Wisconsin Lawyer
Vol. 79, No. 3, March 2006

Avoid Pitfalls When Dividing Marital Assets

by Thomas J. Watson

If you thought being a family law attorney meant not worrying much about estate planning, tax law, and business law, you probably quickly learned that you were wrong. In divorce actions today, hiring the proper experts, identifying and finding assets, getting accurate property appraisals, considering tax implications, and dividing retirement accounts fairly and accurately can mean the difference between a job well done and a malpractice claim.

Business Assets

Whether the asset is a large corporation or a small family business, many lawyers agree that hiring an expert to value corporate or partnership business assets is your best bet. Madison attorney Janice Wexler says, "Know thyself. I am quite well aware that my ability to read and understand business tax returns is limited and that I need help."

Of course, many clients do not want to pay for the additional expense of hiring an expert. Another problem, says Milwaukee attorney Gregg Herman, is determining whether you even need that expert. "Many 'businesses' are really jobs and have no saleable value. In those instances, hiring an expert may be throwing good money after bad." Determining asset values of a self-employed person also can be tricky, especially if the self-employment business is cash-based, such as construction.

Sally Anderson, vice president of claims for Wisconsin Lawyers Mutual Insurance Co., says disputes over business assets sometimes turn into malpractice claims. "In one case, the attorney's former client decided nearly two years after the divorce was final that she didn't get enough money from a small family-held corporation, even though at the time of the divorce she was quite pleased with the lawyer's representation."

Finding assets also can be an expensive, wild goose chase. Wexler says that just as in valuing known assets, "Clients are often faced with a decision about costs of discovery versus the anticipated useful results" when trying to find assets. Wexler and Herman urge lawyers to document their advice and their clients' decisions in writing. Sometimes, clients who decide not to spend the additional money on discovery or on an expert see things much differently when they do not get the result they want.

While obtaining written documentation of the client's decision may help protect the lawyer against a future malpractice claim, Anderson says there is an even better reason to do it. "It's more about client service than protecting yourself. It elevates the importance of the decision for the client, hopefully encouraging some serious soul searching. You're telling your client `hey, this is a critical decision so pay close attention.' Alerting your clients to the importance of their decisions is especially true when the client chooses not to follow your advice."

What other business assets can be problematic? Wexler cites stock options, time share condominiums, federal retirement accounts, armed services retirement accounts, and unique collectibles as often difficult to value. The right expert can make all the difference.

My Lawyer Made Me Do It

Anderson says clients often come forward after the divorce with a coercion malpractice claim - a complaint seen far more often in family law cases than in any other area of practice. "I call it the `my lawyer made me do it' claim. We have seen several cases in which former clients claimed their lawyer incorrectly evaluated the assets to be divided, leaving them with less than they deserved, and then `bullied' them into signing the stipulation."

Anderson says family law practice is more vulnerable to the coercion claim for an obvious reason: "Emotions often run high in family law cases. The lawyer is dealing with all the dreams of a lifetime. When things go badly for someone, looking for a scapegoat is not all that unusual."

Retirement Accounts

The process of dividing retirement assets has caused a growing number of malpractice claims. Retirement accounts have changed dramatically over the past 20 years, and lawyers must keep up with those changes. Even something as routine today as a 401(k) account was not the norm until the late 1980s and early 1990s.

While the division of marital property is governed by state law, any assignments of pension interests must also comply with federal law, namely the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986. A "qualified domestic relations order," or QDRO, may assign some or all of a participant's pension benefits to a former spouse, to satisfy family support or marital property obligations. Each QDRO must be submitted to the pension plan administrator for approval.

Using QDROs to divide retirement assets is a common practice in divorce work. So why do many of them result in malpractice claims? Anderson says initially family law attorneys drafted QDROs themselves rather than outsourcing that work. "It took a long time for some lawyers to realize they should hire an expert to draft a QDRO." Wexler does not hesitate to send this work out. "I think lawyers who do not specialize in these are insane to try and draft them."

Herman agrees, especially when it comes to defined benefit plans. "We now outsource all QDROs. Defined benefit plans are more complex [than defined contribution plans]. In addition, there are hybrid and sometimes much more sophisticated plans. For these, an expert is always advisable." On the other hand, Herman says defined contribution plans, such as a 401(k) account, which are not pension accounts, are generally straightforward and frequently, he says, companies have prescribed forms that family lawyers themselves can use to divide the assets.

Anderson warns that lawyers can run into problems even if they hire the expert drafter, and she sees the malpractice claims to prove it. "Lawyers should at least make sure they understand these documents well enough to protect their clients. We've had cases where the lawyer did not even read the QDRO, assuming that because an expert drafted the document, it was fine. That can be a huge mistake."

Lawyers should make sure they know the experts to whom they are outsourcing the work. Anderson says, "Not knowing the expertise of the person you are hiring to draft a QDRO can come back to haunt you."

Finally, Anderson says, lawyers should consider recommending a written contract between the document drafter and the client. "A written contract between the expert hired to draft the document and the client can avoid a myriad of issues. A contract clarifies the role and loyalties of the drafter (is this third party working for both spouses, or only one?), specifies the fee, and spells out responsibility if there are errors in the resulting document. From the cases I see, very few lawyers do this."

Wexler says lawyers also must be wary of client confusion. "Clients often don't understand that [retirement funds are not] cash in their pocket. They also conveniently forget their lawyer's advice about early withdrawal penalties and income taxes."

Marital Property Agreements

Another big change in family law practice over the past 20 years has been the increased use of prenuptial agreements, according to Herman, who has been practicing family law since the early 1980s. "In addition to the increased quantity of these agreements, the quality is also dramatically better, making the likelihood of applicability at the time of divorce greater." He says the use of marital property agreements is almost routine now, whereas in the past it was the exception.

Anderson cautions, however, that while prenuptial agreements may be fairly common, lawyers should not take them for granted. Clients need information about the likely enforceability of the agreement. Having an agreement does not guarantee that a judge will enforce it. A poorly drafted marital property agreement can result in a malpractice claim - even years later.

Another potential pitfall is dual representation. It is not unusual for a lawyer to agree to draft a marital property agreement for a couple, but Anderson says it is a mistake for the parties not to have separate representation. Wexler agrees. "In order for the agreement to be as strong as possible, which is the point of doing one in the first place, both parties must have lawyers."

Anderson wonders whether some attorneys, despite knowing the risk, draft a prenuptial agreement for a couple because they feel they cannot turn down the business. While this practice may bring in some money in the short term, Anderson says it can cost an attorney in the long run. "Avoiding problems now can save you time and money in the future. The risk of joint representation here, even with signed conflict of interest letters, is too great."

Conclusion

Family law is the practice area giving rise to the third-highest number of malpractice claims, behind personal injury and real estate work. "When the dust settles," Anderson says, unhappy clients who are at their lowest point emotionally and financially "sometimes look for someone to blame for their continued unhappiness." When you are drafting a marital property agreement, identifying and valuing all the assets available for division, or dividing retirement accounts, make sure your client seriously considers hiring the right experts. Anderson says too many malpractice claims have been the result of the lawyer failing to use an expert or failing to document why an expert was not hired, and the unhappy former client coming back and questioning that strategy. Even when your client tells you an expert isn't necessary, make sure you document that decision and the advice you gave your client so that the client could make an informed decision. As Anderson says, "It's good business for your client and for you."

Wisconsin Lawyer