse will receive income from the QTIP trust until their death—after which the beneficiaries are entitled to the remainder.

    Making the Right Estate Plan Revisions
    The above strategies may allow your clients to exercise greater control over their estates following a divorce. If you have further questions about any of these strategies and how they may help your clients, contact our experienced accountants at any time.
  • 12 Jan 2022 9:43 AM | AAML NJ Administrator (Administrator)

    By Noel Capuano CPA, CFF, CVA, Principal at Friedman LLP | Friedman LLP, AAML NJ Gold Sponsor

    As accountants, we are frequently asked to quantify provisions of settlement agreements.  Often, this becomes necessary in post judgement situations, when the memory of the intent of the agreement - at the time it was negotiated - has “faded” and any ambiguity can provide an opportunity for disagreement.  In these situations, accountants may be asked for guidance regarding the interpretation of those agreements.  

    In divorce matters, attorneys generally spend a great deal of time negotiating the specifics of parenting time – down to memorializing pickup times, holidays, grandparents birthday visits – all with the goal of avoiding future conflict. Unfortunately, for a variety of reasons, certain aspects of the financial settlement may not receive the same attention.  Financial terms can be misused/misunderstood and/or not adequately defined; this very often leads to confusion, conflict, and post judgement litigation over the original intent of the agreement.  The following terms are just a few examples of language that is often used incorrectly and/or misinterpreted.  By understanding the potential for misinterpretation one can design agreements that proactively address those issues that may otherwise arise down the road. 

    1. Net Income

    “Net Income” is defined, in the most simplistic terms, as revenue minus expenses.  Revenue and expenses can legitimately vary (perhaps greatly) between the books and the tax returns. Both are “correct” but each paints a different picture.  We frequently see significant confusion with regard to whether “net income” - as used in the agreement - is calculated before Perks, Owners Compensation, Draws or Distributions.  Depending on the type of entity, these items (which are frequently disputed during the pendency of the divorce)  may or may not be included in the determination of net income.  Don’t assume the parties are informed of your definition of “net income;” include a clear definition in the agreement.  

    A few key considerations for defining net income: Is it before Owners Compensation/Perks?  If there was a valuation performed, is the net income based on the reasonable compensation adjustment used for that valuation? The difference can be substantial, and the time taken to clearly define the specifics is well worth it.  

    As an example, take the situation involving  a buy-out of equitable distribution based on a percentage of the “net income” reported by the business owner.  There was a “floor” based on the prior three years of reported net income, which was clearly meant to be a safety net for the very situation that was to follow.  The first year after the divorce, the owner increased their  salary, thereby reducing net income.  The spouse, who was entitled to review the annual tax returns, objected for various reasons – since net income was much lower than its historic norms.  The spouse’s  position was that the owner increased their salary solely to reduce the buyout, not to recognize any post-marital increase in responsibilities, etc.  The spouse represented that they  were not aware that officer compensation was deducted in the determination of net income, and that had they understood that, they would not have agreed to the arrangement.

    Could this situation have been avoided by using more specific language? Perhaps. Had there been a discussion regarding these very issues that the spouse simply does not recall? Possibly.  The inclusion of the wording that the buyout was to be based on “net income prior to Officer Compensation/Perks etc.” would have not only removed the potential for future disagreement, but also eliminated any potential “divorce-related” incentive for the owner to increase their salary.  The previously referenced “floor” on which the buyout was based most likely accomplished the same outcome, however, the spouse clearly did not understand that and the outcome was post-judgment litigation and additional attorney/expert fees.

    2. Net Proceeds from Sale

    In a situation where a residence or other asset is sold and the “net proceeds” are to be divided between spouses, there should be a clear stipulation as to specifically how net proceeds is defined.

    For example, consider a recent case in which a vacation home that was deeded to the wife was to be sold shortly AFTER the divorce, with the “net proceeds” to be split equally thereafter.  (Remember a second home is not eligible for the exclusion of the gain). In this situation, the sale would be reported on the wife’s individual tax return in the year following the divorce; as such, any potential gain would be reported by the wife as well.

    The husband, based on consultation with his tax advisor, was of the impression that he would not be responsible for any tax on the potential gain because a) the sale would be reported on the wife’s tax return and b) he was not on the deed.  Based on the wording of the settlement agreement which referenced “net proceeds,” that was not clear.  The fact that the sale would be reported on the husband’s individual tax return is more a formality, and practitioners unfamiliar with divorce negotiations can often over simplify the impact of the “mechanics” on the intent of the agreement.  Since the tax to be paid was not insignificant, it is unlikely that the agreement did NOT intend for the “net proceeds” to include a provision for the associated tax liability as the property was going to be sold as part of the divorce and said tax was easily quantified (see below regarding situations in which this is not the case).   

    3. “Net of Tax”

    Unlike the prior example, where the tax burden on a sale can be relatively easy to determine, other situations can pose a myriad of more nuanced issues.  These situations often involve a spouse’s continued “participation” in a future benefit stream.  For example, where a spouse may have stock based compensation that will vest in the future or where they are owners in a pass-through entity from which they receive distributions.  In these instances, the recipient/owner spouse will incur a tax liability that most would agree the payee spouse should share in some way.  This is where very specific language can be of great benefit in avoiding future conflicts.  Limiting the reference to “net of tax” can lead to a variety of interpretations, and in turn, significantly different conclusions.  Will there be an agreed-upon “effective” rate used? Will there be an accountant appointed to prepare a more “exact” computation of the tax liability attributable to the specific income source to which the recipient spouse is entitled? Considering that taxes are often paid, at least in part, the year AFTER the “income” is received, is there a matching of taxes paid to income received? The possibilities are numerous, and while it is often desirable to keep things simple, the mechanism for doing that is to make sure the agreement is as detailed and specific as possible.

