The Risk Manager, Winter 2000
The current good economic times have created wealth that dramatically increased the nature and value of the assets of a lot of people. Your clients often have a house, a car, and a large retirement account. They own financial instruments of all kinds and have financial interests in a variety of novel arrangements. It is difficult in the extreme to identify and evaluate a client's or an opposing party's assets in this day of stock options, IRA's, Roth IRA's, SEP IRA's, 401K's, defined contribution pension plans, annual bonuses, two income families, a host of new closely held businesses, and an apparently ever rising stock market.
New asset issues seem to arise daily. Is an inheritance income that should be used in setting child support? (no in Arkansas) Is an annual bonus that varies from year to year income that should be used in setting child support? (yes in Iowa) In a divorce settlement must a disability payment be shared? (only to the extent it is intended to serve as retirement benefits in New Hampshire) The latest asset issue concerns frequent flyer miles and other rewards programs. Are these assets that should be considered in estate planning and divorce settlements? While this may initially seem a frivolous consideration, in fact, these rewards programs can have a significant value and be a hot button issue for some clients.
Lawyers practicing family law, bankruptcy law, and estate planning are particularly vulnerable to a claim that all assets were not identified and evaluated accurately - but this risk is not exclusively theirs. Both litigation and transaction lawyers must get the numbers right to serve their clients competently. Claims may result from inaccurately evaluating a family business, not considering how capital gains taxes impact on a division of stocks, mutual funds, and real estate, or simply failing to get a complete inventory of assets.
Procrastination is dangerous. A sudden large move in a stock price can radically change negotiation positions in a divorce action. Thus, not moving quickly to closure when using financial instrument valuations as part of a negotiation or agreement opens a window of market fluctuation risk for a lawyer. The client will blame the lawyer if it looks like the lawyer could have in any way avoided a disadvantageous price change (no matter how unfair it is to do so).
The first step in managing asset valuation risk is to recognize the problem. If your practice involves evaluation of assets - and most do - then you need a systematic way of making a thorough asset investigation every time.
Some things to consider are:
Are you well informed on financial markets, business financial statements, and retirement plans? If not, make a special effort to acquire the knowledge you need to practice a matter competently that requires this kind of expertise. If you don't have the time to come up to speed, do not take the matter.
Use experts in accounting, retirement programs, and financial planning to assist you in analyzing assets. In a divorce case the husband's pension plan statement reflected his contribution and earnings. It did not show that the employer was to make a substantial contribution at time of retirement. Thanks to the expert the wife's lawyer used to bring this out, the wife got an extra $1,500 per month.
During the representation, monitor carefully the value of assets like stock that fluctuate in value. Take into consideration that most retirement plans grow in value over time. Real estate may or may not appreciate. Check it out.
Understand the tax implications of an asset evaluation - especially capital gains taxes.
- Ask your client lots of questions to identify assets. They need more help in this regard than you might think for both innocent and not so innocent reasons. Use discovery to flush out opposing party assets. Be meticulous becuase every asset missed will likely come back to haunt you - especially in divorce settlements which take on a life of their own. Document the file carefully to show your diligence.
- Be alert to developing asset evaluation issues. What else is out there like frequent flyer miles that could surprise you?
- Use asset checklists based on the type of matter - divirce, business dissolution, partnership formation, etc.