Page 50 - Family Law Services

Separate Property Issues and Active Passive Appreciation During the Marriage

When determining the value of the marital estate, states follow either the community property standard
or the equitable distribution standard. In a community property state, assets acquired during the marriage
are typically considered jointly owned and upon division in a divorce are generally divided equally. In
an equitable distribution state, assets acquired during the marriage from marital efforts or funds are con-
sidered marital. In a divorce, equitable distribution does not mean equal distribution, and, based on the
facts and circumstances, the court may make the division of assets unequal.

In some states, separate property owned prior to the marriage may retain its separate status depending on
the facts and circumstances. If the separate asset has appreciated in value during the marriage, the in-
crease in value may become marital if the increase was due to the personal efforts of the spouse. If the
increase in value is due to passive activity, then the increase typically remains separate property.

If the subject company’s owner spouse acquired or was gifted his or her ownership prior to the marriage,
all or part of the ownership interest could be considered separate property. If the owner spouse is not ac-
tively involved in the company, then any increase in value would be considered to retain its separate sta-
tus, unless marital funds were invested. If the increase in value can be attributed to the personal efforts
of the spouse or to the contribution of marital funds, then the increase would become marital. The CPA
expert may be asked to perform an analysis to determine if personal efforts or marital funds contributed
to the increase in value.

Buy-Sell Agreements and Covenants Not to Compete

Depending on the standard of value, buy-sell agreements between the owners of the company and the
company itself are typically analyzed and considered when valuing the company or an ownership inter-
est in the company. For marital dissolution purposes, a buy-sell agreement may or may not be control-
ling or accorded any weight by the court. The CPA should be familiar with the state’s prevailing case
law.

Another major issue that the appraiser may need to consider is whether a covenant not to compete by the
spouse working in the business is to be included or excluded as part of an FMV appraisal. Many, but not
all, appraisers have interpreted FMV to have an implied covenant, although this can be affected by con-
sideration of local case law. Logically, a willing buyer will not buy an enterprise, particularly its good-
will, if the seller has the right to open up across the street. And, a hypothetical seller would want to max-
imize his or her proceeds. Some jurisdictions consider the value of a covenant not to compete to be the
separate property of the professional and, therefore, not divisible; in these jurisdictions, this issue may
be highly contested.

Discounts and Premiums

Applying discounts and premiums can have a major impact on the value of an ownership interest. De-
pending on the standard of value determined in each jurisdiction and specific case law, they may or may
not be applicable. The CPA needs to be well versed on the jurisdiction’s case law and, if they are to be
taken into consideration, then he or she needs to know that they can be a major area of contention be-
tween the opposing experts.

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