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All blog articles are contributed by the attorneys at Lasher Holzapfel Sperry & Ebberson. These articles address a wide range of issues that are faced by our individual, family and privately-held business clients.

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THE LHS&E BLOG

Divorce and its Impact on the Family Business

After the difficult decision is made to end a marriage, business owners are faced with another dilemma. What impact will this divorce have on the family business? How will an equitable division of property and liabilities affect the long-term management and ownership of the business? A Seattle divorce attorney can assist in advising the impact a divorce has on a family business.

In dividing property and liabilities, Washington law dictates that the court divide all property and liabilities in a just and equitable manner, after considering all relevant factors, and without regard to marital misconduct.

Fault is not a relevant factor. The factors are: the nature and extent of the community property; the nature and extent of the separate property; the duration of the marriage; and the economic circumstances of each spouse at the time the division of property is to become effective. This includes the desirability of awarding the family home or the right to live therein, for reasonable periods to a spouse having custody of any children.

All property, both community and separate property, is under the jurisdiction of the court. There is a presumption that all property obtained during the marriage is community. Separate property is property owned prior to the marriage, or obtained by gift, or inheritance during the marriage. The character of the property is determined as of the date the property was acquired.

A business which was commenced during the marriage and capitalized with community accumulations or leveraged on community financing will be considered community property. The fact that only one spouse ran the business or contributed to its success does not change its community character.

A major concern is the continued ability to operate the business on a day-to-day basis. There should be no sudden shift in management where one spouse has run the business and the other been inactive. During the pendency of the dissolution, the standards by which management decisions will be judged are whether actions taken were reasonably prudent and undertaken in the ordinary course of business.

In order to determine how the business will be allocated between the spouses, it must first be valued. Valuation of a closely held business, unlike other assets, can be problematic. A Seattle divorce attorney will usually accomplish this with the assistance of an accountant with business valuation experience.

Methods used for valuation include: straight capitalization of accounting; capitalization of excess earnings; market value appraisal; and the formula contained in a buy-sell agreement.

After a value for a business is determined, the business will be awarded to one of the spouses as part of the equitable distribution of property.

A business which was managed by one of the spouses during the marriage is usually awarded to that spouse, although an off-setting award of other assets or even a buy-out provision may be necessary to create an equitable division of the value of the parties' estate.

In a case where a business is the sole significant asset, a court, depending upon the duration of the marriage, might award long-term maintenance to one spouse and the business to the manager spouse.

Spousal maintenance, where appropriate, will be considered simultaneously with a property award as courts attempt to balance and equalize family income for a period of time.

Disproportionate awards of property are not the norm. Generally, an award of more than half the property to one spouse is only appropriate where one spouse has a much lower earning power or potential when compared to the other spouse.

In a long-term marriage of 25 years or more, courts will attempt to leave the parties in as good an economic position as if the marriage had continued with an effort made to enable both parties to continue with the lifestyle experienced during the marriage.

If the marriage is considered mid-term (5 to 25 years), courts will attempt to provide one spouse with sufficient resources to allow that spouse to rehabilitate him or herself to enter the labor force and become self-sufficient. If the marriage is less that five years in duration, courts will attempt to return the parties to the position they were in prior to marriage, typically with an equal division of community assets. Personal assets are usually awarded to the original owner.

Courts have awarded all of the community property to one spouse where the other spouse had a substantial separate estate. This may happen where one spouse owned and operated a business before the marriage and its separate character was perserved but the earnings of the parties were used to accumulate community property during the marriage.

Disproportionate awards of property are more common where there is limited community property. A typical example would be where the community property assets consist mainly of the equity in a family residence and very little else. In that case, it is not unusual that an award could be heavily skewed in favor of the spouse who has the lower earning potential and primary parenting responsibility for the parties' minor children, and who more than likely has spent considerable time outside of the labor force.

The larger the marital estate, the more likely an equal distribution. The closer one of the spouses is to retirement age will also have an impact. All contribute to disproportionate awards.

As an asset of the marriage, the family business will be impacted by the dissolution. How, and to whom, the business will be awarded in a property division is contingent upon the equitable nature of that award. An experienced Seattle divorce attorney can assess financial circumstances and provide counsel as to what the best course of action is for your business and your family.