By Jeffrey D. Jones, ASA, CBA, CBI
If you own a business and you are getting a divorce, there are some unique factors that can have a major impact your marital estate in Texas. Whether or not your spouse works in the business or owns stock or partnership interest in the business, your spouse is deemed to own 50% of your ownership interest in the business. The spouse operating the business is known as the In-Spouse and the non-operating Spouse is known as the Out-Spouse. Before a divorce can be finalized, the Court will require that both sides submit an inventory of all the assets owned by the estate and their market values.
If you and your spouse are unable to come to an agreement as to the value of the business, real estate, and personal property, the Court will require appraisals of the items in dispute. The value of the business will often be the single largest item in the marital estate. Its value, along with the value of the other items owned by the marital estate, will be utilized by the Court in reaching a final opinion as to how these assets will be divided among the parties. Usually, the Court will allow the In-Spouse to keep the business and offset that value with the other assets owned by the estate for the Out-Spouse. Sometimes, however, there is not enough value in the other assets to offset the business value. In this case, the Court may require the business to be sold or utilize loans or promissory notes to equalize the values.
In Texas, State and Case Law dictates some unique factors that must be considered when valuing a business and/or ownership interest therein. These factors include who is qualified to conduct a business appraisal and which items are to be included and excluded in the final opinion of value. These factors will be addressed in a series of articles to come in the following issues of this publication.
All States consider a business a marital asset whether in a Community Property State or Equitable Distribution State. In Community Property States, like Texas, the husband and wife are deemed to own a business on a 50/50 basis regardless of their actual ownership or participation in the business. In Equitable Distribution States, the courts look at the financial situation that each spouse will be in after the termination of the marriage and divides the assets in a manner fair to each spouse, taking into consideration the earning power of the spouses, separate property of the spouses, the value that one spouse contributed as the homemaker, the duration of the marriage, the age and health of the spouses, marital infidelity, and who has the children, among others. In Texas, the Courts will consider the financial situation of each spouse after the divorce, the earning power of the spouses, and separate property of the spouses, in reaching a final opinion of value of the assets and their distribution among the parties.
In marital dissolution cases, the courts will require that both parties render a list of the assets they own along with a determination of value. These assets are to be identified as either marital assets or separate property assets. Assets, including a business acquired during the marriage, will be included in the marital estate. Assets acquired by either party prior to the marriage or assets obtained by way of gifts or inheritance are usually considered separate property not included in the marital estate for division purposes.
There are two circumstances under which separate property assets may come back into the marital estate. The first is when marital assets and/or community time and effort have been expended upon the separate property assets. An example would be when community funds are used to pay expenses of separate property assets or separate property income is used to pay community expenses. In these circumstances, many courts have determined that the separate property and marital property assets have become so commingled that they are indistinguishable.
The other circumstance which can bring separate property into the marital estate is when there has been growth in value of these assets from the date of marriage to the date of marital dissolution. In several States, including Texas, case law dictates that the growth in value was due at least in part to the community efforts and therefore allows the increase in value during marriage to become a marital asset. To protect your separate property assets from becoming part of the marital estate, extreme care should be taken to maintain separate business and personal accounts for the income and expenses and not intertwine the income and expenses.
Jeff Jones is the President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. located at 10500 Northwest Freeway, Suite 200, Houston, TX 77092. He can be contacted by phone at 713-401-9110 or by email at [email protected].