Why do family law attorneys care about Law Day?

Why do family law attorneys care about Law Day?

Brendan Hammer
Illinois Fellow
American Academy of Matrimonial Lawyers
May 2022
Why do family law attorneys care about Law Day

In 1961, the U.S. Congress designated May 1 as "a day of national dedication to the principles of government under law," enshrining the concept of Law Day that was established in 1958 by President Dwight D. Eisenhower. This year, Law Day commemorates "The Constitution in Times of Change." But most family law cases involve state statutes and case law: in general, the Constitution doesn’t apply.

And yet, by providing an aspirational creed, an outline for governance, a mechanism for the allocation of power and an articulation of rights, the Constitution embodies the quest to promote and pursue the concepts of fairness and progress. And in no area of law are these more fundamental than in family law.

More than in most other areas of law, clients served by family law attorneys present myriad, unique contexts and circumstances that bear on their claims. Our clients can be married or unmarried, with or without children (whether biological or adopted). They cover the entire gamut of identifiers—racial, ethnic, economic, gender, sexual orientation, religious, educational, vocational—that characterize America.

Attorneys and judges must navigate intersecting areas of law, including bankruptcy, personal injury, employment, immigration, trusts and estates, criminal and real estate law. Because our field presents such a diverse client base, and because it is the most intimate and personal of legal practices, it challenges the court and legal systems to operate as broadly and dynamically as possible. As a result, the underlying message of Law Day—the idea that "government under law" can prove flexible in its application to a diverse population—has perhaps the most relevance for family law attorneys and litigants.

In addition to serving their individual clients, family law attorneys can offer critical assistance to other legal professionals.

  • In cases involving corporate buy-sell agreements, certain trust agreements and other contracts, documentation often references an array of issues that intersect with matrimonial law. Among these are access to income, terms for repayment or forgiveness of debt, asset control rights and valuation of property.
  • Settlements in employment and other professional disputes can have family law implications for situations in which a litigant recovers for injuries or claims arising during the marriage. In a divorce proceeding (depending on the jurisdiction), such seemingly straightforward provisions and agreements might be interpreted by a divorce court so as to place greater reliance upon principles of equitable distribution found in domestic relations law.

Thus, the value and benefit of experienced matrimonial law counsel can extend well beyond the simple representation of a husband or wife and the individual issues of marital assets, custody rights and spousal or child support.

To best serve our range of clients, whose diverse problems often call for unique approaches, the Illinois court system addresses family law matters with a flexibility designed to promote equity, a preeminent consideration in our field. Domestic relations courts, known as “courts of equity,” allocate marital property to achieve “equitable division.” But what is the practical application of this emphasis for people living in an increasingly multicultural society? In an era of historic shifts in demography, mobility, work/life balance, economics and moral norms?

Fortunately, the structure of family law permits it to adapt to real-world shifts with unusual agility. From issues such as co-parenting, relocation, spousal and child support, and division of assets, the law is equipped to yield results consistent with the tenor of the time. In our practices, we have seen remarkable shifts in accepted norms on all of those issues and more. As culture and circumstances continue to evolve, these new norms will be subject to additional shifts, and the law should evolve accordingly.

Certainly, the law, the legislature and the judicial system are not perfect. As with most human endeavors, they derive from a complex mix of compromise, tradition and aspiration. Then they are mediated by individual legislators and judges subject to the commitments and biases endemic to humankind. Significant inequities persist and require additional calibration.

But on a day of commemoration such as Law Day, we can look back at where we have been to survey where we are, and then look forward to where we want to go. The trajectory we chart will not be free of controversy or conflict. But under the rubric of the Constitution, we have a robust system of law by which to resolve, procedurally and substantively, family law issues in the interest of fairness, equality and equity—ideals that hold particular significance in the practice of family law.

Brendan Hammer

Reach him at bhammer@sdflaw.com and 312-578-7108

The Impact of Inflation on the Division of Assets for Small Business Owners

The Impact of Inflation on the Division of Assets for Small Business Owners

Jennifer Fletchall
Illinois Fellow
American Academy of Matrimonial Lawyers
April 2022
Division of Assets in a small business

The United States has hit the heights. That's not a good thing.

