Employment Not a Substantial Contribution to Family Business

Keyt v. Keyt, 244 S.W.3d 321 (Tenn. 2007)

Employment Not a Substantial Contribution to Family Business

The husband and wife in this 2007 case were married in 1988.  The wife did not work outside the home, and the husband was employed by a trucking company founded by his father.  The husband had been employed by this firm prior to the marriage, and before the marriage, his parents had implemented an estate plan.  Under this plan, the husband received gifts in the form of cash or stock.  These distributions began about four years before the marriage.  The annual gifts were valued under the estate plan at $20,000 per year, with the full value of the husband’s stock was set at about $250,000, representing about 14% of the company.

These shares, however, came with restrictions.  The husband had no voting privileges, and had no ability to sell or encumber the stock.  In 2002, the company was sold, and the husband’s share of the proceeds was about $2.5 million, although the value after certain indemnities was pegged at about $1.3 million.

The trial court set the appreciation at just over $1 million, and held that this amount was marital property.  The husband appealed, and the case was ultimately heard by the Tennessee Supreme Court.  The high court noted that increases in the value of separate property are marital property only if both parties “substantially contributed” to the appreciation.

The husband argued that the court needn’t even reach the issue of whether the wife contributed.  Since both spouses must substantially contribute, he argued that he himself made no substantial contribution, and that his contributions to the company were merely those of an employee.

The Supreme Court noted that the husband “had no involvement in acquiring new customers, in determining shipping routes, or in deciding what equipment to purchase and where to build new terminals.”  The court distinguished the case from Clement v. Clement, No. W2003-02388-COA-R3-CV (Tenn. Ct. App. Dec. 30, 2004), in which the husband had taken a very active role in the management of the company.

Since the husband made no “substantial contribution” to the increase in value, the high court held that the appreciation was his separate property, and reversed the lower court.

This post is part of a series, Appreciation of Separate Property: The Forensic Accountant’s Full Employment Act.

To learn more, visit When Professionals Divorce in Tennessee: Valuing Professional Practices.