    There is no such thing as a perfect agreement.  Having your financial professionals review the language before the final settlement may ultimately save legal and accounting in the long term.  If you have any questions about the financial language within a proposed or pending agreement, contact a Friedman professional today. 

  • 20 Dec 2021 4:00 PM | AAML NJ Administrator (Administrator)

    By Kelly Clifford, Vice President, Sales | LEAP Legal Software, AAML NJ Silver Sponsor

    Advancements in legal technology are helping New Jersey law firms rethink how they run their businesses. Many legal professionals are shifting their focus to “practice productivity” to enhance quality legal services, improve operational efficiencies, and grow their firms.

    Here are four ways that LEAP helps New Jersey law firms, just like yours, become more productive:

    1. Using Automation to Eliminate Inefficiencies

    LEAP enables New Jersey legal professionals to rely on technology for work like client intake, opening and managing matters, and completing legal forms. A prospective client will complete online intake through the LEAP Web Portal and the matter is automatically pre-configured based on area of law and jurisdiction, without any manual setup.

    One of the most popular automation features in LEAP is document assembly. A court form library, with thousands of forms and templates, is readily available for New Jersey law firms. This library includes popular legal forms like Seller’s Residency Certification, 1099-S Reporting, Certification of Insurance Coverage, Summons (Divorce), Affidavit of Title- Individual or Married Couple, Case Management Order, and more. The forms are instantly pre-filled with information directly from the electronic matter. This eliminates any time spent searching for forms and entering information in multiple places to complete a document. 

    The latest version, LEAP 2.3, also includes a Clause Library so that New Jersey attorneys can add their most used clauses with only one click. 

    2. Organizing Information in One Place

    Law firm staff often spend too much time trying to find sticky notes, following up with colleagues for updates, and switching between multiple computer systems to work on a matter. LEAP eliminates all this hassle by keeping all matter information, files, correspondence, and financial records in one place. 

    LEAP also leverages Amazon Web Services, with 99.99% uptime, to provide a secure and modern database for easy access to information and “one version of the truth.” LEAP is a cloud-based legal practice productivity solution that eliminates time being spent on dealing with data corruption, server downtime, managing IT resources, and more. The time saved from these types of tasks can be spent on being productive in other areas of the firm, like business development. 

    3. Ensuring Critical Deadlines are Met

    The latest version of LEAP allows New Jersey attorneys and litigators to streamline how they manage different matters with critical court dates and legal deadlines. A seamless integration with LawToolBox allows law firms to map critical dates, pre-set from the court, and calculate them according to LEAP matters. 

    This workflow allows legal professionals to stay on top of complex legal cases with critical due dates so they never miss a deadline. It also protects New Jersey law firms from legal malpractice risks. With LEAP and LawToolBox, attorneys have peace of mind and can easily calculate, create, and track legal deadlines with only a few clicks.

    4. Keeping Your Law Firm in Your Pocket

    Technology is changing the traditional work model and allowing consumers to have healthcare, banking, and legal services readily available to them from anywhere. This ease of access to information is creating greater expectations from consumers who are paying for these types of services. 

    New Jersey law firms are getting more inquiries, questions, comments, and more at all different times of the day. To keep up with the demand, it’s imperative for law firms to adopt a work model that allows for staff to have flexibility to work from anywhere. The LEAP Mobile App keeps New Jersey legal professionals productive while away from their desks, enabling them to easily correspond with clients, access files, scan documents, instantly capture billable time, and more. 

    With the latest version of LEAP, New Jersey law firms will also benefit from an updated user interface making the mobile app even more intuitive with dashboard overviews for matter details. 

    LEAP is the legal practice productivity solution helping New Jersey law firms exceed client expectations, enhance work efficiencies, and be more profitable. Learn more about how to make your firm productive by visiting www.leap.us/new-jersey/ and schedule a time to meet with a productivity specialist. 

  • 20 Dec 2021 9:57 AM | AAML NJ Administrator (Administrator)

    By Carla Fried | Guaranteed Rate 

    Separate emotion from your financial well-being and make a new plan

    During a divorce, it can make all the emotional sense in the world to want to hold on to the house. You love it. You don’t want to add to the tumult younger kids already feel by adding a disruptive move. You simply can’t imagine uprooting.

    But holding on to the home can be financially risky. Sure, your lawyers will work with you to come up with an equitable split of assets if you keep the house. That’s not the main problem. It’s everything that comes after the divorce.

    Can you afford to refinance? If the home isn’t paid off, you will need to take out a new mortgage. Everything peachy with your soon-to-be ex? Perhaps you’re (both) thinking it’s no problem to just keep the existing mortgage? That’s setting you up for problems down the line. Your relationship may change. And it leaves you legally exposed to each other: If your ex gets sued, the home could be exposed.

    Are you relying on alimony to keep the house? If you can’t cover all your housing costs from your own income, think twice about staying put. What if your ex loses a job? Or falls behind in payments?

    Do you really have the cash flow to handle taxes, insurance and maintenance? Property tax is an especially big issue if you live in a state with high income tax and home values. The tax reform package that went into effect in 2018 sharply limits the total amount of state and local taxes you can deduct on your federal return. That effectively has raised the cost of home ownership in pricey states with pricey homes.

    Will it be affordable in retirement? If you are within 10 or so years of retirement, you need to think long and hard about this. Yes, there are reverse mortgages, but taking out a reverse mortgage in your 60s or early 70s because you can’t otherwise afford to keep the home is a sign that you in fact can’t afford to keep the home.

