Protecting Professional Practices in Asset Division
During a divorce, asset division is almost always the most complex and fraught part of proceedings, if only because both spouses are very invested in fairness. However, the process can take on an even more personal bent if one of the marital assets is a spouse’s professional practice—as a doctor, dentist, attorney, and the like.
While many businesses can be divided between the spouses, especially if they are family businesses, a professional practice is slightly different because it is intimately tied to one spouse and his or her ability to earn a living. The procedure for dividing a professional practice is extremely complex.
Is it a Marital Asset?
The first question that must be asked is whether your practice is a marital asset at all—if it is not, it will not be divided. If they do not start out as such, most businesses do become marital property over time, or at least partially marital property.
Under Illinois law, if a nonmarital asset increases in value during the marriage, the amount of the increase qualifies as marital property (but the entire asset may not, depending on the specific circumstances). The rationale is that marital funds were used to augment the asset—in this case, the professional practice.
Conversely, if enough marital assets are spent on the nonmarital property, and it is used directly by both spouses, or if it is held out as belonging to both spouses, the property will usually be held to have become a marital asset. If your practice is declared to be a marital asset, it is open to division under Illinois’s equitable distribution laws.
Valuation is Critical
If your practice is held to be a marital asset, the next step is to value it, and it is absolutely imperative that the arrived-upon value be accurate. A valuation expert like a licensed appraiser or certified public accountant (CPA) will assess a multitude of factors in order to arrive at an appropriate value, including appreciation during the marriage, fair market value, tax issues, and one particularly esoteric factor referred to as the goodwill of the business.
The goodwill of a business is defined as an intangible asset with the value of the company’s brand, customer and employee relations, and the like. While it may be intangible, however, it has value, and it can be difficult to pin such a value down. Because professional goodwill is attached to the business and not the spouse, it does qualify as a marital asset.
However, it is important not to confuse personal and business goodwill—both cannot be claimed as assets, at least not in the same manner. Doing so is referred to as ‘double dipping,’ and is considered inappropriate because goodwill can be used to discount the value of assets. In other words, if one wants to keep the practice intact, then he or she must ensure his or her spouse is compensated with roughly equal marital assets in terms of value.
Have Questions About Keeping Your Practice?
This area of asset division can be extremely complex and personal, and many laymen have trouble understanding just what is what. If you need help understanding the process of asset division, our Wheaton divorce attorneys may be able to assist. Contact our offices today to set up an initial appointment.