The Harold Hamm divorce case is attracting the attention of advisers for a reason other than the billions at stake: the dilemma of the distribution of assets related to a business.
Did Mr. Hamm’s business increase in value due to normal market forces during the marriage, or was it due to his own efforts?
By now you know the infamous check for $ 975 million that Mr. Hamm, CEO of Continental Resources, wrote to his ex-wife Sue Ann Arnall. An Oklahoma state court had ordered Mr Hamm to pay that money to Ms Arnall, in the form of alimony and interest for the division of property. The order also dissolved their 26-year marriage.
Initially Ms Arnall declined the check, but then cashed it and said she would continue her appeal against the earlier ruling.
“I will not reject my appeal and I do not think my right to appeal should be denied because I have accepted, in the meantime, a small part of the estate that we have built over more than two decades,” said Mrs Arnall said. Reuters in a Jan. 12 statement through his lawyers. This marital heritage is said to be worth more than $ 18 billion.
While it’s safe to say Ms Arnall and Mr Hamm will once again have their high-stakes day in court, divorce counselors say they faced similar issues among clients when they determine how to allocate assets between spouses when a business is involved.
“The big problem in their case, and in many others, is how much of the increase in the value of the business is related to normal market forces versus the husband’s efforts to work in the business. “said Justin Reckers, CEO of Pacific. Divorce Management and Director of Financial Planning at Pacific Wealth Management.
According to November decision, the Oklahoma state court discussed the issue of separate property versus marital property in the context of a division between the parties.
Property acquired during marriage is joint in nature. Meanwhile, when it is claimed that the property was acquired as a separate property from a spouse, it depends on the source of that property, as well as the intention and purpose behind it, depending on Judge Howard Haralson, who ruled on the case.
When separate assets become jointly owned, they are considered a gift to the matrimonial estate. In addition, separate assets can change after acquisition and become matrimonial property if they are mixed with other matrimonial property, Haralson said.
Last but not least: when separate goods are brought into the marriage and increase in value during the marriage, this increase in value is considered wholly or in part of a matrimonial nature, depending on the cause. In his ruling, Mr. Haralson cites an earlier case in which the Oklahoma Supreme Court ruled that if a spouse brings separate property to the marriage and its value increases due to circumstances beyond the control of the parties – the market appreciation, for example – the increase can’t be treated as a divisible marital property. There must be proof that the increase in value stems from the efforts of a spouse.
“The work and efforts of both spouses belong to the matrimonial partnership […] and the income earned by a spouse during the concealment is generally of a marital nature, ”the judge observed in his November ruling.
This brings us back to the question of whether the increase in the value of the business is primarily due to normal market forces or is it attributable to Mr. Hamm’s leadership?
EVERY EFFORT COUNTS
Divorce experts have noted that it can be quite difficult to divide a business asset between spouses. For example, in the Hamm case, although the oil mogul founded the company long before he married Ms Arnall, she occasionally worked for the company in the marketing and sales of crude oil.
In the event of divorce, the distribution of property depends on state law: under a common property regime, common property is generally divided 50/50. Equitable distribution regimes allow the court to divide a property based on what is fair to both spouses, which is not necessarily 50/50.
It is not always easy to assess exactly what the two spouses contribute to a business, either.
“In a situation, both parties can run the business,” said Avani Ramnani, director of financial planning and investment management at Francis Financial. “The wife can be more on the administrative side and the husband on the functional side. His argument could be that if he’s not there, there is nothing to be done. But her argument is that she helped create it and owns part of it.
Marriage attorney Randi L. Karmel noted that contributions can be direct, as in Ms. Ramnani’s example, or indirect.
“Sometimes the spouse is an accountant, sometimes they offer clients or lend money – it’s pretty straightforward,” she said. “In other situations, the [business-owning spouse] would not have the business and the family. He or she travels on business and obtains international clients while the spouse stays at home and takes care of the children.
Courts can be very discretionary when determining the value of these joint efforts in a business, Ms. Karmel noted.
Sometimes divorced people will try to pretend that a non-working spouse did nothing to increase the value of the business. Mr. Reckers has encountered such a situation in a divorce case.
“He claims that [she] helped look after the kids, but never came to social events when he approached clients and didn’t let the world know she was in the business, ”Reckers said.
“Unfortunately for him, he is wrong,” he added. “She doesn’t have to work in the company. She just has to be married to him while he works in the company.
STAY OUT OF COURT
Ultimately, prevention is the best way to avoid a scenario in which the spouses will debate the regulations and the value they have brought to the business. It’s best handled in a prenuptial agreement that is drafted up front and reviewed periodically.
These agreements can override state laws that would determine how property is to be divided, Ms. Karmel said.
Business owners can also exclude their separate ownership from community real estate assets in a marriage contract, which is especially valuable if the value of the business is expected to rise, Mr. Reckers.
Equally important, clients should try to stay out of court.
“Push as hard as you can to keep the client out of the court system,” Reckers added, noting that since the Hamm case is public, personal details of the couple’s holdings have been made public since the decision of November. . “This is private information, and if it was done outside of court, it would remain private.”
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