    Agreeing to sell the house today could do wonders for your later years. If you downsize, you can reduce your living costs, and perhaps your share of a home sale can plump up your retirement savings. Let’s say the two of you sell the big house, you’re able to downsize, and you pocket $100,000 to invest. At 7% compounded annually, you’d have roughly $195,000 more in savings in 10 years.

    Given all the moving pieces you will be considering, it can be helpful to get an expert’s insight on how best to think about keeping or not keeping the home. A certified divorce financial analyst is trained to help you – and your divorce attorney – understand how decisions made today will play out in the future.

  • 17 Dec 2021 9:33 AM | AAML NJ Administrator (Administrator)

    By Jeralyn Lawrence, AAML NJ Chapter President 

    The principle that child support belongs to the child and not to the custodial parent is firmly established in New Jersey law. As a result, the misconduct or failures of their custodial parent may not be used to unduly burden children or deprive them of necessary support. This principle has come up for discussion on multiple occasions, especially in cases relating to child support claims filed later in the child's growth and development and after they have been estranged from the non-custodial parent for a significant period of time. One such case, L.V. v. R.S, 347 N.J. Super. 33, 788 A.2d 881 (N.J. Super. 2002), decided by the Appellate Division in 2002, has become a widely-cited precedent, especially when a noncustodial parent seeks to rely on the delay of the custodial parent to bar the collection of child support.

    The doctrine of laches applies to bar claims or allow for relief when one party has engaged in a "delay for a length of time which, unexplained and unexcused, is unreasonable under the circumstances and has been prejudicial to the other party." W. Jersey Title & Guar. Co. v. Indus. Trust Co., 27 N.J. 144, 153 (1958). Therefore, in theory, and in practice in several cases, it has been relied upon in order to deny an action for child support many years after the birth of the child. Unlike a statute of limitations, laches is an equitable principle, and the court may exercise discretion as to what type of delay is unreasonable and thereby bar relief.

    As noted in L.V. v. R.S., "Laches is an equitable doctrine which penalizes knowing inaction by a party with a legal right from enforcing that right after passage of such a period of time that prejudice has resulted to the other parents so that it would be inequitable to enforce the right." (347 N.J. Super. at 39)
    However, as noted by the Appellate Division, "[s]ince welfare of children is a paramount concern, a public policy conflict arises from the application of the equitable doctrine of laches to a demand for child support." (L.V., 347 N.J. Super. at 40). The Appellate Division has repeatedly ruled that the application of the principle of laches to child support matters is closely circumscribed and that, even if it may be applied to actions by the custodial parent, that principle may not carry over to a claim by the minor child themselves.

    Facts of the Case

    In L.V. v. R.S., the plaintiff, who was the mother of the child and her custodial parent, appealed to the Appellate Division after the lower court denied her application for child support after a trial. The application was filed on behalf of her daughter Michelle in 1998 when Michelle was 16. The case began by seeking a paternity adjudication as well as a child support order, but the defendant, R.S., conceded that he was the father of Michelle after a genetic test established paternity with 99.99% confidence.

    During the case, a pendente lite child support order was entered against the defendant for support of $183 paid weekly via wage garnishment, although its enforcement was deferred until the case was heard. The current wife of the defendant also filed a counterclaim against L.V., stating that she and R.S. had agreed to waive claims for child support, and the two claims were consolidated. The two parents, who were never married, had an off-and-on relationship between 1978 and 1981; in April of 1981, after their relationship had ended, L.V. and R.S. engaged in sexual intercourse. L.V. informed R.S. that she was pregnant with his child, and he sent her $100 for expenses.

    Michelle was born in 1982, and her birth certificate named only the mother as her parent. L.V. testified that she did not want any contact with R.S. nor did she want his involvement in their daughter's life. They had little to no contact in the ensuing years, although R.S. sent L.V. a letter when Michelle was 7 years old, providing contact information and apologizing for past misconduct. L.V. did not respond to the letter or seek child support, although she stated that she was aware of how to file a child support action.

    When Michelle was 16, she sought to find her father, using the internet and other public information. Eventually, Michelle found R.S.'s brother, who provided her with R.S.'s email account. Michelle and R.S. began communicating via email, sharing details of their lives and current photographs; during these email conversations, R.S. referred to himself as "Dad." L.V. called R.S. at work after learning of the conversations, and Michelle expressed that she was angry at her mother for doing this. After the conversations progressed over several months, Michelle asked R.S. for his address. He provided his work address but not his home address. However, Michelle told him that she already had found his address on her own.

    At the trial, Michelle stated that she had asked for the address to file a child support application but said she did not start the relationship with her father for that reason. After R.S. received notification of the support claim, he angrily responded to Michelle, who responded in kind, ending the several months of friendly communication over email. The trial court judge denied L.V.'s support claim on the basis of laches, noting that L.V. did not want R.S. to be part of Michelle's life for many years and that, after their arguments following the support application, they would be unable to establish a bond.

