Marriage, Divorce and Your Business

Marriage, Divorce and Your Business

Sep 16, 2012

If you own a business, or any asset for that matter, and you intend to marry or divorce, you need to read this.

Virginia is not a community property state. But it is an equitable distribution state. What does that mean to you? If you acquire an asset during your marriage, unless you inherited it or got it as a gift (from someone other than your spouse), it is presumed to be martial property. It doesn’t matter if the asset is only in your name, your spouse’s name or joint names. It is still presumed to be marital if it was acquired any time between the date you got married and the date you and your spouse finally separate. And marital property is subject to being equitably divided by the court when a marriage breaks up.

So let’s consider an example. Suppose you got married back in 1980, and after your happy honeymoon you begin a new business. You incorporate (using one of Bean, Kinney & Korman’s lawyers, of course), and you own 50 percent of the shares of stock. Your buddy from high school is your business partner. He owns the other 50 percent. Naturally, your shares of stock are restricted. The shareholders’ agreement provides that shares of stock cannot be transferred to anyone outside the corporation. Even though 50 percent of the shares of stock are in your name, they were acquired during the marriage so they are now considered marital property. In a divorce, the value of all marital property will be divided by the court.

As if that isn’t enough, your 401(k) and IRA are marital property to the extent that they accrued during the marriage. Any part of any retirement plan, IRA or stock option plan you had before you married can be considered separate property. It goes without saying that all of this is a double edged sword. Your spouse’s assets are subject to the same rules. If assets are acquired during the marriage, they are presumed to be marital, and the value of the marital assets are subject to division.

Back to our hypothetical. The good news is that even if your shares of stock in your business are marital, you can still keep possession of them.

Here’s how this works. In Virginia, the court first determines what property is separate and what is marital. Then the court decides, based on the evidence, how much each marital asset is worth. Finally, the judge determines what share of the marital assets each party will receive. But the judge can literally divide only marital assets which are in joint names. That division can be in kind (the wife gets some of the marital widgets and the husband gets some) or by a sale of the asset and a division of the proceeds of sale. It is not unusual, for example, for the court to order that the former marital residence be sold, and after expenses of sale, the net proceeds to be split between the husband and wife.

Remember, though, that Virginia is not a community property state, so marital assets do not have to be divided 50/50. They can but do not have to be.

Okay, back to our hypothetical again. The judge orders that 45 percent of your shares of stock in your business should be allocable to your spouse. You then have a choice. You can just give your spouse 45 percent of your shares of stock, or you can give her cash in an amount equal to that 45 percent. Remember, the court will determine the value of those shares at your equitable distribution court hearing. Maybe you can offer your share of the equity in the marital home instead of the cash payment or the actual shares of stock. But what you offer has to be accepted by your spouse, or, failing that, approved by the court. The purpose of that requirement is to avoid a situation where one spouse offers the other all of his “dog” stocks to satisfy an equitable distribution award.

When you reach settlement or when the court awards your spouse an interest in your retirement, IRA or whatever, the tax penalties can be avoided by having the lawyers prepare a Qualified Domestic Relations Order (“QDRO”). The QDRO has the effect of transferring the interest in the plan or account to the benefit of your spouse without triggering the penalties. The transfer of an IRA, if it is done as part of the divorce can be accomplished directly from your IRA custodian to your spouse’s IRA custodian, again avoiding tax penalties.

What factors determine the percentage of each marital asset the court will give to the husband and to the wife? The Virginia Code lists ten factors the court must consider. They are:

  1. How much did each spouse contribute to the family? Both monetary and non-monetary contributions are considered
  2. How much did each spouse contribute, monetary and non-monetary, to acquiring and maintaining the asset?
  3. How long were you married?
  4. Your age, your physical condition, and that of your spouse.
  5. What caused the marriage to break up?
  6. How and when specific items of marital property were acquired.
  7. What are the debts, how did they arise, and what property is security for the debts?
  8. Is the asset liquid or not?
  9. What are the tax consequences to each spouse?
  10. And the catch-all. Such other factors as are necessary or appropriate for the court to make its decision.

There are no percentages or weight assigned to each of these criteria. There is a reason for that. The statute is not intended to be a mathematical formula. Instead, it prescribes guidelines within which the trial judge exercises his or her discretion. You should be aware that there have been cases where someone has tried to hide assets or moved assets around to confuse the situation. Competent counsel can discover that kind of chicanery. And if a judge thinks someone is playing games, the consequences can be dire.

Where there is a business that is not publicly traded on a stock exchange, you can expect that there will be valuation issues. What does that mean? It usually means dueling experts. Each side hires an expert to do an evaluation of the business. There are various accepted methods of doing such evaluations, and there are various facts and figures that can be subject to differing interpretations.

Would it surprise you to learn that the expert hired by the spouse who owns the business often reports a low value, and the expert hired by the so-called “out spouse” comes in with a higher value? Could that have anything to do with the fact that the out spouse expects cash in lieu of a marital share of the business?

In most cases, it is wise to give serious consideration to trying to settle your case. It is the best way for you to have some input and control over the result. If you go to court, you present your evidence, you make your argument, and then you sit down and the judge makes a decision. You have to live with that decision, like it or not. If you appeal a court decision you don’t like (and why else would you appeal?), appellate judges decide the case based upon the arguments and the evidence in the trial court. You have even less input and control.

You can try to settle your case directly with your spouse, although this can be dangerous without advice from a lawyer. You can also work with your lawyer to negotiate a settlement with your spouse’s counsel. Or you can go to a mediator to try to settle your case.

There is much to think about when you become involved in a divorce or think you might. This article gives just the barest outline some of the considerations that can arise in dividing marital property.

And there are many issues besides the division of property. There is child custody, support payments for the children, support payments for or from your spouse, and the divorce itself. There is a lot more you must know about. And – do I even have to tell you – you can only get full information and advice from a lawyer.

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