When a high-earning professional or the spouse of an investor faces a divorce in Garden City, the financial stakes are often centered on private equity interests. Unlike a standard savings account or a primary residence, private equity holdings are among the most complex assets to value and distribute.
New York law follows the principle of equitable distribution. This means that while assets are not necessarily split 50/50, they are divided in a way the court deems fair based on the specific facts of your marriage. Because private equity involves unique structures like “carried interest” and capital calls, you need a clear understanding of how the law treats these interests.
Is Private Equity Considered Marital Property?
In most New York divorce cases, any asset acquired from the date of the marriage until the day a summons with notice is filed is considered marital property. This applies to private equity interests regardless of whose name is on the investment paperwork.
However, there are two main categories to consider:
- Direct Investments–These are capital contributions made into a fund using marital income or savings.
- Carried Interest–This is a share of the profits of an investment or fund that serves as compensation for the investment professional.
If the right to receive these payouts was earned during the marriage, the court will likely view them as part of the marital estate. Even if the payout happens years after the divorce is final, the portion of the work performed during the marriage remains subject to property division.
Challenges in Valuing Private Equity in a Divorce
Valuing a private equity interest is far more difficult than checking a stock ticker. These assets are often illiquid, meaning they cannot be easily sold or converted to cash. We look at several factors to determine what these holdings are worth:
The “Co-Co” Problem: Co-Investment and Carried Interest
One spouse might be required to “co-invest” their own money into a fund. We must distinguish between the return on that initial investment (the capital) and the “carry” (the performance fee). In New York, both are usually subject to property division if they originated during the marriage, but they are valued differently.
Restricted Access and Transferability
Most private equity agreements have strict rules that prevent a spouse from simply transferring half their shares to an ex-partner. This is known as a “restrictive covenant.” Because you cannot easily sell these shares on the open market, a “lack of marketability” discount is often applied during the valuation process to reflect that the asset isn’t immediately “spendable.”
Tax Implications
Private equity distributions are often taxed as capital gains rather than ordinary income. When we help you handle private equity in a divorce, we account for these future tax liabilities. It would be unfair for one spouse to receive $1 million in cash while the other receives $1 million in private equity that will actually be worth $750,000 after taxes.
How New York Courts Divide These Assets
Because you cannot usually split the actual shares in a private equity fund, the court typically uses one of two methods:
- The Buyout Method: One spouse keeps the entire private equity interest and “buys out” the other spouse by giving them a larger share of other marital assets, such as the family home or liquid brokerage accounts.
- The “If, As, and When” Approach: If there isn’t enough cash to do a buyout, the court may order that when the private equity interest eventually pays out (the “liquidity event”), a percentage of those proceeds must be paid to the non-titled spouse.
The second method is often used when the investment is in an early stage, and its future value is highly speculative.
The Role of Pre-Existing Agreements
Just as fertility clinics use consent forms to dictate the future of frozen embryos, many private equity professionals have partnership agreements that outline what happens in the event of a divorce.
If you signed a prenuptial or postnuptial agreement, that document will likely control how your interests are divided. New York courts generally honor these written contracts, provided they were signed voluntarily and were not unconscionable at the time. We can review your partnership and joinder agreements to see if there are specific “trigger events” or valuation formulas already in place.
Protecting Your Interests
If you or your spouse holds private equity positions, we suggest taking the following steps to prepare for your property division proceedings:
- Gather the Summary of Terms: Obtain the most recent quarterly reports and the private placement memorandum (PPM) for each fund.
- Identify the Source of Funds: Determine whether the initial investment came from “separate property” (such as an inheritance or money earned before the marriage).
- Track Capital Calls: If marital funds are used to meet capital calls during the divorce process, this must be documented.
- Consult with Financial Professionals: We work with forensic accountants who understand the nuances of “waterfall” distributions and internal rates of return (IRR).
Why You Need Legal Guidance in Garden City
Dealing with private equity in a divorce combines high-level finance with complex New York case law. The outcome of these valuations will affect your financial life for decades.
At Aiello & DiFalco, we assist clients in Garden City in managing these high-stakes financial issues with discretion. We can:
- Review and interpret complex partnership and joinder agreements.
- Advise on how New York judges typically value carried interest.
- Work with valuation experts to ensure your assets are not over- or undervalued.
- Advocate for a distribution plan that accounts for tax consequences and future capital calls.
The decisions you make today regarding your investment portfolio will impact your long-term security. Whether you are the fund manager or the spouse seeking a fair share of the marital estate, we are here to provide the support you need. Connect with us today!