    In terms of any claim by L.V. herself, the Appellate Division agreed that the finding was fair. "While laches does not arise from delay alone, the actions and non-actions of the plaintiff are sufficient to justify the bar of laches to deny her any claim for reimbursement. The record shows that she was aware of procedures to obtain child support and to locate the defendant but chose not to do so in order to inhibit any daughter-father relationship." However, the court differentiated between any monetary award to L.V. and the rights of Michelle to make a claim for ongoing support moving forward. Specifically, the court held that "there is no basis to impute to a child the custodial parent's negligence, purposeful delay or obstinancy so as to vitiate the child's independent right of support from a natural parent." (Id. at 40)

    The New Jersey Parentage Act provides recognition of the child's independent right to seek support or paternity, even if the action is filed by another on behalf of the child. Further, "a child is barred from relief by a prior paternity action only if the mother fully represented the child's right in the prior proceeding." (Id.)
    Therefore, the Appellate Division reversed the trial court's findings and remanded for further proceedings. Specifically, the court noted, "We see no reason why he should not be compelled to support her in spite of plaintiff's actions. As her father, he owes her the duty of support regardless of the quality of their relationship. There is no such tilting of an equitable balance to deprive his daughter of on-going support." (Id.) The date of support would extend from the filing of the complaint to the daughter's emancipation, but the plaintiff could not seek retroactive child support prior to that date.

    Child's Right to Support

    Despite the acts of Michelle's mother, which may have severely hampered the father-daughter relationship and in fact prevented Michelle from benefiting from financial support from her father prior to the age of 16, the Appellate Division was clear that the child would not lose her rights as a result of the actions or inaction of her parent. This has been one of the enduring legacies of this case, which has been cited dozens of times in ensuing actions. While the acts of the custodial parent may bar that parent from a later claim, they do not prevent the child from enforcing his or her own interests, especially when, as is the case here, the child is clearly old enough to understand the action and express her own needs and wants.

    The case also highlights another key principle in New Jersey's child support jurisprudence: The right to support cannot be waived on behalf of the child by the parent. This comes up not only in cases like L.V. v. R.S., where one parent is estranged for many years but also in cases where parties seek to make agreements that do not require child support to be paid by one parent or where parents seek to extinguish child support obligations as part of a property settlement agreement during a divorce. "The purpose of child support is to benefit children, not to protect or support either parent. Our courts have repeatedly recognized that the right to child support belongs to the child, not the custodial parent." J.S. v. L.S., 389 N.J. Super. 200, 205 (App. Div. 2006)

    The Appellate Division distinguished the case from two prior cases in which laches was used to deny a child support claim. In State v. Volk, 280 N.J. Super. 57, 654 A.2d 500 (App. Div. 1995), the Appellate Division held that laches barred a claim for child support which had remained dormant for nine years after the mother and child relocated to Virginia. In the Volk case, no contact had been reestablished between the father and the child, and the prior pending claim had been dismissed after the family moved. Still, the court noted that the child may have an independent claim for support that could potentially be taken up by a guardian at litem.

    Previously, in Moore v. Hafeeza, 212 N.J. Super. 399 (Ch. Div. 1986), the Appellate Division denied a plaintiff's action for support 15 years after a previous claim had been dismissed when filed by the Board of Social Services. The claim was dismissed on the grounds of res judicata and collateral estoppel, but the court noted that laches was an alternative grounds for dismissal.

    However, in L.V. v. R.S., there was no prior dismissed action, and contact, however fleeting, had been reestablished between parent and child. The Court noted, "however sharp the serpent's tooth, an ungrateful child does not relieve a parent of the duty of support ...To the extent that either Volk or Hafeeza may be read to indicate that laches of the custodial parent may vitiate a child's right of on-going support, we disapprove and decline to follow such a holding." (L.V. , 347 N.J. Super. at 43)

    Implications for Practitioners

    L.V. v. R.S. is a widely cited case in a number of New Jersey family law matters, ranging from the right of a child to pursue support to the applicability of laches in child custody, support, or paternity issues. Even when a custodial parent has engaged in some form of wrongdoing or may be barred from seeking a claim against the other parent, this does not extinguish the rights of the child. Further, if the claim could be made in the case of the custodial parent's abandonment or death, it is likely that the claim can still be made by the child in their own interest. Even when the fault of one party may be relevant to property division or spousal support in a divorce action, it is not relevant to child support, as it is the right of the child and not of either parent. This means that children may be able to pursue claims for child support, even after lengthy estrangement and even if their custodial parent is partially or wholly at fault for the estrangement itself.

    Further, the principles underlying the case serve as another reminder that parents may not contract away their children's right to support, whether through a property settlement agreement or another form of contract negotiated between them. The child would retain their rights and may be able to file a claim at a later date. Similarly, children may have a right to intervene in their own interests against both of their parents in marital settlement agreements and divorce proceedings. When constructing a marital settlement of any kind, it is important to explicitly provide for suitable child support, even if this means altering other aspects of the agreement in order to make it clear that the children's interests were not harmed in any future review.

  • 16 Dec 2021 12:28 PM | AAML NJ Administrator (Administrator)

    By Rachel Leberstien, Senior Wealth Relationship Manager and Sharon Klein, President, Family Wealth, Eastern U.S. Region and head of the National Divorce/Matrimonial Advisory Practice | Wilmington Trust, AAML NJ Silver Sponsor.

    As the year comes to an end, your clients face key tax considerations.Your client’s marital status, alimony payments and other divorce related issues can impact their end of year planning, and beyond. Listen as Rachel Leberstein discusses Divorce Tax Considerations at Year End and Beyond with Sharon Klein. 

    For more information, reach out to Sharon Klein at 212-415-0531 or sklein@wilmingtontrust.com.
  • 13 Dec 2021 10:07 AM | AAML NJ Administrator (Administrator)

    By Jasmina Woodson | Withum, AAML NJ Gold Sponsor.

    As business appraisers,  we often have conversations like this:

    Business Owner: These amounts were actually paid! Aren’t I entitled to make decisions regarding my company’s operations that will benefit me? 

    Appraiser: When it comes to business valuation, not exactly…and here is why. 

