What Every Entrepreneur Should Know About Utah Divorce Law

Entrepreneurs, or anyone married or thinking of getting married, should be aware of the divorce process and the pitfalls that perforate it. It is no secret the number of divorces in the United States account for approximately fifty percent of marriages; nor is it a secret the staggering impact a divorce can have on a married couple’s financial portfolio. This chapter is not comprehensive, but it will address important aspects of the divorce process.

If you find yourself in a divorce action, you will need legal counsel to help navigate the landscape of divorce law and procedure.2 Disputes between married couples can be complex and nuanced just as it is with a business dispute. Divorces are challenging because emotions are charged, loyalties conflict, and lives and finances are intermingled. Divorces can lead to complex, expensive and heavily litigated breakups that can harm, or even destroy the marital estate and a spouse’s business interests. To some extent, proper planning at various stages of a divorce action can help business owners or investor and their attorneys successfully negotiate this difficult transition.

One of the largest, most complex aspects of divorce is the distribution of assets and debts, including those associated with business ownership; a determination of custody and parent-time is also a multi- faceted and costly aspect of divorce. Utah is an equitable distribution state. This means the overriding question in a divorce action is “How does one walk away with a fair portion of the marital estate?”

We live in a society where divorce is common and divorce laws play an important role in all of our lives. Entrepreneurs who understand the basics of divorce laws better understand the inherent risks of marriage and the reality of divorce vis-à-vis their financial portfolio.

UTAH’S DIVORCE PROCESS
When you divorce, you will file a petition (a civil lawsuit) with one of Utah’s District Courts. It will cost you $318 for the filing. However, the initial filing is just the beginning of a complex process. In short, the graph on the previous page provides a basic roadmap of the divorce process in Utah.

JURISDICTION: WHERE YOU DIVORCE MATTERS
If you are unable to reach a settlement agreement with your spouse, where you file for divorce makes a big difference. Most states, like Utah, use a set of “equitable distribution” rules to divide the marital estate. They serve more as a guide than a rule. On the other hand, a minority of states apply “community property” rules when they divide a divorcing couple’s assets. There are only nine community property states. California and Texas both follow community property rules as do some other western states, such as Utah’s neighbors, Nevada and Idaho.

Equitable Distribution States
Equitable distribution rules are loose and vest great discretion in a Court to divide assets between a married couple in a fair and equitable manner, in light of the couple’s circumstances. Utah is an equitable distribution state. Judges in equitable distribution states generally consider a number of different factors when they divide a couple’s assets. Typically, they consider the ability of each spouse to support him or herself after the divorce. In particular, if a spouse has forgone career opportunities to raise children, that spouse may receive a greater share of the assets. Another example of the power of equitable distribution is the impact of the duration of a marriage. If the couple’s marriage only survived a short time, the court may prove reluctant to give one spouse money earned by the other.

Equitable distribution courts will consider the age, general health and vocational training of each spouse when determining an alimony award. Some courts, like Utah, consider the amount of alimony and child support paid by a spouse in deciding if an award of additional marital property is warranted. In short, equitable distribution will not necessarily cut the marital estate in half; it could be more or less than a 50% distribution of debts and assets, unlike community property states.

Community Property States
Fewer states have promulgated “community property” rules when they divide a divorcing couple’s estate. In these states, judges simply divide the couple’s joint assets in half. Utah is not a community property state. In many ways, this makes for a quick and clean division of marital property. Judges do not attempt to divide assets fairly, so they do not consider the employment prospects, age or health of either party. What judges do is more formulaic wherein the spouses are deemed to equally own all income and assets earned or acquired during the marriage. This means that both the husband and wife are deemed to equally own all money earned by either one of them during the marriage, even if only one spouse is employed. In addition, all property acquired during the marriage with “community” money is deemed to be owned equally by both the wife and husband, regardless of who purchased it. In a community property state, equal ownership also applies to debts. This means both spouses are equally liable for debts. In most cases, this includes unpaid balances on credit cards, home mortgages and car loan balances.

