Typically, when a couple decides to divorce, each party retains his or her personal assets, while the marital assets are split according to what is most fair to the situation. While this seems fairly straight forward, the process can become somewhat more complicated when the simple question "What is the source of the appreciation?" is raised. Whether assets are the result of passive or active appreciation can have a surprising impact on how a New York couple's assets are actually divided in a divorce
One way for something to increase in value is referred to as active appreciation. For an asset to have actively gained value, either one or both individuals in a marriage must have put forth some type of effort. A good example is the growth of a business. If the business owner managed to grow a company through innovative ideas and strong leadership, a rise in value or profit would likely be considered as active appreciation.
Conversely, passive appreciation is quite the opposite and, instead, points to factors outside of a person's control. These types of factors can include inflation, consumer demands and even various market trends or consumer tastes. An asset or company may benefit from these forces without the owner ever actually making any changes. While an increase in value may have risen out of the situation, it is still considered passive appreciation when no one actually had to make any effort to reap the benefits.
When this comes into play in asset division, the result can be difficult negotiations. For example, oil-tycoon billionaire Harold Hamm and his ex-wife were married for 26 years before they chose to divorce. Although Hamm's wealth skyrocketed during that period of time, he argued that his company had not benefited from his wise leadership but rather from outside forces that propelled his oil company forward. As such, he claimed that the passive appreciation of value in his company meant that it was a personal asset and not something that had to be divided with his wife. New York individuals who believe that their assets passively appreciated should be prepared to demonstrate how they were influenced by something outside of their control, otherwise they may be subject to typical asset division guidelines.
Source: Forbes, "Active And Passive Appreciation In The Continuing Story Of Hamm v. Hamm", Jeff Landers, Jan. 22, 2015