    A key step in preparing a business valuation under the Income Approach to value is determining the income stream a business would earn if it was managed by an independent party whose objective was to report the highest amount of earnings for the business. We call these earnings “normalized earnings”. Often, in matrimonial matters we deal with the owners of closely held businesses, whose goal is to lower reported earnings in order to reduce taxes. Because these owners typically have the discretion to adjust the operations of the business to achieve their goal, the appraiser must assess the business’ financials (tax returns, financial statements, detailed general ledgers, etc.) to determine what, if any, adjustments are needed to normalize earnings (i.e., what the company would have earned if managed by the unrelated party described above). Some of the more common normalization adjustments are reasonable compensation, personal expenses (perquisites), unreported income and expenses, and extraordinary or non-recurring items.

    However, when valuing the subject interest of a business the appraiser must also consider all related party transactions. One such transaction is rent for the business premises. Most businesses need to rent space for operations or at the least, storage. There are instances, particularly with closely held businesses, in which this property is owned by 1) the business itself, 2) one or more owners of the business, either personally or through a real estate holding company, or 3) a related party of one or more of the business owners (i.e., relative, friend, business partner, etc.). In any of these situations the business appraiser has to assess if the rent paid by the business is at the market rate. For many reasons it may be above or below what is considered market rate. The following examples illustrate some of the motivations for business owners not to pay market rate rent. 

    1. As discussed above, for tax purposes the owner(s) of the business may increase the rent expense to reduce reported earnings. 
    2. The mortgage and expenses related to the property exceed what would be collected as rental income using market rate rent. As a result, the business pays an inflated rent expense to cover any shortfall. 
    3. The business is not earning enough to pay market rate rent; thus, the rental expense is reduced. 

    In order to calculate the normalized earnings, when the business is not paying market rate rent because the property being leased is owned by a related party or entity, the appraiser should consider making a normalization adjustment. To effectuate this market rate rent adjustment the appraiser typically relies on the following sources of information:

    • Real Estate Appraisals -  The real estate appraisal performed by an independent third-party real estate appraiser may contain the market rate rent for the property. This information is available if the real estate appraiser considered an income approach in their valuation. 
    • Lease Agreements with 3rd Parties - Another source of information is a lease agreement with an unrelated party. If the property has multiple occupants and one or more are unrelated, the lease agreements with those tenants can be used as an indication of the property’s market rate rent. 
    • Online Data –The appraiser can also perform a search of reputable websites for the rental rates of comparable properties to determine the market rate rent based on the square footage and type of space utilized. 

    So, overall, how does the market rate rent adjustment impact your client? Without considering any of the other factors that go into preparing a business valuation, if the business owner is paying rent in excess of market rate, then an adjustment to market rate rent will decrease expenses and increase earnings and the value of the business. Conversely, if the business owner is paying less than market rate rent, then the adjustment will increase expenses and decrease earnings and thus, lower the value of the business. 

    Key Takeaways

    What is a Market Rate Rent Adjustment? 

    The market rate rent adjustment is a normalization adjustment used when preparing business valuations in which the company pays above or below market rent to a related party or entity. 

    Why do appraisers make this adjustment? 

    Using the Income Approach to value, the market rate rent adjustment is made to normalize earnings so that the earnings represent those of a business managed by an independent party whose goal is to maximize profits. 

    How does this adjustment impact the business valuation? 

    With all other factors of business valuation remaining constant, if the business is paying more than market rate rent, the adjustment will result in an increase in earnings and an increase in the value of the business. If the business is paying less than market rate rent, then an adjustment will result in a decrease in earnings and a decrease in the value of the business.

  • 8 Dec 2021 11:46 AM | AAML NJ Administrator (Administrator)

    By Kriste Rodriguez, CPA/ABV | EisnerAmper, AAML NJ Gold Sponsor

    Often times, marital lifestyle/spending analyses are required in order to assist judges and attorneys in developing  the amount of support to be paid to one party. The analysis is time consuming, tedious and costly but necessary. The process includes: 1) inputting transactions from the parties’ bank, brokerage, savings, and credit card statements for a certain period of time depending on the issues of the case; 2) categorizing the data into Case Information Statement (“CIS”) categories; and 3) totaling the categories by year.  The analysis will show the total amount spent from the accounts for each CIS category.  However, the analysis can identify so much more than the obvious!

    Uncover Hidden Assets

    Once the data has been entered from the statements, each transaction must be traced and verified. Any unidentified transaction can lead to the discovery of hidden assets. For example, the identification of an unknown transfer can discover an undisclosed account. Large withdrawals or checks payable to cash for large amounts can  reveal potential undisclosed accounts.   Alternatively, it can potentially mean that one party is diverting funds to third parties, in an effort to “hide” money.  

    Payments that appear to be legitimate can bring light to something much more.  Take for example a single payment to a homeowners’ association.  This would seem normal to most; however, if the homeowners’ association is something that one of the parties is not familiar with, it could lead to a hidden asset. This single nominal payment could reveal the purchase of a home by one of the parties without the others’ consent or knowledge. 

    Dissipation of Assets

    Often times, infidelity is the reason why the parties are divorcing and there may be suspicion that monies have been spent on the paramour.  A spending analysis may prove the amount spent on the paramour, which could result in a credit to the other party. 

