Owning a small business or professional practice is always about responding well to opportunities and challenges.
One of the biggest of these can be divorce. Trying to value and divide ownership interests often requires complicated calculations and may play a big role in determining who ends up with what during property division proceedings.
In this post, we will inform you about one aspect of this: appreciation in the value of an ownership interest in a business that a spouse had before marriage.
Increases in value
In New Jersey divorces, property is divided under the principle of equitable distribution. This generally means that if a husband or wife owned an interest in a business prior to the divorce, it remains separate property.
There are, however, exceptions to this rule under which appreciation in value during marriage of an asset that a spouse brought into the marriage may be subject to division in a divorce settlement.
In determining whether this exception applies, the distinction between “active” appreciation and “passive” appreciation comes into play. In most cases, only active appreciation qualifies for property division. This type of appreciation involves efforts by one or both spouses that increase the value of the company.
Passive appreciation refers to the value by which the business increases due to outside factors. Some of those factors include industry growth, demographic trends, consolidations, economic growth, changes in regulations and financial changes.
Dividing interests in a business
If the marriage took place after the establishment of the business, only active appreciation that occurred during the course of the marriage will generally be divisible. However, determining whether business growth occurred due to active or passive measures poses a considerable challenge in many cases. Typically, a professional valuator will consider various aspects of the business to determine the value and appreciation.
Aside from determining the amount of active appreciation, the valuator may also need to determine whether the active appreciation occurred due to the efforts of the company owner or due to efforts of other individuals involved with the business.
Dividing assets in divorce is often a complicated process, and when valuable and complex assets like businesses are involved, it may seem even more daunting to address. It makes sense to protect your best interests by discussing your specific situation with an attorney familiar with high-asset divorce issues.