The divorce process is always emotionally and legally challenging for spouses who’ve chosen to end a marriage, but when one or both spouses own a business and have complex assets, it becomes a greater challenge. States like Arizona with community property divorce laws compel divorcing spouses to equally divide their marital assets while they may retain any separate assets. As straightforward as this may seem, the process quickly becomes challenging when the spouses have purposefully or accidentally commingled one or more assets that would otherwise have remained one spouse’s separate asset, especially when one or both spouses are business executives.
Separate vs. Community Property in an Executive Divorce
When spouses divorce in community property states, they must divide and redistribute their community property—any property, assets, or businesses accumulated during the marriage, and their community debts. They may retain their separate property. Examples of community property that’s subject to division include:
- The marital home
- Any other real estate property acquired during the marriage, such as rental properties, vacation homes, and investment properties
- All bank accounts begun during the marriage regardless of the name on the account
- All investment accounts opened during the marriage
- Retirement plans and pension packages
- Any businesses begun during the marriage
- Vehicles, boats, and RVs
- Intellectual property such as patents, copyrights, art, or manuscripts developed during the marriage
- Household items such as artwork, antiques, collectibles, furnishings, electronics and appliances
Examples of separate properties include the following:
- A business owned by one spouse before the marriage
- Property owned by the spouse before the marriage
- Any inheritances or gifts belonging solely to one spouse
- Any asset or property acquired after the date of separation or the filing of the divorce petition
Although the lines between separate and community property may appear clear and concise at a glance, it’s not always as simple as it first seems. This is due to the common commingling of separate assets that occurs during most marriages.
What Makes an Executive Divorce so Complicated?
Business executives often have high assets, complex portfolios, and multiple stock options in addition to owning one or more businesses. According to community property divorce laws, a spouse may claim half of all marital assets. Depending on the date the business began, their spouse may claim a portion of the business’s value. If the business was begun during the marriage, both spouses are entitled to half of its assessed value. If one spouse began the business before the marriage, it may seem that it’s their sole property, but what if their spouse invested time, talent, or money into the business? In that case, the spouse may claim a portion of the business’s value—typically, at least half of the increased value of the business. This is an example of commingling what would otherwise remain one spouse’s separate asset.
Commingling also commonly occurs when one spouse invests time or money into the other’s real estate property or when one spouse grants the other access to a bank account or investment account. When Commingling occurs in a business, property, or account, the owner of the asset or property gives up the right to claim the full value of the asset as their separate property. Their spouse is entitled to a portion of the asset’s increased value.
Determining the amount of improved value of commingled property becomes complex and requires thorough financial forensics and reliable valuation of all assets.
In addition, debts are also community property when a line of credit, mortgage, or loan occurs during a marriage, so spouses must equally divide their debts during a divorce. This becomes challenging during an executive divorce involving business loan agreements.
Difficulty in Valuation
Valid and well-executed prenuptial and postnuptial agreements may clearly define how each spouse’s assets are to be divided or retained during a divorce, including a business; however, many divorcing spouses do not have a prenuptial or postnuptial agreement in place. The first step toward dividing property equally and fairly is to determine the value of each asset. To begin the process, each spouse must submit full financial disclosures. With the help of financial forensics experts and reliable valuations of property, they can untangle commingled assets and determine each spouse’s fair share. Valuation of businesses in executive divorce may include any or all of the following approaches:
- A market-based approach valuing the business by comparison with a similar business or on the market and examining trends, profit, and revenue
- An asset-based approach examining the liabilities and assets of the business including its patents, copyrights, equipment, and total property to arrive at a current value
- An income-based approach to evaluate the future income potential of the business through examination of the cash-flow projections and future risk assessments
The results of the valuation of a business in an executive divorce depend on the method used. Often divorcing executives use several methods to determine the value of a business and submit the one that works best for them. In many cases, a spouse uses a different method and disputes the determined value.
Divorcing executives may use mediation, arbitration, and other out-of-court methods to determine the division of assets, including one or more jointly owned or commingled businesses. If they aren’t able to resolve their disputes and arrive at a fair settlement agreement, they must argue their cases in court for a judge to decide.
How Can a Family Law Attorney Help?
A skilled Phoenix high asset divorce attorney can facilitate the smoothest possible strategy for valuing businesses and dividing complex assets during an executive divorce. At Stewart Law Group, we have years of experience in complex divorce law with access to the state’s top valuation experts and forensic financial specialists. We are ready to defend your best interests throughout every stage of the divorce process, including determining your fair share of all business enterprises connected to your marriage. We are ready to use our years of knowledge and experience to guide you through your options not only for your separate and community assets, but also for executive enterprises with choices available such as buying out the company, selling it and dividing the proceeds, or dissolving the business and dividing the profit.
Call Stewart Law Group today so we can begin strategizing the best way forward for your executive divorce case either through an uncontested divorce settlement agreement or by presenting your case in court and aggressively arguing for your rights.