Thinking about getting married? You might be shocked to find out what happens if it doesn’t work out.
There is nothing worse than a long, drawn-out divorce with consistent confrontation. Regardless of the circumstances, it is always in everyone’s interest that the parties move on with their lives and begin the healing process. A dispute over the division of assets acquired during a marriage is one area that causes a divorce to become long and tedious.
Most business owners are a little disheartened to find out that their beautiful Corvette in the garage is going to be sold or equitably divided with their spouse. Whether you are 25 and never married, or 55 and on your fourth, having a basic understanding of how marital assets are divided in a divorce proceeding will save headaches down the road.
Marital Property: the Default
One might expect the law to be technical, lengthy and full of legal jargon; however, when it comes to statutes on marital assets, it is quite simple. If an asset does not meet one of four exceptions, it is considered by default a marital asset.
All gifts (this includes assets acquired in exchange for a gift) are excluded from any division of assets in the event of a divorce. The diamond ring purchased for the first wedding anniversary or the motorcycle gifted by one spouse to the other for their 40th birthday are common examples of gifts generally excluded.
Anything owned prior to the marriage is excluded, provided only that it is kept separate and never jointly titled or deposited into a joint account. Property acquired by a spouse after a decree of legal separation is also not subject to division. Disputes as to whether an asset is separate or marital is generally resolved by the court, which determines whether or not the burden to prove an asset is separate has been met.
Assets can also be protected if one can persuade a future spouse to sign a prenuptial agreement. Agreements can exclude assets from division, provided there is full disclosure of financial circumstances prior to execution. Many successful business owners strive to create that impenetrable prenup, but even iron-clad prenuptial agreements cannot protect a spouse from maintenance claims in the event of a divorce.
Marital property: The Gray Area
There is a common misconception that anything brought into the marriage or inherited is completely separate and the spouse will never have a claim to such assets. While there is some truth to this statement, it is important to understand that there are exceptions to the rule and business owners regularly find themselves paying out much more than they ever anticipated in the divorce.
If a partner enters the marriage with a house in his/her name and thereafter jointly titles the house or a subsequent house that replaces the initial home, then it is presumed that they intended to gift their separate asset to the marriage and it becomes a marital asset. If an inheritance is received and then deposited into a joint account it becomes a gift to the marriage and is subject to equitable division. Although this may seem obvious, one would be surprised to learn how many naïve spouses inadvertently relinquish their prized possessions.
Any appreciation in the value of inherited, premarital or gifted assets is considered a marital asset and subject to being shared. It is always important to keep adequate records of the value of assets owned at the time of the marriage since the parties need to calculate the initial value of the asset and then the appreciation in any divorce. It may be wise to have all assets you own appraised and documented before you marry so there is little room for dispute in the event of a separation.
What is property in a divorce context?
You can expect to share virtually everything that either party owns or has a right to, regardless of how the asset is titled. Examples include:
- Real estate, furniture and personal property
- Bank accounts
- Business interests
- Stock and stock options
- Deferred compensation
- Retirement accounts (401k, pension, PERA, individual retirement accounts)
- Frequent flier miles and hotel reward points
- Beneficiary interests in trusts (Discretionary trusts not included)
- Life insurance
- Club and sports memberships
- Accrued sick and vacation leave
Any debts that were incurred during the marriage by either spouse are considered marital debts and subject to equitable division.
Valuation of assets
All assets need to be valued at the date of the divorce. Assets are generally valued at fair market value. Real estate is appraised unless the property is being sold. Many people assume that any expenses related to the sale of the real estate can be deducted from the market value of the residence. This assumption is generally false. Unless the residence is expected to be sold in the near future, expenses such as real estate commissions are not deducted from the value of the property.
Furniture and personal property is usually split up between the spouses without any formal valuation. Judges dislike wasting their time on personal property division. If you decide to bicker and fight over the pots and pans, you might find yourself bidding for your treasures at the court-ordered garage sale.
Business owners are often shocked at the values placed on their business interests by the accountant or business valuation specialist. Professionals tend to be hit hardest because their practices are often valued emphasizing the value of the business to the owner rather than what they could sell it for. Just remember, business owners frequently find themselves paying half the value of the business to their spouse, plus maintenance. This can have a significant impact on the stability of the business. Other methods to value businesses include the income approach, the asset approach and the market approach.
Courts do not as a rule, deduct capital gains taxes that may be payable in the event that the business is sold. This is unfortunate because the actual net proceeds from the sale of a business interest may be considerably reduced as a result of taxes payable on the sale. Recapture of depreciation on sale of real estate can create tax liabilities that reduce the real value of that asset when compared to a cash asset.
As a result of all this, divorcing spouses need to seek tax advice about the consequences of property divisions because when the tax basis of assets is examined, it can make the division look very different in real terms.
Getting married is one of the biggest financial investment decisions that any business owner can make. It pays to carefully consider the financial implications before tying the knot.