    “Gaps” or “Holes” in Spending   

    Identifying holes in spending can imply numerous red flags. Unusually low or no spending in certain categories such as food and home supplies, restaurants, clothing and fuel can indicate that these items are paid for in cash. The payment in cash for expenditures can indicate any of the following:

    • Cash as a source of income;
    • Implication that these expenses are paid through an owned business;
    • Implication that there may be other accounts that weren’t disclosed where these expenses could be paid from. 
    Indication of Other Sources of Income

    A marital SPENDING analysis is more than just that!  This type of analysis can also reveal undisclosed income sources.  An analysis of the inflows into the accounts could identify deposits for which the source is unknown to one of the parties, thereby indicating another source of income that must be identified by the other party in order to account for the amount when calculating support.

    The analysis can also indicate that the parties are spending well in excess of their disclosed income.  If the spending exceeds the disclosed income and is not reconciled through inheritances, loans, debt balances, gifts. etc., then this could imply that the spending is being funded from an undisclosed source of income. 

    As can be seen from the foregoing, although the analysis is timely and at times costly, the red flags that the analysis can reveal can produce benefits that can significantly outweigh the time and cost!

  • 6 Dec 2021 10:56 AM | AAML NJ Administrator (Administrator)

    By Alana Gibson Chief Operating Officer | DGR, AAML NJ Silver Sponsor

    You’ve been served—by Facebook. 

    While personal service is still the gold standard of service of process, electronic service of process via social media has become much more commonplace over the years. Back in 2011, a judge approved the first case of alternative service via Facebook after a defendant in a divorce case couldn’t be located or contacted through postal mail. Since then, we’ve noticed a significant uptick in court orders for alternate service by social media coming into our office from throughout the country. 

    Here’s what you need to know about the background of these requests and what to expect. 

    Social media can be an effective form of alternate service

    When a spouse simply walks out on their marriage without providing a new address or is evading service, the legal processes for divorce get complicated. Without a known address, personal service becomes much more difficult. Social media provides an opportunity for an alternate method of service that’s likely to reach the recipient. 

    When the individual to be served has left the country, international process service is the next option for service. This means going through either formal or informal methods depending on the need to enforce a judgment. However, another option when not seeking to collect a judgment aside from service via agent could be social media service when appropriate according to the rules of each country.

    These conditions can make service by social media a better option. After all, as the court stated in Noel B. v. Anna Maria, Facebook has no geographical constraints and currently has 2.91 billion active monthly users, with almost 90% outside of the US and Canada. 

    But service via social media isn’t just for international service. Since the early 2010s, there have been numerous cases that have established firm precedent for alternative service via social media in cases pertaining to matrimonial law. 

    For example, in Baidoo v. Blood-Dzraku, the application for alternative service was submitted under a New York rule that permitted a court to order any method of service that was appropriate for a case’s circumstances, as long as it could be shown that other options were “impracticable.” 

    Due process requires any service method devised by a court to be reasonably calculated to notify the defendant of the court proceedings. As noted in Baidoo, publication service, though it has long been permitted, usually doesn’t provide a reasonable probability of actual notice. 

    Presiding New York Supreme Justice Matthew Cooper even commented on the common use of publication in the Irish Echo and New York Law Journal in New York County in his opinion, saying, “If that were to be done here, the chances of the defendant, who is neither a lawyer nor Irish, ever seeing the summons in print, either in those particular newspapers or in any other, are slim to none.”

    Given that reality, when service by publication is the last available option, it begs the question whether service via social media may in fact be the better choice. 

    Requesting alternate service

    In New Jersey, a family court plaintiff can request permission from the court to use an alternative method of service if a spouse has no known address. This is usually either substituted service by a third party who can serve divorce papers to the defendant; or service by publication, usually in a newspaper in the county where the action is filed. 

    Before a court will permit the request, however, the plaintiff must provide an affidavit of diligent  inquiry that demonstrates the completion of specific efforts to locate the spouse. Even after years of court precedent, personal service is the preferred method for service of process by far. If there’s a known address or ability to conduct an investigation to locate a new address for an individual, courts still require that the established steps of due process are followed prior to approving service via Facebook.

    When seeking alternate service via Facebook or any other social media platform, it’s important to have conducted the appropriate due diligence prior to requesting. This includes searching for forwarding addresses, potentially bringing in a private investigator, and more.

    Pursuing service through social media

    In cases where service via social media has been ordered, the judges clearly articulated that they viewed this method as useful and were unopposed to bringing technology into legal practice when necessary.

    In each case where service via social media has been ordered, there were several things the courts looked for prior to approving the request:

    Is this the right individual?

    Many critics of the practice of service via social media point out that it’s easy to create fake accounts. This is true—and it means that it’s important to do the necessary research. Clients should be prepared to submit affidavits of communications with the defendant through that account. If that’s not available, then other concrete evidence the account belongs to the defendant should be produced, such as regularly posting pictures of daily activities or updates containing information that’s not common knowledge. 

    Why is social media a better method than others?

    This goes back to the need to attempt personal service first. This type of service will only be approved once other options have been exhausted.

    In Baidoo v. Blood-Dzraku, the wife sought a divorce from her husband whom she didn’t live with or see for five years after the marriage. Serious attempts were made to locate the husband. 

    • After moving in 2011, the post office had no forwarding address for him.
    • His pre-paid cell phone company was contacted and an investigator was hired to locate him. 

    These efforts failed to turn up an address for him. In situations where there’s clearly no other way to effectuate service, service by Facebook would seem to be a logical path forward given that the wife and husband communicated regularly on Facebook Messenger.

    Can we be sure they will receive notice?

    Receiving notice and establishing jurisdiction are key elements of service of process. The courts want to be confident that an individual is likely to receive the documents. That’s why it’s important to have proof that a subject regularly uses their social media account, whether it’s for using direct messages, posting updates, or interacting with other account users.  

