Is trail income goodwill? Tennessee divorce court examines

BVWireIssue #174-3
March 15, 2017

A Tennessee divorce dispute centering on a financial planning practice raised the issue of what to do with the “trail” income—the money a sole proprietor makes from the ongoing management of his clients’ accounts. Conceptually, is it like professional goodwill or is it a marital asset subject to distribution?

The husband’s business generated direct commissions from the sale of financial products as well as trail income. At trial, the husband conceded that, unlike the goodwill in his practice, he could sell the trail income separately for two times its annual value; in case of disability or death, he also could assign the trail income to another professional, in which case the assignee might pay the family a certain percentage of the annual earnings.

After the trial court had found that the trail income was a marital asset and awarded the wife half of its value, the husband appealed. He claimed the trail income was no different from the professional goodwill found in a solo practice, which under state law was not a marital asset. The Court of Appeals disagreed, noting that “[i]n contrast to professional goodwill, [the husband’s] trail income could be sold separately.” There also was a methodology in the industry for valuing such trail income as sellable property, the court noted. But, in reviewing the husband’s objection to the trial court’s child and spousal support findings, the Court of Appeals noted a double-counting issue. The trial court, in its income determination, appeared to have included the trail income that it had distributed as a marital asset, the reviewing court noted. To do so was improper under the applicable statutory provision, the appeals court found.

Consequently, the Court of Appeals vacated the support determinations and ordered the trial court to recalculate the father’s income, excluding the trail income distributed as a marital asset. But, said the appeals court, the trial court “should consider, however, any additional income generated by this asset after the division.”

The case is Fuller v. Fuller, 2016 Tenn. App. LEXIS 974 (Dec. 21, 2016). A digest of the decision and the court’s opinion will be available soon at BVLaw.

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