Vol. 79, No. 3, March
Avoid Pitfalls When Dividing Marital Assets
Malpractice claims can result when the
family practice lawyer fails to use an expert or fails to document why
an expert was not hired to help value and divide marital
by Thomas J. Watson
Thomas J. Watson , Marquette 2002, is
director of communications at Wisconsin Lawyers Mutual Insurance Co.,
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.
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
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
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
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
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."
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."