Businesses are Marital Property
If you are married in Colorado and you or your spouse own a business, that business is all or in part marital property. If the business was opened during the marriage it is all marital property. It does not matter if your name is listed as an owner or not.

Business Valuation is often a Difficult Task
One of the more difficult parts of a divorce process is to place a monetary value on the marital business for purposes of dividing the business between the parties. This is called the Business Valuation Process. Experts typically need to be hired to accomplish this task and, depending on the size, type and level of complexity of the business, it can become a large, difficult and expensive project.

The recent implosion of the US and world financial markets and the demise of the real estate bubble, have caused a recession that has affected most businesses in the US. This has caused a new problem for valuing businesses for the purposes of divorce.

Past Business Valuation Techniques often don't fit in Today's Economic Enviroment
In the past, Business Valuations have used techniques that are based on the presumption that the historical performance of the business is a good indicator of the future trajectory of that business. Fundamentally, the mathematical models assume incremental improvement over time. Typically, the evaluator will look at the last five years of the business to determine the present value. Even if the current year shows a lower profit level, it will be factored in with the prior four years. The result may be a valuation that is out of sync with the realities of what the recession has done to the present and future revenue forecasts for your business.

In today's business climate, it is necessary to find ways to craft an equitable division of a business with the uncertainty of the business environment in mind. Coming to a bottom line figure to use for division may produce an unfair result on either side. On the one hand, the business could be valued too high because the valuation is based on past years and the person running the business has to pay out, to the other spouse, a large amount that is inconsistent with the current conditions and possible future of the business. On the other hand, the business could be in dire straits at the time of the divorce and therefore valued low, yet have a business rebound in one to three years. This leaves the spouse who did not run the business in a position of getting too small a value because he or she just happened to divorce during a recession slump. We are just not as sure these days what the future will bring.

Flexible Solutions for Today's Economy
One solution being used by family attorneys and business evaluators these days is to look outside the box at more flexible solutions. You have to tap into more complex solutions more often used when a business partnership or other entity is dissolving or when there is a buy out of one of the owners. Some solutions that are being looked at are Earn Out Options, Liquidating Events, Stock Sharing Provisions and more.

Without getting into the complexities of corporate law, the bottom line here is that you have to craft a solution that can be flexible, at least into the near future of the business. If you reach a bottom line figure and leave it at that, you may be setting this couple up to have to go back to court time and again as business conditions change. Also, if the business soars back to health in short order following a low valuation settlement number, you might leave the non-business spouse without recourse.

The Need for Protective Provisions and Professional Oversight
In order to have flexibility built in to the separation agreement, there is probably going to be a need for a professional to have some oversight over watching the business results over time and key business changes to assure that there is no "funny business" going on with accounting to skew the numbers as you move forward. There may also be a need for business oriented provisions to be placed in the settlement agreement to assure that the non-business spouse's interest in the business is protected into the future outlined in the agreement. Maintenance/Alimony may have to go to a sliding scale to avoid the attorneys fees it would take to go back to court over and over as the business re-stabilizes. There are a number of avenues to take for overseeing the future of the business. These avenues can run from working together with a financial expert in periodic review meetings to mediation or to working with a Special Master.

Consider Collaborative and Creative Solutions
The need for flexibility in the division of business interests needs to be considered in today's business climate when contemplating a divorce. Creating and maintaining a collaborative atmosphere to come up with a flexible solution is best given the lack of stability in today's business environment. The more creative the couple is willing to be in problem solving the uncertainty of the business's future the more likely they can come to a result that is equitable.

Every business and business sector is unique. You will need to work with your attorney and the appropriate experts to come up with a solution for business valuation in your particular case. There are still cases where a bottom line value can be reached, but in today's economy it is wise to look into flexible solutions as an option.

Get Expert Adivse
My advise on dealing with irrevocable trusts in Divorce litigation is to make sure you have good experts involved both on the issue of "Characterization of the Interest" as well as the "Valuation of the Interest".

Every Trust is different and the provisions of the trust must be fully evaluated to determine if the party's interest in the trust will be considered property by the court in a divorce action.

Remainder Interest
Generally speaking, the Court will look at the level of control that the party has over the trust and if they have a "remainder interest". A remainder interest means that it is a certainty in the trust instrument that the benificiary will recieve the property contained in the trust, at some point (unless they do not live long enough to get it). For instance, some trusts are set up so that at a certain age, the party will get the funds (ie; have full control over the funds). This is considered a remainder interest. Even though the party has no control today, they do have a "vested interest" in the funds. Generally this will be considered to be the party's separate property. Once this is determined, any increase in value in the trust during the marriage will be considered marital property even though the party has had no access to the trust assets during the marriage.