    Account authentication is key

    As noted above, fake accounts are a real concern when it comes to service of process via social media. The Baidoo court addressed this by requiring the plaintiff to submit an affidavit verifying that the defendant owned the account in question. 

    She provided copies of messages between herself and the defendant and identified photos of the defendant on the account. While this wasn’t absolute proof of ownership, the court determined that it was sufficiently persuasive. 

    The court also required her to show that the defendant logged into the account on a regular basis. Another step the court took to ensure that the account was legitimate and belonged to the defendant was to require that the notice be posted three times, at weekly intervals. The plaintiff also had an active mobile phone number for the defendant, making voice mail and/or text available as a backup notification method.

    While the effort required to authenticate account ownership and ongoing use is significant, it doesn’t appear to be more strenuous than the work that goes into getting service via publication approved and completed. What’s more, in most cases it’s likely more effective.  

    Pitfalls of e-service

    Service of process via social media has its pitfalls. It’s possible that an account is fake, or that the owner stops using the account, or that a message might go to the wrong person. However, the measures used in Baidoo offer a degree of security. It’s also important to point out that the method under discussion is Facebook’s private instant messaging service, Facebook Messenger, and not a public post.

    When a private message is opened on Facebook Messenger, Facebook provides a “seen” message with the time and day the message was received. It is of course still not possible to prove that the person who saw it was the account owner—for example, a friend or family member may have access to a defendant’s account and open the message. This is also the case with email. 

    For these reasons, e-service is by nature less reliable than personal service or mail service with return receipt requested. Even considering these pitfalls, though, notification by instant message seems to be more reliable in this day and age than notification via publication.

    What’s more, not all cases will get approved. Take Fortunato v. Chase as an example. Fortunato claimed the credit card debt in her name was actually accrued by her estranged daughter. In an effort to implead the daughter on the suit, Chase was unable to locate an address and requested to effect service through Facebook. Yet the court denied the request, stating there wasn’t enough evidence that the profile belonged to the correct individual and “the Court’s understanding is that anyone can make a Facebook profile using real, fake or incomplete information.”

    Looking forward

    Service of process via Facebook as an alternate service method has become more widely accepted these days, and its use suggests that it’s a more effective option than service by publication. Prior to pursuing this service method, however, it’s critical to demonstrate necessary due diligence in attempts at personal service as well as proof of ownership and frequent use of the Facebook account.

  • 8 Nov 2021 4:18 PM | Mary Adams (Administrator)

    By Jeralyn Lawrence, AAML NJ Chapter President

    Alimony allows former spouses who were financially dependent on their partners during their marriage to meet their own needs. It takes into account the economic entanglement that the two people had. Therefore, the resources of the former spouses, the marital standard of living, and the age and health of both parties, along with the duration of the marriage, have long been substantial factors in determining an alimony award.

    When circumstances change, an alimony order may also change. This means if one party's income changes significantly, it may be a reason to reevaluate or terminate the obligation. In New Jersey, alimony may also be terminated when the recipient remarries or cohabitates with another partner.

    In the past, while it was clear that remarriage terminates an obligation to pay alimony, some recipients have chosen to live in marital-like situations with combined finances but without a legal marriage in order to preserve their alimony. Therefore, the question of when cohabitation similar to marriage emerges has become a subject of disputes between former spouses when alimony has been ordered.

    In 2014, an amendment to the state's alimony statute (N.J.S.A. 2A:32-23n) laid out specific factors to be considered in order to determine when cohabitation is present sufficient to cause the termination of alimony. One unpublished 2020 case considered by the Appellate Division,
    Wajda v. Wajda, lays out some guidance about how the Appellate Division views what is needed for a movant to present a prima facie case of cohabitation sufficient to receive discovery or move forward to a plenary hearing.

    Ending Alimony for Cohabitation in New Jersey

    Prior to the 2014 legislative reform, several cases established principles on which alimony could be ended when the recipient became seriously involved with another partner, even without a remarriage. The 2014 reform aimed to codify and clarify the factors that could lead to a determination of cohabitation. Cohabitation under the law does not necessarily require the couple to reside in one household, but it is defined as an "intimate, mutually supportive personal relationship wherein a couple shares duties and privileges typically associated with marriage or a civil union."

    Overall, courts reviewing these types of petitions focus on the financial aspects of cohabitation, which may be considered to differentiate cohabitation from a dating relationship. A dating relationship is not a sufficient reason to terminate alimony, while the "marriage-like" relationship of cohabitation is sufficient. The elements laid out in the statute that point toward cohabitation are the following:

    • Intertwined finances such as joint bank accounts and other joint holdings or liabilities;
    • Shared or joint responsibility for living expenses;
    • Recognition of the relationship in the couple's social and family circle;
    • Living together, the frequency of contact, the duration of the relationship, and other indicia of a mutually supportive intimate personal relationship;
    • Sharing household chores;
    • Whether the recipient of alimony has received an enforceable promise of support from another person within the meaning of subsection h. of N.J.S.A. 25:1-5; and
    • All other relevant evidence.

    In order to move a petition for termination forward to discovery, a movant must make out a prima facie case for cohabitation. It is not necessary to show that all of the above factors are present in order to make a case for cohabitation, and the definition includes both emotional elements like recognition of the relationship, living together, and sharing lives as well as primarily financial elements such as joint liabilities and joint budgeting. However, the financial elements may provide the clearest demonstration of a difference between cohabitation and a dating relationship, both of which are often public and supportive.
    At the same time, these are the most difficult elements to prove without some access to discovery. People are generally not in the habit of sharing their personal financial decisions, so while a movant may be able to show photos of a couple traveling together, it may be very difficult to present any evidence of intertwined finances without access to discovery.

