When a couple divorces and there is a family business, it will be necessary to determine the value of the business. If you own a business and you are headed toward divorce, we highly recommend calling upon a business valuation expert who will distinguish between the business’ “active” and “passive” appreciation.
Valuating the active and passive appreciation in a business is crucial and the difference matters a lot. Often, a spouse’s interest in a closely-held business exceeds the marital residence, so it must be given the attention it deserves. Not only is the business a valuable asset, but valuation can be a complex matter, especially if the spouse owned the business before the marriage.
In the context of divorce, the active appreciation of a business owned prior to a marriage is typically included in the marital estate, whereas the passive appreciation is left out. By “active appreciation,” we’re referring to a spouse’s active involvement in the business during the marriage.
What Constitutes ‘Active’ Appreciation?
Active involvement can mean a variety of things, such as buying a bigger building so the business can hire more employees and expand operations, developing new products and services that lead to the company’s growth, and other activities that contribute to the company’s appreciation.
On the other hand, “passive appreciation” has to do with an increase in value of a premarital asset due to external market conditions. For example, if a premarital asset, such as a piece of land increased in value during the marriage strictly because of market conditions, and not because of the owner spouse’s active involvement, the increased value would remain separate property and would strictly belong to the owner spouse.
If the same piece of premarital property tripled in value because the owner spouse developed the land (active appreciation) while he or she was married, the increased value during the marriage would be counted as marital property and subject to division under New York’s equitable division laws.
If you’re divorcing and one of you owned a business or real estate before the marriage, it’s critical that the active and passive appreciation are distinguished because it can make an enormous difference in the settlement. Having a knowledgeable attorney and business valuation expert can help protect your interests throughout the divorce process.
For divorce representation in Putnam, Dutchess, and Orange counties, contact us today.