Of course, judges in community property states consider a party’s age and employment prospects when they award alimony and child support. In a community property state, a spouse who stayed home and cared for the children may receive generous alimony and child support payments. Some community property states often have strict formulas to determined alimony. Utah does not have an alimony formula, but some advocate persuasively the adoption of alimony guidelines.3 Although Utah is an “equitable distribution” state, certain laws and rules govern the divorce process and the grounds for divorce.4 Most divorces in Utah are resolved on the grounds of “irreconcilable differences” because it is the least expensive route to resolving a divorce

IDENTIFIYNG AND DIVIDING THE ASSETS AND DEBTS OF THE MARITAL ESTATE
The methods employed by Utah trial courts can be a guide for parties who seek to settle their case. The courts seek to identify the parties’ property and then they classify it as marital or separate. The courts will want to value the property to assist them in providing for an equitable distribution of the property. Before classifying the personal property, it must, of course, be identified. After identification and classification of separate or marital property, the fair market value must be determined. In order to establish a value, certain experts may need to be retained (i.e. a real estate appraiser, personal property appraiser, business valuation analyst).

The Utah Court of Appeals spelled out a four-step process for making an equitable distribution of property:6

Determine whether the property is separate or marital;
Determine if there are exceptional circumstances that overcome the presumption that marital property should be divided equally between the parties;
Assign a value to each piece of marital property (values are determined by experts);
The property will be divided in such a way that the other party will no longer have claim to the property, thus allowing the parties to move on with their lives;
Property is defined as something tangible or intangible to which its owner has legal title. One way to identify property during a divorce

is through the parties’ financial disclosures. Each party identifies their assets and liabilities through a Financial Declaration, which is required by Rule 26.1(c) of the Utah Rules of Civil Procedure. There are number of categories of assets and debts parties acquire during marriage such as the following:

Real Estate: marital residence, investment properties, land.
Motor Vehicles: trucks, cars, motorcycles, boats, airplanes.
Household Good: furniture, jewelry, guns, clothing, refrigerators, washers, dryers, food storage, antique collections.
Other Personal Property: pets (not subject to a custody dispute).
Bank Accounts: checking, savings, saving bonds, money market accounts, certificate of deposits.
Investments in Closely-held Businesses: Limited Liability Companies (LLC), corporations, partnerships, sole proprietorships.
Investment Accounts: stocks, mutual funds, bonds, options, futures, investments in foreign exchange markets (FOREX), exchange-traded funds (ETF), gold, silver, life insurance.
Retirement Accounts: 401(k)s, IRAs, other defined benefit or contribution plans, deferred annuities.
Other Assets: tax refunds, club memberships, intellectual property, frequent flyer miles, online cash accounts (e.g. PayPal), account receivables, music or video libraries (Amazon or iTunes).
Liabilities: credit cards, lines of credit, mortgages, medical and dental bills, back taxes, account payables, car loans, student loans.

 

Tips on Uncovering Hidden Assets: If the other party’s Financial Declaration is incomplete or vague, their personal property must be identified through other methods such as:

 

Interrogatories
Depositions
Subpoenas
Records search
Interviews of friends and co-workers
Tax Returns
Credit card and bank history
Internet search (social media, Google, other technological devices to track the other party’s computer history)

 

There are a number of methods one can use to identify marital assets. An important method is to review the federal income tax return to determine whether a party’s assets show up. The schedules on Form 1040 are an excellent source of information. For example:

 

Schedule B: shows interest and ordinary income from dividends
Schedule C: shows income from sole proprietorships and single member LLCs
Schedule D: capital gains from sale of investments
Schedule E: discloses income from rental properties and royalties, reveals ownership in limited partnerships and S Corporations
Tax refunds that are applied to next year

 

Keep in mind that not all assets can be located by reviewing the tax returns because assets not generating taxable income will not be on the tax form.

Usually parties do not seek to hide retirement assets, but they can often be overlooked. For example, retirement accounts are not considered when someone changes jobs and forgets to transfer or rollover the firm sponsored account into a separate account. An important reason to have copies of a few years of W2s and/or paystubs is to help identify any withholdings that are/were contributed to firm sponsored retirement accounts.

