The following article from Forbes.com discusses the basic components of Active & Passive Appreciation in Divorce. This is an important concept that needs to be considered, especially when you have a owner-spouse with a personal business.
When last we visited the case of Oklahoma oilman Harold Hamm (founder of Continental Resources, the largest leaseholder in North Dakota’s enormously productive Bakken Shale) and his estranged wife Sue Ann, their divorce trial was getting underway. Billions of dollars were at stake, and there was the potential for the largest divorce settlement in history. Divorce professionals, financiers and Continental Resources (CLR) investors alike were interested in the outcome of the case.
When the ruling was made last November, Hamm was ordered to pay Sue Ann Arnall (the former Mrs. Hamm) about $1 billion. The estate had been estimated at about $18 billion.
Both parties are now appealing. Ms. Arnall contends that the settlement is not enough; Mr. Hamm says, actually, it’s too much.
Her position is fairly straightforward. She had been seeking several billion dollars, and $1B doesn’t represent an equitable distribution of assets from their 26 year marriage. (“How is a billion dollars not enough?” you may be wondering, and while I agree that certainly anyone can live well on a billion dollars, remember this: It isn’t the dollar amount that’s being deemed inadequate, but the equity of the settlement. In Ms. Arnall’s estimation, it’s not that the amount isn’t high enough; it’s that it isn’t fair enough.)
Harold Hamm’s position seems to have changed. His attorney was quoted at the time of the settlement as deeming it “fair.” Mere weeks later, Hamm now says it was “erroneous and inequitable.” Oil prices are at a five-year low, share prices have declined some 30%, and his net worth has reportedly fallen by one-third – and lo and behold, $1B is a significantly higher percentage of his assets than he’s happy to give up to his ex.
The divorce finance concept at the heart of all this is that of active vs. passive appreciation.
Active appreciation is increase in value that can be attributed, at least in part, to the contributions or efforts of either spouse. If you own a company that grows and succeeds because of your ideas, leadership and business acumen, that increase in value is due to active appreciation.
Passive appreciation is increase in value due to outside market forces such as supply and demand and inflation. For example, suppose you’ve owned a parcel of land for 20 years. In all that time, you’ve made no improvements to it whatsoever, but the area around your parcel has been attractively and successfully developed. What was once useless scrub is now considered highly desirable acreage, and with no effort on your part, your parcel is worth substantially more today than when you bought it. The difference is due to passive appreciation.
Villela & Shilts, LLC 