When navigating a divorce, the complexity of asset division can be particularly daunting. In his video blog, Ken Jewell delved into the nuances of asset division, and explored potential strategies to protect your interests in a divorce.
How Is a Business Divided in a Divorce?
A business is considered an active asset, meaning it is an asset which one party to the marriage works on a regular basis for a large part of their waking hours. As such, it is not subject to a 50/50 division upon divorce. Instead, a “degree of contribution analysis” is used to determine the value of the business for the purpose of division. It’s also important to understand that the part of the business being worked on before the date of the marriage, and any part of the business being worked on after the parties’ divorce action is filed, won’t be subject to this analysis.
If the non-title holding spouse indirectly contributed to the business, the degree of contribution analysis focuses on the contributions they made outside the enterprise. Such activities could include any non-business related responsibilities, such as raising children, managing the household, paying bills, and purchasing essentials. Typically, the title-holding spouse would need to handle these outside tasks on their own, but because their spouse did so, the title holder was free to focus on growing the business. Generally, the indirect contributions of a non-title-holding spouse account for 5% to 25% of the business’s appreciation from the date of the marriage date until the date divorce proceedings begin.
If the non-title holder was directly involved in the business, the degree of contribution analysis will focus on the contributions the non-title holder made within the business. Such contributions can include anything from giving advice to the title holder and showing up at promotional events to being present at the business itself to assist with filing, answering telephones, managing staff or balancing the books, or even helping the title holder make day-to-day decisions or larger executive decisions. Direct contributions by a non-title holder are typically valued at 25% to 45% of the appreciated value of the business, beginning from the date of the marriage until the date of the divorce action. However, the title holder is always entitled to a credit equal to 10% of the value to account for the goodwill, the name, the efforts, and the branding of the owner that was critical to the business’s success. Once that credit has been taken off the top, the remaining 90% of the business’s value will be subject to the analysis.
How Are Homes Divided?
Homes are subject to a similar type of analysis. However, it will focus on whether the home is a joint property acquired during the marriage or a separate property either acquired by one party prior to the date of the marriage, or as a gift that’s provable or an inheritance made to one spouse during the marriage.
Any asset, such as a bank account, owned by one spouse prior to the date of the marriage remains theirs after the parties are wed. If a gift is acquired during the marriage, it will be considered separate property, provided it can be proven it was made to only one spouse. For example, a gift in the form of a check written to only one of the parties and deposited into their own bank account (which does not bear the other spouse’s name) is usually considered the recipient’s separate property. Finally, in the case of an inheritance, any asset received by one party during the marriage by virtue of someone’s death will remain their separate property, as long as the other spouse’s name doesn’t appear on the title.
So what does this mean in the context of purchasing a marital home? Typically, when a couple buys a house, they make a down payment, often consisting of joint assets acquired during the marriage. In this case, the proceeds used to make the down payment would be marital property. However, if someone contributes their separate property to the purchase of a marital home, and the property is being sold upon divorce, or one spouse buys out the other’s interest, the party who contributed the property will receive a credit for their contribution before the remaining net proceeds (the amount remaining after the mortgage, taxes, and other expenses are satisfied) are equally divided among the spouses.
Why equally? Much like a business that resides and operates in a storefront, a marriage is operating in a house. Courts typically presume that the maintenance and management of the home was a joint effort of the marriage that warrants an equal distribution. However, occasionally a court may award a lower-earning spouse slightly more than 50% of the net proceeds, on the assumption that a spouse earning significantly more money will have the opportunity to make back what they’re giving up, while the lower earner is less likely to have that chance.
How Are Investments Divided?
Investments are generally divided 50/50 because they’re passive assets. Much like a marital home, investments appreciate or depreciate on their own without the effort of either party. As such, courts feel it’s unfair to award one party or the other a greater amount.
However, there are some exceptions. If there is a pre-marital portion of the investment account, if a provable gift went into the investment account, or if the investment account is an inheritance that does not bear the name of the other spouse, that portion will be deemed a separate property asset. With respect to any premarital portion, it is important that the parties maintain a statement showing how much was in that account when they got married. Otherwise, they won’t be able to prove how much of that asset was separate property.
What Strategies Can Be Employed to Protect Your Interests in a Divorce?
Protecting your interests in a divorce depends on your specific facts and circumstances.
A trust can be used to protect separate property, particularly the marital home. The separate property would be deposited into the trust, and the trust would then purchase the marital home. At that point, both spouses are essentially deemed tenants and have no ownership interest in the property, so no claim could be made against the asset.
The same would be true of an investment account. When placed in a trust, separate property, along with any dividends and interest it generates, can retain its separate property status if used for purchases during the marriage, depending on how and for what it’s used. However, if it’s used to pay for marital expenses, the separate property converts to marital property. Likewise, if liquid assets are deposited into a trust as separate property, the assets, along with dividends and interests, will also maintain the separate property character, provided they’re not being used to pay for marital expenses. Whenever a separate property asset is used for a marital expense, it automatically loses the protections of a separate asset, as it’s difficult to determine what that money was used for, how it was used, and how to claw it back. However, if the separate property is used for capital improvements – for example, to build an addition to the marital home or to make a down payment for the purchase of a home – the separate property will maintain its character.
Finally, if you decide to purchase property, such as a motor vehicle, through your business, it will be classified as a business asset, not a marital asset. There’s then a strong argument that the vehicle would not be subject to division under standard marital practice rules, but would instead be part of the degree of contribution analysis when valuing the business for purposes of dividing it as an asset.
If you are considering divorce, contact us to discuss how we can assist you in protecting your interests and achieving the positive results you want.
