Trail income is different from personal goodwill, Tennessee court clarifies

Tennessee does not consider personal goodwill in a solo proprietorship a marital asset. But what about trail income, the money a financial planner makes from managing his or her clients’ funds and portfolios? In Fuller v. Fuller, the owner-spouse argued the goodwill analysis applied to the treatment of trail income as well. The Tennessee Court of Appeals recently disagreed.

This ruling adds another nuance to the state’s shifting goodwill jurisprudence.  

The husband’s financial planning practice generated direct commissions from the sale of financial products as well as “trail” income. The trail income made up the majority of his earnings. 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.

Testimony from a veteran financial planner confirmed that for purposes of valuing a financial planning practice the “guideline is two times a year’s trail, plus … one times the [direct] commission.”

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 was not a marital asset.

The Tennessee Court of Appeals agreed that it was “well settled under Tennessee law that professional goodwill is not a marital asset that can be divided in a divorce proceeding.” The rationale has been that it would be unfair to compel a professional practitioner to pay a spouse a portion of an intangible asset, as determined by the court, when that asset was not salable, the appeals court explained.

“By contrast,” the Court of Appeals said, “the trail income under review in the present case could be sold or assigned by the [husband], as he acknowledged.” Further, the industry had a methodology for valuing this income as sellable property. The fact that trail income could be sold separately was “a controlling factor, distinguishing its nature as an asset from the concept of goodwill,” the Court of Appeals held.

It affirmed the wife’s right to half of the value of the asset. But, in reviewing the husband’s objection to the trial court’s child and spousal support findings, the Court of Appeals pointed out a double-counting problem. The trial court, in its income determination, appeared to have included the trail income that it had distributed as a marital asset, the appeals court noted. To do so was improper under the applicable statutory provision.

Consequently, the Court of Appeals remanded, ordering the trial court to recalculate the father’s income and support obligations.

The case is Fuller v. Fuller, 2016 Tenn. App. LEXIS 974 (Dec. 21, 2016).