One place often overlooked is the party’s insurance policies. The property insurance policy will list all property that is insured, including the following: Real estate, vehicles, jewelry, and collectibles. Another method to uncover hidden assets is to review bank, retirement and/or investment account statements to identify unreported assets. Looking for unexplained withdrawals and/or

transfers can lead to undisclosed accounts.

Marital v. Separate Property. If a married couple cannot reach a signed, settlement agreement on their own accord, the divorce court will make the final decision on how the parties will divide their property.7 Property division includes all assets and debts—personal property, real property, and business interests, amongst other assets. Generally, when dividing property in a divorce, the trial court “must identify the property in dispute and determine whether each item is marital or separate property.”8 In Utah, it is well-settled that each party is entitled to all of their separate property and half of the marital property, unless equity demands otherwise.9

The difficulty is in discerning between separate and marital property. Utah courts have provided some guidance on the distinction. For example, separate property is all property acquired before marriage (pre-marital property10), the appreciation of the pre-marital assets, or property acquired after marriage via gift or inheritance.11 All other property is deemed marital and it “encompasses all of the assets of every nature possessed by the parties, whenever obtained and from whatever

source derived.”12 However, separate or pre-marital property may lose its “separate” nature by commingling it with marital property.13 An example of co-mingling is illustrated in Bradford v. Bradford where the husband conveyed his separate interest in a piece of real property to both him and his wife.14 The act of the husband changing title to the real property effectively extinguished the separate nature of the real property, thus converting into marital property. Like in Bradford, if a spouse’s real property converts to martial property it will be subject to division if the parties divorce.

The separate character or identity of the inheritance, gift, pre-marital property may be retained if kept in segregated accounts and portfolios. Although titling the property in your own name will help, it may not be sufficient to defend against a commingling claim. Moving a pre-marital investment from one account or medium to another does not alone destroy the separate nature of the segregated account.15 Commingling issues raise difficult questions. For example, what happens if one spouse brings money into a marriage and that money is used as a down payment on a house? Does the spouse lose the down payment (owned before marriage)? Utah courts, naturally, have held that it depends. In one case, the down payment did not need to be divided equally between the parties because “the appropriate treatment of property brought into a marriage by one party may vary from case to case.”16 In another Utah case, the Court of Appeals upheld the trial court’s ruling that the wife’s stock was separate property although proceeds from the sale of the stock were occasionally used for family purposes and some of the proceeds were deposited into marital bank accounts.17

Property division in Utah’s equitable distribution scheme does not require the division of property be equal. In making the distribution, Utah courts will consider a number of factors, including “the amount and kind of property to be divided, the source of the property, the parties’ health, the parties’ standard of living and respective financial conditions, their needs and earning capacities, the duration of the marriage, and the relationship the property has with the amount of alimony awarded.”18

You must be able to trace the money or asset as being separate property. Communicate clearly with your spouse about what is or is not marital property and the keep the line of ownership clean (tracing it) so as to avoid the claim of commingling. For example, if you receive an inheritance and you don’t want the inheritance to take on the nature of marital property (subject to division), you should keep the inheritance titled in your own name. However, Utah courts have long held that property can be distributed regardless of which party’s name appears on title.19 If it is an inheritance in the form of cash, for example, keep it in a segregated bank account in your name only. Always keep in mind that separate property is never out of the divorce court’s reach; an equitable distribution court, such as in Utah, may award an interest in your separate property to your spouse in “situations where equity so demands.”20 Pre-marital agreements can assist in demarcating separate from marital property. A pre-marital or “prenuptial” agreement is a valid, enforceable contract and so is a post-nuptial agreement (a signed agreement entered after marriage and before divorce).21

Identifying, valuing, classifying, and making an equitable distribution is one of the primary objectives in divorce (more about alimony and child custody issues below). Let’s review how a few larger assets are addressed under Utah divorce law.