Discretionary Power placed with the Trustee
The other issue to look at is the party's power and control over the trust assets. Generally speaking, the more the trust is set up as "discretionary" in the trustee, the less likely it is going to be held as property of the beneficiary. In other words, if the party in the divorce has little or nothing to say about what he or she is going to get and when, that party does not have control over the property and therefore the court would not hold the trust to be his or her property.

An interesting circumstance may be that the party has access to the income from the trust and uses that income to live an extravagant lifestyle but has no control or say over the corpus of the trust. The court could find that there is no property interest. The only avenue that the spouse has in this case is to make a case for maintenance. The spouse would have no claim against the property of the Trust itself as part of the division of the marital estate.

I want to emphasise again that this blog entry is to give you a general idea about how the courts veiw trust instruments in terms of determining if they are property in a divorce case. In any particular case you need to individually review the trust with experts and a good divorce attorney to see how a court might view the trust under the facts and circumstances of your case.

So, you bought your home before you got married. Only your name is on the title and only your name is on the mortgage. Well then it is your separate property right...even though you are now married right... IF you want to sell the property you can and the proceeds would be your separate property right?...

Well, these questions do not lend themselves to yes/no answers. Lets examine a few possible scenarios and how the law would treat your separate property home.

Marital Interest in Separate Property:
The day you got married your spouse began to acquire a "Marital Interest" in your separately owned home. This interest is equal in value to the increase in value of the home during the marriage. So your spouse does have an interest in your separately owned home if the market value has increased during the marriage.

Commingling of Separate Funds with a Marital Asset:
Lets say that you sell your home that you owed separately and you and your new spouse purchase a home together. You take the money that you earned through the sale of your house and put it in as a down payment on the new marital home that you own together with your spouse. That money was your separate money but you have now commingled it with your new marital home. The law would presume this money was a gift to the marriage and the new home is marital property to be divided if you were to get a divorce. You might be able, during a divorce, to bring sufficient evidence that this was not meant to be a gift to the marriage and if the money is traceable, you might be able to overcome the presumption that the money was a gift to the marriage.

Keeping your Separate Property Separate:
If you sell a home that is your separate property during your marriage (or any separate property for that matter) you can keep that property separate by putting the proceeds into a separate account with only your name on it. You can invest that money in a separate account. The only part that would become marital is the increase in value of money or investment during the marriage. You could also buy another house in your name only with those proceeds and it would remain separate property.

Selling your Separate Property Home during your Divorce:
If you are in the process of getting divorced you might not be able to sell your separate property home without the consent of your spouse because there is an automatic injunction during a Colorado divorce against disposing of marital property. If there has been an increase in value in your home during the marriage, then your spouse has a marital interest and you cannot sell during the divorce process without their consent.

In a recent Colorado Court of Appeals case, a husband appealed the finding by the divorce court that some of the stock options earned by his wife were earned prior to marriage and were therefore separate property and not subject to division of the marital estate.

The relevant facts in In re the Marriage of Powell, No. 06CA1369 are that the marriage occurred on September 23, 2000 and that the stock options were granted to the wife on February 27th, 2001. The wife argued that the stock options were awarded in 2001 but that these options were for services rendered in 2000 and that the options were earned at the time the services were rendered. The District Court agreed and prorated the options as separate for services rendered before the date of the Marriage.

The Colorado Court of Appeals disagreed. The wife's stock option plan stated that the committee "may" issue the stock options. The Court held that the wife had no enforceable property right at the time the services were rendered because the committee had no obligation to issue a stock option at that time. The Court held that the option was not "earned income" until it was granted on February 27th, 2001. Since the couple was married on that date, the stock options were marital property.

One other finding of the Court of Appeals in this case is of note. The husband was a homemaker inside of this marriage. The value of his contribution to the marital estate as a homemaker was not taken into consideration by the trial court. This decision was upheld because the trial court had weighed the factors dictated by statute. Also, the husband had owned a home before he married but conveyed it into joint tenancy with the wife following the marriage. He argued on appeal that it was inequitable for the trial court to award the wife 60 percent of his premarital home. The Court of Appeals affirmed the lower court in stating that once conveyed, the home was part of the marital estate and subject to equitable distribution as part of the overall estate and that it did not matter that the origin of the home was husband's separate property.

Information for this entry was gathered from 38 Colorado Lawyer, No. 4, pg 140, April 2009.