Facts: Husband and Wife divorced after 26 years of marriage.
Husband is a certified financial planner who owns his owns practice.
Husband testified that his practice typically receives two types of income. First, he earns direct commissions from the sale of financial products. Second, he earns resulting income from financial products he previously sold and continues to manage, commonly referred to as “trail” income.
For Husband, the trail income constitutes the majority of his income. For example, in 2014, Husband’s total revenue from his practice was $270,000, which was comprised of $50,000 in direct commissions and $220,000 in trail income.
The trial court ruled that Husband’s trail income generated by his ongoing management of his clients’ accounts was a divisible marital asset. The trial court valued that asset at $400,000, and awarded Wife a judgment for one-half, i.e., $200,000. Husband was ordered to pay Wife $2000 per month until the judgment is paid.
On Appeal: The Court of Appeals affirmed the trial court.
Husband argued the trial court erred by including the value of his practice’s trail income, which Husband characterized as valuing his business goodwill.
It is well settled under Tennessee law that professional goodwill is not a marital asset that can be divided in a divorce proceeding. The rationale when valuing a professional practice results from the inequity of making one spouse pay the other for an intangible asset at a value that could not be realized by a sale.
While a professional business’s good reputation, which is essentially what goodwill consists of, is certainly a thing of value, it does not bestow a separate property interest on the owners of the business. The reputation of a law firm or some other professional business is valuable to its individual owners to the extent that it assures continued earnings in the future. It cannot, however, be separately sold by the owners.
Wife argued the trail income of Husband’s practice was not goodwill because (1) it could be sold or assigned, and (2) the financial planning industry has a standard method for valuing trail income.
Both Husband and another experienced financial planner testified that when a financial planning practice is sold, it is typically valued at one time the annual income from direct commissions plus two times the annual trail income.
The Court held the trail income from Husband’s practice was a tangible asset separate and apart from any goodwill of the practice:
Inasmuch as the undisputed evidence demonstrated that [Husband’s] trail income could be sold or assigned and that there exists a recognized methodology within the industry for valuing such trail income as sellable property, we conclude that the trial court properly determined [Husband’s] trail income to be a divisible marital asset. In contrast to professional goodwill, [Husband’s] trail income could be sold separately. We therefore determine this to be a controlling factor, distinguishing it’s nature as an asset from the concept of goodwill. Furthermore, the fact that [Husband] could assign his trail income for value upon his disability or death also supports the conclusion that such income constitutes a divisible marital asset.
Thus, the trial court’s judgment was affirmed.
K.O.’s Comment: Goodwill can be valued and divided as part of a divorce in certain situations. In Hartline v. Hartline, the Court explained the difference between the personal goodwill of a practitioner and the business goodwill of a practitioner’s business, complete with staff, equipment, and a location that could be assumed by another practitioner. Business goodwill may be included in the business valuation where the practitioner has one or more partners or pre-established contracts that could be assumed by another practitioner. In those instances, the goodwill is a tangible asset that can be sold or assigned just like the trail income in the case above.
Information provided by K.O. Herston: Knoxville, Tennessee Divorce and Family-Law Attorney.