Real Estate: One of the largest assets or debts arising from a marriage is real property. The easiest way to identify real estate holdings is to conduct a public records search on the County Auditors website. The auditor’s office will likely have information on the property

owner and an estimated value of the real property for tax purposes. The estimated value reported is not likely to represent the fair market value of the property. In order to determine the fair market value of the real estate, a real estate appraiser must be retained as an expert.

Retirement Plans: Retirement plans are large marital assets. Retirement and pension plans may include defined benefit plans, defined contribution plans, 401(k) plans, state and federal government retirement or pension plans, private employer benefits, and some military retirement benefits. Retirement and pension plans may be regulated by federal and state law and by plan policies.

A marital portion of the retirement funds are to be divided equally. “A marital portion” is considered to be the funds accrued either 1) from the date of marriage to the date of separation, or 2) from the date of marriage to the date of divorce. As a general rule, anything paid into any type of retirement or pension plan by either party from the date of the marriage to the date of the divorce is marital property.

Spouses may agree between themselves how much of a retirement account each spouse should receive. If the spouses cannot agree to how much each spouse is entitled to, the judge will likely apply the formula from the Utah Supreme Court case of Woodward v. Woodward, 656 P.2d 431 (Utah 1982). The courts understand the Woodward share to be as follows: multiply one-half of the value of the account by the number of years the parties were married and divide by the number of years the employee has worked. For example, if the account value is $30,000 and the parties were married for 7 years and the husband worked for 12 years, the wife’s share would be $8,750:

 

$30,000
x
1/2 = $15,000
$15,000
x
7 = $105,000
$105,000
/
12 = $8,750

 

Other factors affect this formula, including the date of separation, or whether one of the spouses has done something unreasonable, such as spending, destroying, or giving away marital property.

If a retirement account is to be split or transferred to the other spouse, then a special order, separate from the divorce decree, called a

 

Qualified Domestic Relations Order, or QDRO (pronounced kwădrō) must be signed by the judge. The person who administers the retirement or pension plan cannot divide an account or pay benefits to a spouse who did not contribute to the plan without a QDRO. Once a QDRO is signed by the judge and approved by the plan administrator, the plan administrator will divide the account or pay the benefits according to the QDRO, rather than the pension plan.

One ought to consider whether or not a loan has been issue from the retirement account before the parties reach a certain agreement on how to divide the retirement funds. If there is a loan, the question is who assumes it.

Social Security. Social Security is often overlooked as a retirement benefit; however, if a couple is married for ten years or longer, when reaching age 62, the lower or nonearning spouse may be eligible to collect derivative Social Security benefits based on the former spouse’s earnings records. The derivative benefit is equal to one-half the amount the former spouse is eligible to collect. The non-earning spouse on the verge of the ten-year period may want to consider delaying the divorce until the ten years is met.

To be eligible for Social Security benefits, a person needs to earn 40 Social Security credits. A person can earn up to four credits per year, and become eligible for retirement benefits after working l 0 years. Retirement benefits are calculated using the highest 35 years of earnings. These earnings are then applied to a formula to arrive at a basic benefit at a full retirement age of 65 or older.

Stock Options. Stock options can constitute a significant portion of the divorcing couple’s assets. Their fluctuating value, variation in vesting methods and the tax consequences of their transfer can all affect a divorcing party’s portion of the settlement in a drastic way. Your divorce attorney will assist you in identifying and assessing the value of the stock options and use the appropriate formula for their division correctly. Some issues to look for are whether the options are vested or unvested; if not vested, you must determine the vesting date—what happens if the options were awarded during marriage, but vest after the date of separation or divorce? Other questions to consider: What type of stock options are analyzing: incentive stock options or non-qualified

 

stock options? Is the stock restricted? What are the tax consequences of the stock options?