In 2022, the annual inflation rate in the U.S. accelerated to 7.9%— the highest since February of 1982. (Keep in mind that in developed countries, including the U.S., anything above 4% is considered "high.") And inflation is predicted to increase in coming months as we start to feel the impact of the war in Ukraine and the world's sanctions against Russia.

Inflation is the rate at which the value of the dollar falls at the same time that the price of goods and services is rising. This reduces purchasing power. The math is pretty straightforward. Higher costs for businesses lead to increased prices, which raise the cost of living. This in turn may lead to demand for higher wages, which results in worker shortages if employees leave for better pay from a competitor. These shortages can force businesses to offer higher wages to entice workers to return—which means higher costs. And the cycle begins again.

From a macro-economic standpoint, as prices rise, the value of a country's currency begins to decrease. But inflation also can quickly filter down to individual households, where the largest assets are the marital residence, retirement accounts and businesses—all of which must be properly valuated during a divorce settlement.

To gauge the impact of inflation on a personal level, just check your retirement account balance; if it's lower than it was three months ago, inflation is most likely the cause. Inflation also can reduce the value of the marital estate; the future cost of consumer spending; the value of spousal maintenance; and especially the value of the small business that has supported the home and purchases over the years. (All of these factor into the division of assets.)

For a small business, inflation's effects may not immediately be obvious.

  • Inventory Costs. Inflation causes businesses to pay more for inventory as well as materials. If these costs cannot be met, it can lead to an inventory shortage.
  • Employee Wages. When the price of goods increase, employees will want a higher wage. If a company is unwilling or unable to increase wages, talented employees may leave.
  • Consumer Purchasing. Another consequence of rising prices: the number of consumers buying those goods decrease.
  • Investment. To correct inflation, the Federal Reserve hiked interest rates in mid-March, for the first time in three years. Higher interest rates often deter business owners from borrowing money for investments in equipment and facilities.

To achieve an equitable appraisal, business owners should strongly consider employing a business valuation expert, who will typically choose one of three methods: the Asset Approach, the Market Approach or the Income Approach. Most of these experts, when valuating a small business for a divorce settlement, will choose the Income Approach. It includes an analysis of the business’s cash flow over the last five years, as well as projections of future cash flow. Notably, the business valuation expert also will determine the impact of inflation, along with other factors, on that cash flow.

Inflation impacts the value of a business primarily in three areas.

  1. It can alter the risk-free rate, which is used in calculating the cost of equity. As the name suggests, the risk-free rate is the rate of return an investor would expect on an investment that has no risk. It is determined by using the interest rate on a Treasury Bill, a very safe investment since these are backed by the government. As interest rates rise, the risk-free rate will also rise—which, all other things being equal, would decrease the value of the business.
  2. Inflation may also affect the after-tax cash flow of a business. If a business incurs additional costs due to inflation—and if revenue does not rise accordingly—a business’s after-tax cash flow will decrease. Again, all other things being equal, this can decrease the value of the business.
  3. Finally, inflation can change the effective tax rate paid by a company. Take the example of a company that deducts depreciation expenses related to newly purchased equipment. If decreased cash flow (or lack of funds) prevents the business from making such purchases, it will have no new assets to depreciate; the company then loses the opportunity for pre-tax depreciation. Inflation is the root cause, and this too will reduce the business’s value.

Inflation not only afflicts individual consumers faced with higher prices at the grocery store, the gas pump and the mall. It also affects small businesses that already are walking the tightrope between increased costs and maintaining profitability. If the business owner is in the process of obtaining a divorce, inflation must be considered in calculating the value of the business—and, correspondingly, the value of the marital estate—to arrive at a fair and equitable conclusion.

Jennifer Fletchall

The Modern Prenup

The Modern Prenup

Shana L. Vitek
Illinois Fellow
American Academy of Matrimonial Lawyers
February 2022
Prenup cartoon

On a recent episode of “Shark Tank,” two entrepreneurs pitched an investment in their online business called “HelloPrenup.” Engaged couples can create their own agreement “together” on this cheerfully designed website. They complete a questionnaire; pay about $600 to obtain the completed contract; and can then make their agreement official by signing it without consulting an attorney.

My anxiety escalated just at the thought of couples who rely on preprogrammed questions—without legal advice—to create legally binding prenups. I waited for the Sharks to start pointing out all the problems I saw with this process. To my surprise, not one but two Sharks ultimately invested in the business.

