Divorce will undoubtedly be one of life’s significant turning points. The longer you have been married and the more assets you’ve accumulated, the more complex the process. Things such as businesses and retirement packages must be assessed and weighed against marital debt.
Fortunately, Texas is community property state and that can help streamline the process. The Lone Star State also applies the “equitable distribution” standard, which means that only things accumulated during the marriage are considered community property and are usually divided equally. Exceptions include thing such as gifts and inheritances. However, defining the value of marital assets and debts can be a complicated process that often requires strenuous negotiations and litigation.
When determining whether a business qualifies as a marital asset, the relationship between investment and time are important factors. For example, if the business was started prior to the marriage, any value it built up then falls outside the community property lines. If it began during the marriage, it generally is viewed as a marital asset. But many times the lines are blurred, particularly if its value increased after you tied the knot. Here are some pertinent questions to consider.
- Were marital funds or assets ever used for the business?
- How long before you were married was the business established?
- What is the current value compared to the start of the marriage?
- Did marital support play a role in the businesses success?
Basically, the greater the support drawn from the marriage, the greater the potential marital interest.
Assessing business value
When it comes to defining the value of an established business, the old “book value” approach doesn’t capture a company’s potential. It’s just not as simple as subtracting the debts from the value. This area of negotiation often has the parties claiming vastly different numbers.
- Growth or shrinkage: This can be a highly speculative. Often one side points to an emerging robust economy. The other predicts an industry downturn. Making your case often comes down to who can provide the more persuasive data and expert valuations.
- The practice: Take a business like the TV show Flip or Flop. The house-flipping hosts who recently separated are the business. There is no real brick and mortar structure, just their joint charm and charisma. In terms of putting a value on their “business,” one would have to look at things like TV ratings and the show’s life expectancy. Keep in mind, without them, there is no business. The same holds true for professionals such as doctors, life coaches, motivational speakers, and real estate agents among others.
- The recession: When facing divorce, it’s common that a company will see a sharp and unexpected dip in revenue. This is a pretty standard tactic used to avoid paying a spouse full value.
Determining marital debt follows a similar line of thinking as community property and equitable distribution. The negatives that occur during the marriage count. It doesn’t matter that one spouse or the other took on the debt, even personally. Also, the same exceptions apply to debt.
Things like student loans that were taken out before you were married do not become part of the marital obligation. But if someone went back to school and paid via loans while married, that may count against your portfolio. It may be wise to have a record of debts and dates to show what is and is not your responsibility.