Protecting Retained Earnings From Distribution In Divorce

In divorce cases, when one of the spouses has ownership interest in a closely held corporation the retained earnings held in the corporation can be a point of contention. The issue of retained earnings may be particularly scrutinized when the spouse with the ownership interest in the corporation is the sole or majority shareholder or has the authority to determine his salary, pay dividends and decide the amount of earnings to retain. See In re Marriage of Lundahl, 396 Ill.App.3d 495 (1st Dist. 2009). Typically, if an ownership interest in a closely held corporation is nonmarital property then the retained earnings of that corporation would also be nonmarital property. However, there are arguments that the spouse without the ownership interest could make a claim for reimbursement to the marital estate. One of these arguments is that the spouse with the ownership interest made significant efforts to the corporation that caused substantial appreciation in the value of the company and was undercompensated for those efforts. Further, a spouse without an ownership interest could have an argument that retained earnings are marital property when the company did not have a history of retaining earnings at that level and there was no legitimate business reason for doing so. If you have questions about retained earnings and marital assets, call me.