Approximately 2.7 million marriages will take place in the United States in 2022. Of those, an estimated 5% of couples will have executed a premarital agreement before walking down the aisle—a surprisingly low percentage considering the U.S. divorce rate consistently drifts between 40% and 50%. Many lawyers see a specific uptick in the number of millennial couples requesting a prenuptial agreement. One factor is that the average age of those in first marriages has risen, which means that each spouse has had more years to work and build wealth they wish to protect.

The website “HelloPrenup” promises a “frictionless prenup for modern couples.” But who are these “modern couples?” If they are two healthy individuals with similar incomes, who do not plan to have kids, I could envision this “frictionless” prenup working. But this is not the typical prenup client. More commonly, one spouse has (or expects to have) substantially more wealth than the other. And the other spouse signs the agreement — without due diligence or understanding what is being surrendered—to prove it’s not about the money.

Consider the following scenario: Jack and Jill plan to get married. In their early 30s, both have good jobs and retirement accounts with similar balances. As a “modern couple,” they decide to create an online prenup. Because they earn similar incomes, each agrees to waive maintenance. They agree to keep their own retirement accounts and any other accounts in their sole names. They agree that any joint assets should be split 50/50. Easy, right?

Now jump ahead 13 years or so. Jill stopped making retirement account contributions since quitting her job four years into the marriage to care for their three children— one with special needs. Conversely, Jack now earns five times more than when they married; has received a large inheritance; and has a million-dollar retirement account.

Many would say that due to these changed circumstances, enforcing the terms of this prenup would be unfair: a court would never uphold that prenup. They would be wrong. In fact, the court will most likely find the agreement fully enforceable.

Premarital agreements should not be taken lightly. They are powerful contracts that can effectively and efficiently protect both spouses in the event of divorce. That’s why both parties need their own attorney to review the agreement prior to signing it. Just as no two divorces are exactly the same, no two marriages are exactly the same—and no two prenups should be the same.

Lawyers can ensure the terms are legally fair for both spouses. And keep in mind that as circumstances change, your prenup can be supplemented, modified or voided by agreement during the marriage. Knowledge is power.

There are several reasons for each party to hire an attorney to review and advise you about a prenup:

  1. Divorce laws vary from state to state. If you don’t know what the law entitles you to have, you won’t know what you are giving up.
  2. Devastating outcomes can result from poorly drafted prenups, and not just for the spouse with less money. A spouse who is wealthy on wedding day may have agreed to pay a lump sum to the other in the event of divorce, but later experiences a financial catastrophe. That spouse may still be required to pay that substantial lump sum.
  3. A prenup is nearly impossible to invalidate, and many include clauses that penalize a spouse for challenging the validity of the prenup. For example, if someone challenges the prenup and loses, they could be ordered to pay the other’s attorney fees in addition to their own.
  4. Plans change. Couples who don’t plan to have kids change their minds. People change careers. What might have seemed fair at the time of the marriage may be completely inequitable 10 years later.
  5. Having lawyers review a prenup provides an added layer of validity. The presence of attorneys makes it much harder for someone to claim they didn’t know what they were signing.

Over the years, many divorce clients have told me they wish they had entered into a premarital agreement before tying the knot. But that desire was ultimately outweighed by the fear of offending their partner or creating conflict during this joyous time in their lives. So, what is the best way to broach the topic with your future spouse without derailing the entire engagement?

Negotiating a prenup is not something you should do the week before the wedding. Raise the idea of a prenup as soon as possible, even though you may be uncomfortable doing so. If diving right into the topic is intimidating, start a conversation about how you would like to handle finances during your marriage. Do you know what assets and debts your spouse has? Will either’s home become the marital residence, and if so, how will the expenses be paid? Will bank accounts be kept separate?

As these conversations unfold, you can easily pivot toward the possibility of a prenup. And if you agree to create one, schedule a time to consult with attorneys to understand the process.

People don’t get divorced without an attorney, so why would they create a prenup—which will dictate what happens in a divorce—without an attorney? The divorce rate approaches 50%. If you booked a vacation and knew there was a 50% chance you would have to cancel, wouldn’t you pay for travel insurance? You can apply the same risk management principle here.

Shana Vitek

©2022 Illinois Chapter of the American Academy of Matrimonial Lawyers