Divorce can be an emotional and mental rollercoaster with division of assets and child custody two of the often most difficult issues to be considered. Division of assets includes the division of business interests if one or both spouses have shared the ownership of a business. In most cases, spouses who are entering a divorce should consider using professional legal advice if there is a business involved in the division of assets. It is important to understand the implications of potential capital gains risks as well as other tax considerations when dealing with the business.
Why a business may be considered marital property in Massachusetts
Massachusetts follows the principle of ‘equitable distribution’ when marital assets are shared. The Probate and Family Court doesn’t necessarily need to be involved in a divorce as long as decisions about the divorce are conducted sensibly. Divorce law as it applies to business interests typically applies when there is a dispute over the division of assets. Note that there are alternatives to seeking a decision by the court, such as the use of mediators and divorce attorneys, but if a decision from the court is not sought, any arrangement should be formalized in a written agreement.
Equitable distribution in Massachusetts means that any property owned by either or both spouses may be considered part of marital property and the court may decide that all parts of the marital estate are subject to fair division. Fair division doesn’t necessarily mean that assets are divided equally as a whole number of criteria are used to ensure that the needs of each spouse are considered. As far as asset distribution is considered, it does not matter whether the assets were acquired before the couple were married or acquired during the marriage, although the contribution to the business as well as any increase in its value during the marriage will be considered as well as other factors such as:
- how long the marriage has lasted;
- the current income and future ability to continue earning an income of each spouse;
- the contributions of each spouse to maintaining the marriage;
- the future needs of each spouse;
- how likely each spouse will be able to acquire assets after the divorce.
Businesses must be carefully valued before any division on divorce
A business must be carefully and accurately valued before any decision about how its assets should be divided between the two divorcing spouses. This shouldn’t be taken lightly and if the assets are substantial may mean expert guidance from accountants, valuation professionals and attorneys who understand Massachusetts divorce law.
The following factors may be taken into consideration by business valuation experts:
- accounts receivable and liabilities;
- customer contracts;
- future earning potential;
- intellectual property;
- market position;
- revenue and cash flow;
- tangible assets, such as equipment, inventory, and real estate.
How businesses may be valued in Massachusetts
There is more than one method that can be used for valuing a business for divorce purposes. These include the income, assets and market valuation options. The calculation of business interests may use one or a combination of methods when making a decision about the distribution of business assets.
The Asset Valuation option involves the calculation of the market value of the business assets, taking into consideration any liabilities such as debts and tax deductions. This option is most used when the business assets include a considerable amount of equipment and /or real estate.
The Market Valuation option compares the value of the business with similar businesses which may have been sold recently. This method is not so useful if insufficient comparable data is available.
The Income Valuation option uses an estimation of potential future business income that could be earned if the business was to continue without it being sold. This option is useful when the business is a professional practice or service based.
Options for Dividing the Business
Careful and accurate valuation of business assets precedes a decision about how the division should actually take place. There are various options which can be considered. These are explored below.
Option 1 – the business is sold outright and any sale proceeds are divided according to mutual agreement or taken into consideration by the Court for “fair division”.
Option 2 – the business is continued to be operated by both spouses following divorce. This is probably the least likely option, but if the end of the marriage is relatively amicable, then this option may be the easiest to decide on.
Option 3 – one spouse takes possession of the business by buying a share of it from the other spouse. This is typically the most common option as long as the spouse who buys the other’s share has enough capital to do so.
Risks involved in capital gains tax assessment
Potential future capital gains tax liabilities must be carefully assessed when options for dividing business assets are considered in a divorce. The business may seem to be a very viable concern and highly valuable, but the spouse who retains the business may be liable for capital gains tax in the future. This is a source of unfairness in business assets division unless future taxes are taken into consideration.
Capital gains taxes may be due when:
- liquidation of appreciated assets are carried out;
- transfer and / or sale of stock ownership takes place;
- there is a sale of business interests;
- there is a sale of commercial real estate.
The business may seem to be valued at a certain amount, but if one of the spouses retains ownership of the business and later sells it will be responsible for state and federal capital gains taxes if these are applicable. The real value of the business at the time of the divorce then has to take into consideration a careful estimation of these taxes at the time the division of business assets is calculated.
Seek professional legal advice on business division from a Boston divorce attorney
Whether a divorce settlement is made with the assistance of the Probate and Family Court or not, it is advisable to seek professional legal help from a divorce attorney when business interests division is necessary. Division of business interests requires accurate valuation of the assets and a careful legal assessment of potential future tax liabilities. Professional divorce attorneys can seek additional advice from tax professionals, accountants and valuation experts.