How to Divide Intangible Assets in Divorce

Author: Miod & Company
Date: May 19, 2022
Category: Tax
Average Time Reading: 6 minutes

In divorce situations, valuation issues often arise when one spouse has an interest in a business or an intangible assets. Valuing these items and their contribution to the value of the marital estate can be challenging.

Most of the time, when a person thinks of assets during a divorce, their first thoughts include tangible and liquid assets: material items such as houses, vehicles, and business inventory. One aspect that is not often considered is the allocation of intangible assets. 

Defining Intangible Assets

Intangible assets sound similar to what they actually are, any belongings or resources that are not physical in nature. This discounts common assets like real estate or material objects, which are clearly tangible. It even discounts monetary assets like stocks and bonds, considered to be liquid assets. Even most illiquid assets, which are valuable things that can’t be sold quickly for cash but are still worth a lot, are not intangible. These include art pieces and collectibles.

Trademarks, copyrights, brand names, and other forms of joint-owned intellectual property are the main types of intangible assets. Here are some more specific, concrete examples:

  • Your business has copyrighted a certain method of drawing architectural plans
  • Your business’ name has gained prominent brand recognition
  • Your business has purchased a patent for a specific tool used for your business
  • Your business has a temporary professional certification

All of these things could be valued and given a monetary value, but usually, it is something that happens after the fact. In fact, intangible assets are usually not accounted for “on the books.” Also, they can either be created or acquired/bought by the current owner(s). This is why figuring out the value of intangible assets in divorce settlements can be hard, but it’s important to do so. 

Intangible Asset and Community Property Laws

Like many other physical assets, intangible ones can also be subject to equitable distribution during a divorce. During a divorce, intangible assets can also be split in a fair way, just like many other physical assets. Contrary to popular belief, equitable distribution does not solely mean splitting up money and houses. It can also mean distributing intangible assets. Moreover, equitable distribution is not always synonymous with equality, but it can mean that each spouse may be entitled to assets that they would not typically be entitled to if it is deemed equitable.

However, some states, like California, are community property states rather than separate property states. This means that anything a couple owns together, like a closely held business or a property they both own, is considered “community property” and is split in half when they get a divorce. Unless there is a prenuptial agreement or shareholder agreement that says a certain asset should be split in a different way, the law will focus on dividing assets equally. 

In states where “community property” is the norm, any property or assets that were earned during the marriage can be divided fairly. This includes debts accrued, business started, and income acquired. Intangible assets are usually rare, but when businesses are started together or later, jointly-owned, they can make a difference in divorce proceedings.

Valuation and Division of Intangible Assets

A trusted professional must value all of the combined assets of a marriage in order to assure an accurate and fair division of assets. Intellectual property, or intangible assets, is often the least thought of and most complicated part of the valuation process. However, in the digital age, intangible assets are becoming more and more common.

Usually, how it goes is that one spouse is awarded ownership of the intangible asset in question and the other is awarded equitable compensation for their share of the asset. However, it can differ based on the age or life cycle of the asset. This means that, over time, the values of immaterial items like copyrights and goodwill can vary and change the outcome of divorce proceedings.

Seeking Legal Counsel for Intangible Assets in Divorce

Although some of the previous information may make it seem like divorce is an inevitability or that divorce could mean real trouble for the future of your business, this can be curbed by hiring legal counsel. Of course, the first and most judicious decision you could make is to sign a prenuptial agreement or shareholders’ agreement with your business partner or spouse.

Plenty of the time, these contracts are not foreseen or do not account for ever-changing financial circumstances when it comes to owning a business. Because of this, it is highly recommended that you hire a divorce lawyer or forensic accountant to help you figure out how to divide your assets. 

Divorce can be complicated, and seeking out experienced and trustworthy forensic accountants can save you a lot of money—and maybe even save your business. For the assistance of a reputable and honest team of people, contact Miod and Company today.

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