Build-Up of Retained Earnings as Marital Savings

 

“Money frees you from doing things you dislike. Since I dislike nearly everything, money is handy.” – Groucho Marx

 

Sometimes a business, over the years, builds up a very substantial investment or cash position, far and away above what is needed for operations. If so, that might be a situation where there has been a build-up in retained earnings (that is an increase in equity), meaning that the company retained a (substantial?) portion of its income above and beyond what would appear to be its operating needs, rather than distributing it to the owners in the form of increased compensation or dividend distributions. Depending on various factors, that may mean there were disguised marital savings. The company kept it rather than giving it directly to the marital estate.

While a first blush reaction might be to the effect of “so what?”, when we recognize that marital savings is considered a component of lifestyle, you can see where “hiding” some of that lifestyle by not giving the family unit a chance to spend it, might effectively distort that family’s lifestyle. In addition, as a practical matter, since the non-business spouse generally gets less than 50% of the business, but generally 50% of the family savings, this is not only a lifestyle (and therefore support) issue, but also one that might have a significant bearing on equitable distribution.

Before assuming that every build-up in retained earnings/equity is a proxy for marital savings, recognize that this is generally a subjective area, and there can be solid business explanations for a build-up. Among the concerns we need to address before we can conclude a build-up was marital savings, are:

  •  Liquidity – a build-up in equity is not necessarily synonymous with a build-up in cash or investments. This argument generally doesn’t go very far when the build-up is not in liquid form, but rather for instance invested in plant and equipment;
  •  Ownership interest – this is kind of an easy one if the interest at issue is a 100% ownership interest, or at least greater than 50%. However, if it were a 10% interest, the argument would likely be much weaker. It is unlikely 10% had the ability to dictate whether the company was going to retain those earnings and when and if it was going to distribute them;
  •  Size of the company – as a general comment, a small company tends not to need much in terms of a build-up of funds; whereas a medium or large company may have need for same;
  •  History – not that this is determinative, but it might be relevant if the company has a history of distributing (whether by compensation or dividends) substantially all of its income and then changes that in the last few years;
  •  Growth – in general, all other things being equal, a growing company has a greater need to retain income to fuel that growth, than does a stagnant or shrinking company.

Kind of as a bonus, if the financial expert can make the case for such a build-up, that there is excess liquidity, non-operational assets, then in the typical income or even market driven approach to value, there will likely be additional value. Thus, not only is there a bump up in the martial standard of living, but also something extra on the value end, and an argument for a better carve-out for the non-business spouse.

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