Debts. As it is with assets, so it is with debts. Debts need to be identified, classified as marital or separate, valued, and distributed equitably (not equally) between the parties. Utah Code 30-2-5 spells out how debts are to be handled:

 

Neither spouse is personally liable for the separate debts, obligations, or liabilities of the other:

contracted or incurred before marriage;
contracted or incurred during marriage, except family expenses as provided in Section 30-2-9;
contracted or incurred after divorce or an order for separate maintenance under this title, except the spouse is personally liable for that portion of the expenses incurred on behalf of a minor child for reasonable and necessary medical and dental expenses, and other similar necessities as provided in a court order under Section 30-3-5, 30-4-3, or 78B-12-212, or an administrative order under Section 62A-11-326; or
ordered by the court to be paid by the other spouse under Section 30-3-5 or 30-4-3 and not in conflict with Section 15-4- 6.5 or 15-4-6.7.
The wages, earnings, property, rents, or other income of one spouse may not be reached by a creditor of the other spouse to satisfy a debt, obligation, or liability of the other spouse, as described under Subsection (1).

 

Valuing Business Interests in a Utah Divorce

 

Married couples often acquire business interests during marriage or they bring business interests into the marriage. The business interests must be identified, valued, and divided through some type of equitable payout or offset. This process of valuing the business interests can be the most involved, complicated, and expensive part of a divorce action. A business owner who is divorcing must understand what a business valuation expert will do in a divorce case and the various methods employed to value a business. It is paramount to understand that all businesses are not treated the same under Utah law. A divorce attorney, accountant, and business valuation expert will help divorcing parties understand their own unique circumstances.

Identifying: First of all, if one is not sure if their spouse has acquired a business interest, business ownership interests in a closely- held business may be identified on the party’s tax returns. If the business income flows through to the individual tax return, this income can be found on Schedule C or E of the individual’s federal tax Form 1040. If the business is a C Corporation, the income does not flow to the individual return; however, the individual return may still identify any interest or dividends received from the C Corporation on Schedule B of their tax return.

Valuing. Here’s the deal: the marital portion of the business will be shared equally between the divorcing parties. However, arriving at a value of the marital portion is not a simple, nor is it an inexpensive process. Valuation of a business interests or the business itself is a complicated and nuanced process. There is relatively little case law on this process, but the case law is instructive and useful.

Let’s start with a discussion of the question, “What is my business worth?” or “What is my spouse’s business worth?” When you ask this question you are really asking to know either the price or the value (i.e. valuation) of the business. Many people use the terms price and value interchangeably. However, the terms are quite different. Basically, a business appraisal, or valuation, may produce a specific value necessary for division of the marital portion of the business in a divorce action (as well as other legal reasons). A price, on the other hand, is what the market might pay for the business. Most buyers and sellers of a business really want an idea of price, but that is not to be confused with what happens in a divorce because there is not typically a buyer or seller in a divorce. With that said, if neither of the parties are retaining ownership of the business, and the parties decide to sell the business, the marketplace will likely determine what the divorcing parties will get, which, in turn, will be divided between the parties.

Choosing the Business Valuation Methods: The fair market value of a business interest must be determined once business interests are identified. A business valuation expert will conduct a business valuation

to make this determination. The valuation expert will determine the financial condition of the business interests. Part of this analysis includes a determination of whether any adjustments need to be made to the financial statements. Making adjustments to the financial statements provide a picture of the value of the assets and the financial operating results of the business. Examples of some normalizing adjustments include:

Recasting the income statement;22 and
Recasting the balance sheet.23

Once your data is prepared, it is time to choose the business valuation procedures. Since there are a number of well-established methods to determine business value, it is a good idea to use several of them to cross-check your results. All of these analyses have has an associated cost to them, so you will need to work with your divorce attorney and the business valuation expert to determine the best course of action with the divorce budget available to you.

Keep in mind that there are three primary valuation approaches to be considered: asset approach, income approach and market approach. A business valuation expert and divorce attorney can elaborate on these different approaches as you move forward with the business valuation.

The set of methods you choose to determine your business value depends upon a number of factors. Here are some key points to consider:

The complexity and value of the company’s asset base.
Availability of the comparative business sale data from the market.
Business earnings history.

 

Availability of reliable business earnings projections into the future.
Availability of data on the business cost of capital, both debt and equity.