    It should be noted here that a prima facie case does not necessarily require extensive evidence. A prima facie case is one that is "sufficient to establish a fact or raise a presumption unless disproved or rebutted; based on what seems to be true on first examination, even though it may later be proved to be untrue." (Black's Law Dictionary). It is therefore unnecessary for a movant to prove cohabitation in fact in order to make out a prima facie case.

    Wajda v. Wajda

    In 2019, the Appellate Division ruled in Landau v. Landau (461 N.J. Super. 107, 218 A.3d 823 (N.J. Super. 2019)) that applicants seeking a termination of their alimony obligations must establish a prima facie case for cohabitation in order to proceed with discovery. However, the court did not specify what type of evidence or how much was sufficient to make out such a case, nor did it evaluate any presented evidence of cohabitation on the merits.

    The Landau court reversed a trial court decision granting discovery to an ex-husband and alimony payor who argued that his ex-wife and her new boyfriend traveled together and enjoyed a shared social life, noting that the two maintained separate homes but often slept at each other's home. The Appellate Division reversed the discovery order on the basis of the privacy rights of the supported spouse in her private relationships because the court did not state that a prima facie case was made While the court indicated that discovery could not be used to make a prima facie case where none existed, it did not spell out which elements movants needed to meet in order to make out such a case.

    Wajda v. Wajda, decided approximately 7 months later on April 23, 2020, was an unreported and therefore non-precedential decision of the Appellate Division. Here, the Appellate Division reversed a trial court judge who had denied discovery and found that the movant did not make a prima facie showing of cohabitation. In the Wajda case, the movant presented a certification stating that his former wife's new boyfriend often stayed in the ex-wife's home, alleging that they had established cohabitation.

    The payor paid $425 in alimony weekly to his ex-wife, and he presented a report by a private investigator detailing the above assertions. In response, the ex-wife said that her boyfriend lived in New York and only stayed with her and that they did not share joint finances. As the court noted, "The report also indicated that A.S. remained in the home when defendant was not present and when the parties' daughter was there, kept his car there, often drove defendant's car, did some household chores, and kept his two dogs there."

    The Appellate Division did not rule on the merits of the underlying cohabitation claim. However, it  overturned the trial court, affirming that the movant had made a sufficient showing to warrant further discovery and thus a prima facie case. The Appellate Division recognized that it would be nearly impossible to address the economic factors of cohabitation without moving forward to discovery, ordering the case to be returned to the trial level for further proceedings. "We recognize the difficulties of developing proofs of things such as intertwined finances, joint bank accounts, shared living expenses and household chores, and recognition of the relationship in the couple's social and family circle, without either invading a former spouse's privacy or taking some discovery on the issue... The question is whether plaintiff made a sufficient showing to warrant further discovery. We think he did." The court, however, did not explicitly address the issue of what was necessary for a movant to make out a prima facie case.

    After Wajda: The Temple Decision

    The Appellate Division's later decision in Temple v. Temple (A-0293-20 (N.J. Super. Jun. 17, 2021)) provided much greater clarity to movants seeking to terminate an alimony obligation on the basis of cohabitation and move forward to a plenary hearing on their case. The decision in Temple, which reiterates many of the principles expressed in the Wajda decision, was originally issued as unpublished but was later published, becoming binding authority in New Jersey alimony cases.

    In the Temple case, the Appellate Division once again dealt with a situation where a trial court had erroneously denied further discovery to a movant who had laid out a claim to terminate alimony on the basis of cohabitation. The payor alleged that his ex-wife had been in a relationship with the same person for 14 years, during which her new partner had referred to her as his wife, that the couple lived together, and that they shared a common lifestyle. However, the trial court denied the ex-husband's petition for further discovery because his petition did not address all six of the enumerated factors in the statutory definition of cohabitation.

    The Temple court noted, as the Wajda court had prior, that it was extraordinarily difficult for movants to make out any claim regarding the financial elements of cohabitation without a successful motion for discovery. Requiring such at the motion level would make a successful claim "as rare as a unicorn," the Appellate Division noted in their decision. The court held that the trial court was incorrect in requiring movants to make a showing of all six factors for cohabitation before being granted discovery on the basis of a prima facie case.

    Going further, the Appellate Division likened the consideration of such a motion to that given to a summary judgment motion, in which the court determines whether issues of material fact are being presented. Given that such issues were clearly at hand, the movant should have received an assumption of truth to the extent of allowing discovery to move forward in the case. Of course, the facts in the Temple case may be stronger than those in the Wajda case or other cohabitation claims, but the published ruling lays out clear guidelines that can help movants make out such a claim in a petition to terminate alimony obligations.

    Lessons for Practitioners
    The Wajda case was a precursor to the Temple decision. Both indicate thought from the Appellate Division about how payors of alimony may access the necessary information to make out a claim of cohabitation sufficient to reach discovery or, after that, a plenary hearing for termination. They provide additional clarity to a matter that has long been murky for many practitioners and may correct the tendency on the part of some trial courts to quickly dispose of cohabitation claims.

    Of course, the strength of any claim for termination of alimony relies most on the facts of the specific case as well as the arguments that can be marshalled to support the claim. Timeliness can be another significant factor, although the Wajda case points to a much shorter relationship of months, rather than the Temple relationship of over a decade, as a potential example of cohabitation. Practitioners should keep a fact-sensitive approach at hand, using the approach laid out in Temple to point to sufficient evidence to move forward to obtain further financial or other relevant details.

AAML New Jersey

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