When a couple divorces, it is not merely the individuals in the marriage who go their separate ways. Marital property must also be divided in a process known as “equitable distribution.” At first blush, this undertaking may sound like a simple splitting of assets. However, in truth, equitable distribution often involves contentious determinations of property value and possession. All potentially relevant assets need to be evaluated during the process, whether personal or business. It is this latter category that often proves the most difficult.
Are Retained Corporate Earnings Marital Property?
By way of example, Illinois has recently been dealing with one area of equitable distribution that has proven particularly thorny: how to treat certain corporate earnings when one spouse is a part owner of the company. Obviously, this has important implications for the process of equitable distribution. If this type of asset can be categorized as marital property, it can be included in the pot to be divided among the spouses at the dissolution of the marriage. If, however, it is something other than marital property, it stays out of the pot entirely.
In the 2007 Illinois court case, In re Marriage of Joynt, the court had to determine whether retained earnings of an S corporation, of which one spouse is a shareholder, should be classified as marital property. Retained earnings, defined simply, are corporate assets that are kept by the corporation itself, instead of being paid out to shareholders as dividends. The court in Joynt—later reaffirmed in a 2011 Illinois court case—determined that this question involved two factors:
- To what degree can the spouse exercise control over the corporation to pay out the retained earnings as dividends to him or herself?
- Are the retained earnings calculated in evaluations of the corporation’s value and used for corporate business?
In the Joynt case, the husband owned only 33 percent of the corporation’s stock and did not have the power to issue dividends to himself unilaterally. Additionally, the retained earnings were considered a corporate asset. Thus, despite the husband’s partial ownership of the company, the retained earnings were not classified as marital property and kept out of the process of equitable distribution entirely.
Still, the court was clear: this type of asset could be considered marital property—fit for equitable distribution among the spouses—in certain circumstances. The Illinois court quoted from a similar case out of Wisconsin, where a wife had complete ownership of all corporate shares and was “the sole managing force behind the corporation.” Whether this extreme situation is the only one in which retained earnings will be treated as marital property remains unclear in Illinois and elsewhere.
Resources for Family Law Help
At the law firm of Sullivan Taylor, Gumina & Palmer, P.C., in Wheaton, Illinois, we have extensive experience with issues of marital property classification and determination. We work with clients and outside financial professionals throughout DuPage County, Kane County, and Will County. If you have any questions about equitable distribution, please contact our Wheaton marital property division attorneys today.