 

All known business valuation methods fall under one or more of these fundamental approaches. However, business owners should be aware of some problems that can arise when married couples start a business together. One potential problem is the result of how a married couple may assign the ownership and management of the business when the business is first created. It makes a big difference if one spouse owns a controlling interest in the business because they likely have more decision-making power with the business and day-to-day decisions. This power imbalance can be frustrating to the minority-owning spouse as a divorce unfolds. However, this does not mean the non-controlling interest spouse is stripped from an equal share in the business interests.

Alimony. Alimony (also called spousal support) is designed to enable the spouse receiving support to maintain the standard of living during the marriage and to prevent the recipient spouse from becoming a discharge on the State of Utah.24 There is an enormous body of case law deciphering the multitudinous marriages and how much, how long, and in what nature alimony should be awarded. Unlike some states, Utah does not have a formula (like child support) to determine alimony.25 Because there is no formula, Utah courts must consider a certain number of factors. Those factors are as follows:

 

(8)(a) The court shall consider at least the following factors in determining alimony:

the financial condition and needs of the recipient spouse;
the recipient’s earning capacity or ability to produce income;

 

the ability of the payor spouse to provide support;
the length of the marriage;
whether the recipient spouse has custody of minor children requiring support;
whether the recipient spouse worked in a business owned or operated by the payor spouse; and
whether the recipient spouse directly contributed to any increase in the payor spouse’s skill by paying for education received by the payor spouse or enabling the payor spouse to attend school during the marriage.

 

There are a number of other considerations to be analyzed in a spousal support determination.26 If one is contemplating divorce, or is served divorce papers, it behooves them to seek advice and legal counsel early on in the process about the issue of alimony. Note that alimony is tax-deductible unlike child support.

Custody. Children are expensive, but they are even more expensive after a divorce. A very short overview of how custody works in Utah is essential. The physical custody arrangement is one of the factors in determining child support. In Utah, there are two classifications of custody:27 legal custody and physical custody. Under each classification of custody, there are sub-classifications: sole and joint.

Legal custody has to do with a parent’s rights regarding their minor children’s education, decisions, and other significant decisions. Physical custody has to do with the care of the minor children. In order to determine custody, if the parties cannot reach an agreement, the courts look to the best interests of the children.28 The courts must look to a number of statutory factors in determining what is in the minor children’s best interests. In a custody dispute, it is often helpful to have a custody evaluation expert involved. A discussion about the nuances of

custody battles is more complicated and involved than can be addressed here. However, some advice: 1) consult a seasoned divorce attorney on the issue of custody before (if possible) you decide to divorce; and 2) if you want a shot at sharing custody of your minor children, do not move out of the marital residence. The courts determine physical custody by the number of overnights the children spend in the parent’s care. Joint physical custody begins with a minimum of 111 overnights.

 

Child Support. Child support is determined by a calculation.

Number of children +

Physical custodial arrangement

(if joint custody, the number of overnights each party has the minor children) +

The gross income of the parties

(usually based on a 40 hour work week29) = The child support amount.30

 

For example, depending on the custodial arrangement, if there are two minor children and parent 1 makes $30,000 each year and parent 2 makes $120,000 each year, the following child support amounts will apply.

 

Custodial Arrangement
Child Support Award
Sole custody
$1,550 paid to parent 1.
Joint custody with parent 1 having 183 overnights and parent 2 having

182 overnights.

 

$599 to the parent 1.
Joint custody with parent 1 having 235 overnights and parent 2 having

130 overnights.

 

$1,446 paid to parent 1.

 

Domestic Violence and Protective Orders. A final word on domestic violence: do not commit it or your divorce case will suffer a deathblow. Domestic violence is a crime and you will have to retain a criminal defense attorney to defend you. If you do not know of a criminal defense attorney, contact the Utah Association of Criminal Defense attorneys for a referral. If you threaten to harm your spouse, or you actually harm your spouse, a protective order will likely be granted against you. On the other hand, if your spouse threatens or causes harm to you, you should report it to the police immediately and seek a protective order. Domestic violence must be taken seriously. Keep in mind that a number of divorcing parties seem to manufacture a domestic violence setting to gain the advantage in a custody dispute. Be on guard for those tactics and do not allow a situation to escalate.