By Joshua E. Stern, Principal and Managing Partner, Divorce and Family Law Attorney

A high net worth divorce typically involves individuals with high income levels and/or substantial financial assets. It is common for those assets to add complexity to their dissolution of marriage, whether they be investments, closely held businesses, family trusts, and the like. My high net worth clients come from various industries: medicine, law, business, finance, marketing, entrepreneurship, and the list goes on. Their wealth is typically in the form of high income from business interests, a high paying job, investments, and/or family money.

In this two-part series, I’m focused on people with premarital businesses, partnerships and investments.

The Impact of Marital Labor on Premarital Assets

We’re going to focus on a doctor named Sue. Dr. Sue is getting a divorce. She owns a practice, which she started before she married. Two questions are: How are her assets classified and what is her spouse entitled to?

If an asset is demonstrably premarital, it is presumed to be outside of the marital estate and is not subject to division. Most income earned during the marriage will be considered marital property, typically as a product of marital labor. The underlying logic is that labor and effort could be expended to increase the marital or non-marital estates and that the marital estate is entitled to the benefits of labor performed during the marriage by a spouse. As with anything in law, there are plenty of exceptions.

If Dr. Sue started her practice before her marriage, the business is likely premarital and considered hers. The question then becomes: what is Dr. Sue entitled to as an employee/practicing doctor and what is Dr. Sue entitled to as a business owner? If Dr. Sue set her own compensation amount, did she set it correctly? Specifically, is the marital estate being appropriately compensated for the value of its labor or is Dr. Sue increasing the value of her non-marital estate by holding money back in the business in the form of retained earnings and/or deferred compensation?

So, how do you get compensated for marital labor and what does this mean for Dr. Sue’s spouse? Just as you have marital income, you have marital labor, which is the effort expended during the marriage. If Dr. Sue worked 80-hour weeks to earn a high income and, because of that, her spouse sacrificed a career, dropped off and picked up their kids every day, ran errands, cooked meals and, in general, managed the household, then those are all marital efforts that produced marital benefits by enabling Dr. Sue to maintain a high income. The marital estate has an interest in the benefits of Dr. Sue’s labor.

If her spouse raises the argument that Dr. Sue did not pay herself enough, Dr. Sue will need to prove that she fairly compensated the marital estate and didn’t manipulate earnings by intentionally keeping too much money tied up in her practice.

Determining Reimbursement Based on Marital Labor

Will Dr. Sue’s spouse get money to make them whole post-divorce? While the answer is “it depends,” domestic sacrifice is valid. The law favors inclusivity and is designed to prevent people from depleting or robbing the marital estate. It will all come down to a comprehensive valuation and determining how much of that valuation is because of marital labor.

Dr. Sue’s history of retained earnings and their underlying business necessity will be relevant, as is Dr. Sue’s history of compensation and her compensation relative to other similarly situated professionals. The classification of the business as a sole proprietorship, LLC, S-Corp, corporation, or partnership will impact a court’s analysis. The business’ performance and trajectory are also likely to be considered. Lastly, courts will consider if the working spouse is a controlling shareholder of the business and has discretion over the use of the retained earnings. Needless to say, every case is unique.

Safeguarding Your Wealth When the Stakes are High

When marital labor impacts non-marital assets, things can get complicated. The best first step you can take is securing an attorney who specializes in high net worth divorces and understands the importance of protecting wealth and navigating nuanced financial circumstances.

If you’re looking for an expert you can count on, please reach out today. I welcome the chance to meet with you at our office at the Davis Center in Evanston, or at our offices in Chicago, Lake Forest or Oak Brook. Start by requesting a free consultation or calling (847) 868-9584.

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This is the first article in a two-part series about premarital businesses, partnerships and investments. Next up, I’ll cover what happens when individuals receive compensation or perks due to their premarital partnership status, including passive investment earnings.