20 May The Business End of Divorce
Assuming that you and your spouse didn’t enter into a Community Property Agreement or Community Property Trust under Alaskan law, then your impending, or pending, Alaska divorce case likely falls into the equitable distribution system for dividing marital property.
In a dividing property in a divorce case, the court embarks on a three-step process. First, the court must determine what property is available for distribution by characterizing the property as either separate or marital. Marital property includes all property acquired during the marriage excepting only inherited property and property acquired with separate property which is kept as separate property. Second, the trial court must place a value on the property. Third, the court must fairly and equitably allocate the property (and the debt). In allocating marital property, the court considers the following factors, among other: (1) the parties’ earning abilities; (2) the parties’ stations in life; (3) the parties’ circumstances and necessities; (4) the parties’ physical condition and health; (5) the parties’ financial circumstances, including the time and manner of acquisition of the property at issue, its value at the time, and any income producing capacity; (6) the conduct of the parties, including whether there has been unreasonable depletion of marital assets.
With that in mind, a frequent question is whether an individual's business will be considered marital property. If it is a family business or if both parties have used marital efforts, time, and money to build the business then the answer will almost always be YES.
If the marriage was extremely short and the parties worked hard to maintain completely separate economic identities then it is true that the trial court may treat the property division as an action “in the nature of rescission” in putting the parties back into the position they were in before the divorce. However, even in cases where there is no commingling of assets our Supreme Court has never held that a trial court must apply rescission principles in a property division divorce case.
Now, back to your business. A trial court may only divide property characterized as marital. Separate property becomes marital only upon a showing that the parties intended to treat the property as marital and that there is an act or acts which demonstrate that intent. However, separate property may nonetheless be invaded if and only if the court finds that equity demands an invasion.
So, if you began your business prior to marriage; if the business was established with your separate property; if you and your spouse have demonstrated a clear intent to treat the business as your separate property; if your spouse has never been a shareholder, owner, employee/contributor to the business — then you may be well on your way to establishing that the business is not marital property.
Two major hurdles to that argument though are the legal terms “transmutation” and “active appreciation”. Transmutation is often a matter of intent and actions supporting that intent. For example, placing separate property in joint ownership is rebuttable evidence that the owner intended the property to be marital. Active appreciation occurs when marital funds or marital efforts cause a spouse’s separate property to increase in value during the marriage. The distinction being that if separate property has transmuted into marital property, then it is marital. All of it. Active appreciation, on the other hand, is the recognition that a separate asset can become partly marital by growing in value during the course of a marriage.
In upcoming posts, I will attempt to describe transmutation, active appreciation, and valuation of business assets in more detail. Hopefully this introduction helps you think about different assets that may be involved in your divorce. Business asset allocation cases are fraught with pitfalls and it is highly recommended that you consult a family law attorney prior to filing for divorce in a case where business assets are at play. In fact, I recommend a consultation with a lawyer prior to filing any divorce action – even if it just seems like a simple property divorce with no minor children involved.
Note: This only applies to Alaska divorce cases. This discussion should not be taken as legal advice. Consult with an experienced attorney in your area before taking any action in your divorce case as far it relates to this discussion and business property in a divorce.