The Main Differences Between Active and Passive Appreciation of a Business Interest
Active assets are those that were managed during the marriage such that a change in value is attributable, at least in part, to active contributions from a party or the parties. Passive assets are those that fluctuated in value during the marriage due to market conditions. Words such as “control”, “managed”, and “efforts” describe active assets.
By definition, it should be easy to distinguish an active asset from a passive asset, but in practice, it is not so simple. If the spouse owned the business interest prior to marriage, it adds to the complexity as the appreciation in value of the owner-spouse’s active efforts in the business during the marriage is included as a marital asset subject to ED. On the other hand, if the value of the business appreciated due to market conditions, it is excluded from the marital estate.
A valuation analyst calculates the value of the business interest as of the date of marriage and the date of the complaint. The difference or appreciated value is typically subject to ED. However, is most cases, it is not that simple.
- How does one determine that all of the enhanced value is the result of the active management of the owner-spouse?
- What about market factors? Could a portion or all of the appreciated value attributable to external market conditions and excluded from the marital estate?
- Did business grow due to favorable economic or industry conditions?
- Did business grow due to legislative changes or other demographic trends?
- What about the efforts of third parties? What if there are multiple owners that manage the business?
- What about the non-financial contributions made by the non-owner spouse to maintain the household including raising the parties’ children enabling the owner-spouse to actively manage the business?
- What if the non-working spouse acquired an ownership interest in the business after the marriage?
The value of the business interest subject to ED, the portion of the increase in value attributable to the efforts of the owner-spouse, is not so simple and will make substantial difference in the outcome of the case. Valuation of a business interest and determining the portion attributable to active or passive appreciation requires the right business valuation expert which is crucial in any divorce case concerning ED of a business interest and, as matter of fact, other marital assets.
|Dave Yoon, CPA, ABV, CVA
T (201) 265 2800
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